More tales of 2018 world developments
A first week December report had the U.S. global trade deficit in October jumped to a 10-year high and that the deficit with China surged 7.1% to a record $43.1 billion. U.S. cash aid to farmers hit by China tariffs was about $12 billion. Together with the Administration’s tax cuts and the Fed’s balance sheet bond reduction of $50 billion per month, shortage of dollars in the market meant that the U.S. Treasury would print more dollars.
For mainstream watchers who noted that China’s ownership of U.S. bonds, bills and notes was reduced by $10 million from $1.18 trillion in June 2018 – it’ was less than 1% but let’s connect the dots pertaining to the onset of world order reform. Dumping U.S debt by China would be at a steady pace albeit slow because of the risk exposure of their trillion dollar holdings.
The 2018 inflationary pressures of higher crude oil prices would push affected third world nations to purchase oil on the Shanghai and Hong Kong markets where China’s petro-yuan thrust would then move to the forefront. Nymex crude oil had increased by $4 to above $72 per barrel which was a 5% hit. The petro-yuan thrust would hamper the western economies central banks liquidity drains and a new world order currency would no longer be free from a gold peg. On the horizon was the Fed shrinking its balance sheet, meaning the bonds they were selling were sucking dollars out of the economy. Some emerging markets using their dollar reserves to prop up their own currencies and economies would lead to a ponzi scheme because borrowing money just to pay back old debts meant that.
Foreigners cannot buy more U.S. debt due to shortage of dollars in the market so the Fed will monetize the U.S. Treasury and outstanding debts by just printing more dollars, meaning deflating all outstanding debts – the greatest ponzi scheme. How else will the U.S. Treasury be able to get the funding they need to run the biggest deficits since the Great Financial Recession of 2008, partly also due to Trump’s tax cuts.
The first week of March 2019 saw European Central Bank Chairman Mario Draghi announcing a new long-term lending facility for European banks and promising not to raise interest rates for the next year. Equities subsequently plunged with European banks, autos and basic resources performing worst. Negative short-term interest rates in the past four years were doing more harm than good and the ECB was out of ammunition. Negative interest rates suck deposits out of the banking system, reducing bank profitability. Negative interest rates also forces Germans to increase savings at the expense of consumption, which depresses economic activity.
Hence the Euro zone planned roller coaster quantitative easing rides will become painful options. A reformed world order in global reserve currency could finally take place with China’s nuclear option of dumping U.S. debt. The Chinese leveraging on its petro-yuan agenda would spare all parties the cost of exchanging dollars in the oil trade. Again, in due course some traders instead of holding surplus assets in yuan would freely convert them to gold at China’s exchange markets.
The prevailing October 2018 macro-economic scenario was China’s September exports of 14.5% increase from a year earlier. In spite of escalating trade tensions the weaker renminbi contributed to China’s $34 billion surplus with the U.S. This surpassed the record of $31 billion in August. Tariffs imposed on $250 billion of exports to the US was mitigated by the Yuan depreciation of about 6% against the dollar.
Although the Shanghai Composite Index had touched a nearly four-year low China’s GDP of 6.5% in the third quarter from a year earlier was only slightly down from the 6.7% pace in the previous quarter. China had set a GDP growth target of around 6.5% for 2018 compared with 6.9% economy expansion the previous year. Jump in exports of electrical machinery – the biggest export item from China to the U.S was a sign exporters might have pushed out shipments ahead of implementation of the latest tariffs on $200 billion in Chinese exports. Downside risk could be expected in the fourth quarter.
Many nations like present day China, a previously staunch socialist country tilted to Maoism succumbed in modern times to housing and commercial real estate bubbles in matters of economics and governing communities. In the light of a Britain-Germany Brexit negotiations stand off after June 2017 what were some new developments?
Since 2013 Deng’s domestic political strategy had been replaced with neo-Maoism and neo-Stalinism with regard to realpolitik. Hard to eradicate, the personality cult of the dominant leader had been revived. At the 19th communist party congress Xi set himself up for open-ended rule with the abolition of presidential term limit. There was no designated successor and selective anti-corruption campaign had shattered the personal security pact among the ruling elites. In China’s one-party state any lethal threat to the CCP upended the delicate balance of power at the apex of the regime. Official ideological orthodox had altered to a personality cult of lackey second echelon leaders blindly carrying out earmarked policies.
Xi’s signature foreign policy initiatives of the $1 trillion Belt and Road Initiative (BRI), strategic partnership with Russia and South China Sea intrusions were viewed as confrontational. The United States agnostic viewpoint then changed as China became a threat to its global leadership. With a perception that Trump’s resolute trade war was on the cards many of China’s elite turned to Deng’s forty year ago way forward insightful questioning of “Why have America’s friends grown rich but its enemies have grown poor?”
As at mid August 2018, some pundits did not perceive it in that light. Those who mind did not matter. Those who matter did not mind. How practical it was to be liked by some, not all was Trump’s motivation. The “Trump-Xi friendship” in resolving trade war tit-for-tat measures and threats would be called upon when needed. The prevailing trade war escalation deflected and was working in the U.S. realpolitik lifting of China’s ZTE sanctions – not withstanding whether it was a quid pro quo or anything else.
The greenback was trading near a 13-month high and the U.S. GDP surged at a 4.1% annualized rate in the April-June period. The Dow was once again above 25,000 points and Asian stocks recent slide turned northwards on news of a late August US-China trade talks. Some would see China’s Sinopec offering to take up the surge in shale oil production unlike in May when constraints were imminent. In spite of China’s threat of an anti-dumping probe into U.S. sorghum imports the buying for animal feed had not dampened and even corn imports from the U.S had risen to one of highest levels in the past decade.
Venezuela’s plan to raise crude oil production and Iran turning more to China as the world’s largest importer of crude most certainly would see the Chinese leveraging on its petro-yuan agenda, henceforth sparing all parties the cost of exchanging dollars in the oil trade. The sellers would be able to convert renminbi into gold should they not take up Chinese goods or there be a comparative deterioration in the currency. A reformed world order in global reserve currency could finally take place and freely be convertible to gold.
The increase use of the renminbi in global financial trade would support the yuan vis-a-vis the mighty dollar. Strengthening of the yuan of course would deflect any suspicion of currency manipulation in the matter of ever growing US trade deficit with China.