As the Dow Jones Drops

Down about 1,000 as of this writing. (Since mostly recovered.)

Let’s review: First, various “emerging economy” exchanges lost value, then China, then Wall Street.

The actual economic contagion started with resource prices. That was driven by reduced demand, primarily from China. Oil prices (only one commodity), already under pressure from moderately increased supply (it was less than boosters make out), were crashed by Saudi Arabia’s decision to increase production rather than cutting it back. There’s plenty of speculation why, the practical result was to trash multiple exchange rates and economies and to encourage everyone to overproduce, breaking OPEC solidarity. I don’t think Saudi Arabia is going to win this bet, whether it was to crush specific countries (Russia, Iran) or to crush American high cost oil production.

During this period we had repeated currency devaluations in an attempt to increase the competitiveness of exports. These devaluations had marginal effect at best, didn’t work at least.

China’s growth had been slowing (thus the reduction in their demand for commodities), they encouraged a stock market bubble as consumers were proving reluctant to continue piling into real-estate. They printed vast amounts of money, at least twenty times as much as Europe, Japan, and the US combined, but exports were no longer leading growth. Regular Chinese and private firms have massive amounts of debt.

To put it simply, China had reached the point where export-led mercantilism was no longer working. They needed to shift to domestic consumer demand.  They chose to try and inflate bubbles instead.

Virtually every country in the world was either rolling off a cliff, or struggling to keep their head above water. Most of the South of Europe had never really recovered (Ireland is a partial exception). Latin America was diving, Turkey’s real-estate driven, neo-liberal growth was stalling, India’s “miracle” was always more of a paper tiger than most made out, being concentrated to a minority even as the average number of calories consumed in the country dived.

But this started in China, which is important.

We are now in a situation analogous to the late 19th and early 20th century. America is the global hegemon (as Britain was then), and China is the world’s most important economy (America was then.) China is the global manufacturer. It buys the most resources, which is what most of the world sells, since most countries have given up manufacturing most goods for themselves. It prints the most money, dwarfing America and Europe. Its rich people are driving up real-estate prices all over the globe.

Yes, yes, by some measures the US economy is still “bigger,” but those measures are even more inflated than inflated and bogus Chinese ones. China is the key maker of goods. There are a few other countries that also make goods as the most important (not largest, most important) part of their economy. Everyone else is a commodity producer, a financier, or trying to sell intangibles (intellectual property, whether inventions or fiction or branding).

So what and how China does now matters most, economically. The contagion started in China, spread to emerging economies, money fled to the US and a few other safe havens, China’s economy continued to stall, its stock market fell despite radical attempts to keep it inflated, and that has now come home to New York.

Some are worried this is 1929, but in China. I have been stating for years that the big one would start in China. Whether this is it, we won’t know for a while (just as they did not know in 1929 that it was 1929).

Welcome to the new world. The US and Europe put a LOT of effort into moving as much industrial production as possible to China. China just promised that a very few people would get very rich doing it, and those people made sure it happened. (Look up the profit margins on iPhones.)

I will note that there are still bubbles. Real-estate bubbles (Canada, Britain, a few important US cities, Australia, etc.) and a vast amount of highly leveraged derivatives have been pumped back out since the 2008 crash, since no one actually bothered to regulate or forbid them. And banks and financial companies are now larger and fewer, making the economy and financial markets both more subject to contagion.

The elites learned from 2008 that the important thing to do in a financial crisis is to just print enough money and relax enough accounting rules–extend and pretend. That will be the play again this time if this contagion turns truly serious. I would guess that it will work, sort of: More zombies will be created, they will need higher profits, the real economy will be even more stagnant. And people like Corbyn, Trump, Sanders, and so on will reap the rewards electorally.

Printing money is a viable strategy only as long as the elites control the regulatory apparatus (including prosecutors, finance departments/treasuries, and central banks), legislators, and executives. The reason people are screaming so loudly about Corbyn is not because he can’t win in England, it’s because if he did, and he’s serious about his policies, he will inevitably have to confront them. And an English PM with a majority he controls is pretty much a dictator.

A lot is at stake here. Our elites are losing control over the electoral apparatus and the common narrative. In both cases, the signs aren’t terrible yet, but they are there; the rise of the old right and the old left is visible.

So, there is more pain to come, but there always was. The decision was made in 2008 and 2009 to not allow an actual recovery and to protect the rich at all costs. There was a cost, it has been paid for the last six years, and this is yet and simply another one of those costs. China, as an exporting power, cannot carry the world economy when the people to whom it exports insist on various levels of austerity (be clear, the US is in austerity too, just not as bad an austerity as Europe).

The way the Chinese are fumbling this crisis also convinces me that they are now past the point where enough competent people who remember poverty and fear remain in power.

We continue to live in interesting times.

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