You probably have money invested in the stock market. You need to listen for the words, "deflation" and "China." The moment you hear these words, you might want to stop and pay attention. These words are important to your stocks.
If China enters a disinflationary or deflationary slowdown, bad things could happen. Disinflation is not the absence of inflation. Disinflation is merely a slowing in the rate of inflation.
Isn't disinflation good? Certainly a voluntary disinflation can be good. The U.S. is enjoying disinflation because the Fed is voluntarily reducing its portfolio of bonds. As private buyers snatch up these old Treasury bonds and mortgage-backed securities, they take money out of some bank to pay for them. This reduces the money supply and inflation.
But there is another kind of disinflation - the involuntary kind. Involuntary disinflation and outright deflation occur when investors get scared. They stop borrowing, and they stop spending. They start paying down their debt faster, and they start hoarding money.
This crushes the money supply of the country because the multiplier effect works in reverse. If a single borrower pays off a debt of $1,000 - the money supply of the entire country declines by $10,000 (a multiplier of ten).
Disinflation and deflation also have a psychological effect. Why buy a car today when the price of the same car won't be much higher next year? Your existing car can last another year. Why buy or invest in a condo if the value of the condo is only going to be lower next year?
As investors and consumers put off their major purchases, home builders will be forced to reduce their rate of construction. Car companies may have to reduce their number of shifts. Both types of companies may have to start laying off workers, which means ever fewer potential buyers.
Deflation terrifies economists and politicians
because it is self-feeding.
The more deflation, the more layoffs, the more fear, the more deflation, and the more layoffs. During the Great Depression in the 1930's, the Federal government had a near-impossible time trying to stem the deflationary vortex. The only thing that "saved us" was gearing up for World War II.
The Point of Today's Article:
I had an epiphany last night. I had been listening to a Youtube video describing China's economy as sluggish. This is surprising considering that 1.4 billion people had been locked up in their homes for three years.
When these folks were finally unleashed, one might have thought that their economy would explode with activity. Nope. Their economy is doing better than during the COVID years; but it appears unlikely to surpass that of the U.S. any time soon.
What's going on? Why is China's prodigious growth rate slowing? The standard answer is that China's real estate bust destroyed a lot of wealth. They built too many homes that will never be occupied.
Their banking system is also in serious trouble because it has a trillion dollars invested in mortgage loans and in loans to near-bankrupt real estate developers. I heard that one of China's five largest banks is limiting withdrawals because, among other things, many mortgage borrowers are refusing to pay their mortgages. The homes that they paid for never got built.
Because China's banks are taking massive losses, they are also reluctant to make new business loans. This chokes off the formation of new businesses. But I think there is even a bigger reason why the Chinese economy is slowing, and this was my epiphany.
When President Xi threatened an imminent world war
to re-take Taiwan, he scared the poop out of the Chinese people.
(Please read the above again.)
As a result, the Chinese people have reduced their spending, postponed large purchases, reduced their debt, and began hoarding money.
Now we have all heard how Xi's threats have so frightened international business owners that they have stopped opening up new manufacturing plants in China. If a company with operations on the Chinese mainland makes a profit these days, that profit is immediately repatriated back to the home country, rather than being re-invested in expansion in China.
U.S. Commerce Secretary Gina Raimondo said U.S. companies have complained to her that China has become “uninvestable,” pointing to fines, raids and other actions against firms that have made it too risky to do business in the world's second-largest economy. This capital flight has clearly slowed China's meteoric growth; but far more importantly -
I think that fear of the future is causing
the Chinese people to hoard their money.
I post insights daily on Twitter or a hilarious joke.
The Chinese middle class and up-middle-class is huge - 707 million as of 2018. If many of them are putting off large or discretionary purchases in order to to squirrel away money to survive a war, that's a whole lot of nuts.
Every month, President Xi or one of his admirals threatens war against Taiwan and the U.S. Those threats have recently expanded to include Japan, the Philippines, South Korea, and Vietnam. I think most Chinese people believe him.
China's economy is slowing because its people
are basically preparing for a famine.
The Chinese invest 70% of their savings in real estate, and real estate values in China are falling sharply. The CCP has recently injected $1.3 trillion into their giant home builders - Country Garden and Evergrade - to help them complete many of their unfinished homes.
Chinese billionaires have long since moved their money and their families off-shore. With a possible war coming, foreigners are fleeing China, and they are taking their money with them. Consumer spending is lackluster, and it is falling from fear.
At a minimum, China is facing a deflationary recession. Just like a pandemic, this deflationary slowdown will not be confined to Chinese shores. Will it deteriorate into a full-blown Chinese depression? It happened in Japan in 1990, and the Lost Decade became thirty years.
Your stocks may be affected. So pay attention. You do NOT want to hear deflation and China mentioned in the same sentence.