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What Chinese Market Turmoil Tells Us About 2016

2016 January 13
by Ian Welsh

Since the last financial crisis, I have repeatedly said that the most important economy in the world was now China. China is the world’s largest manufacturing nation. It is probably the world’s largest economy. It is the largest market for commodities, which many of the world’s nations rely on as their primary exports. Because we have gone to a world system which encourages manufacturing overseas for First World nations, this is unsurprising.

China has been creating, publicly and privately, more money than the US, Japan, and Europe combined. Multitudes of it.

Even when it hasn’t been the strongest growing economy, it has driven the growth of many other nations; direct trade with China might not dominate trade for some nations (for example, Brazil), but China determines the price of key commodities which many nations sell.

Some economists will argue that because trade is a small percentage of a particular country’s economy, it does not matter. This is like saying that since the food I eat is a small percentage of my body weight, eating less and worse food doesn’t matter.

Activities at the margins determine prices, economic growth, and employment/unemployment. China is the lynchpin economy which determines these things for much of the world.

So, we’ve had an ongoing commodities price crash, ongoing for some time, with most of the attention on the price of oil (now down to 2003, Pre-Iraq war prices). But commodities overall have crashed, and even countries which have maintained GDP growth (like Australia) have taken huge hits in their labor markets.

With prices down, growth stagnant or down, there is simply much less demand. This is your standard vicious cycle: The Chinese can sell less manufactured goods to the rest of the world, therefore need less commodities, etc.

The Yuan is becoming a reserve currency, and that means it is being unpegged from the dollar, regardless of whether most people can admit this or not. So the decreased exports are putting pressure on the Yuan, everyone’s money is running to the currency of last resort (the US dollar), and people are trying to get out of volatile Yuan denominated assets.

All of that is a long way of saying: This is the year the shit hits the fan.

We never left the depression after the financial crisis. We did, however, still have a business cycle. There was a recovery, expansion, and so on. Now we’re (and by “we,” I mean the entire world, with some exceptions) heading into recession.

That’s a recession within a depression, wherein many First World nations’ median income actually fell, and where employment in core nations never recovered in terms of population percentage.

This is going to hurt.

This is going to really, really hurt.

I’ll discuss specific consequences later, and what you can do. Do not assume this won’t come home to the US. A lot of the pain is being concealed in the US by the flight to the dollar and the oil price collapse, but it’s still going to hit and the pain is still going to hurt.


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17 Responses
  1. DC Brian permalink
    January 13, 2016

    What can we do? Not much about the big picture at this point, but in our own lives a short list comes to mind:

    – Pay off debt if you can
    – Save as much as you can
    – Downsize your possessions and lifestyle to reduce costs
    – Take care of your health: eat right, exercise, quit smoking, don’t skip regular physicals, teeth cleanings etc.
    – Work hard to maintain your relationships with family, friends, and neighbors. Same for your coworkers and professional networks. These are the people who will help you and who you can help when things get bad.
    – Get involved in the community and find out what kinds of charitable or social services options are available. If you need them you’ll know where to go and if you’re lucky enough not to need them, you should still know where to go so you can give time or money to help those less fortunate than you.

    Of course plenty of people have no money, are already unemployed, don’t have health insurance, are disabled etc, so these steps are harder for some than others but we should all do the best we can with what we have.

  2. Hugh permalink
    January 13, 2016

    I agree. We have been in an unacknowledged global slowdown for at least 6 months, and there is no engine in sight to pull us out of it. The middle class in Western nations remains under attack, being stripped and looted by the rich, corporations, and the elites. You can hardly be expected to buy more Chinese goods if your job was sent to China in the first place and all you are left with is no job or a crap one.

    Cheap commodities prices, especially oil, should be expected to fuel economic expansion. So it says a lot about how de-industrialized the US has become that it doesn’t. It also says a lot about the monopolistic business models in the US where the whole point is to keep prices high regardless of cost, demand, or poor quality of service.

    And as I said, you can only loot the vast base of consumers so much before you effect demand. The rich and elites have so strangled end demand, i.e. American consumers, that it is feeding back on to producers of consumer products (China) and further to commodities producers (emerging markets). No amount of QE or whatever name trickledown goes by these day will change that. Whether you call it kleptocracy or neoliberalism or globalization, it is coming up against a wall, a fundamental contradiction that no amount of rhetoric or voodoo hoodoo can change.

  3. Brian permalink
    January 13, 2016

    I found this paper interesting and relevant Why Do Global Markets Suffer From Chronic Excess Capacity?: Insights
    From Keynes, Schumpeter and Marx
    from 2002. The paper describes the process how excess capacity and the lack of demand caused by the neoliberal policies cause what is happening in the China-Global crisis today. Neoliberalism fails to grow demand – through austerity and low wage growth.. Developing markets create competition in core industries thats destabilizes the healthy oligarchies which leads to deflation and excess capacity building. Chronic excess capacity is caused by the failures in neoliberalism. There is the myth that excess production can easily move to a more profitable market, when in reality excess production gets liquidated through bankruptcies. There is a myth that demand will always rise to meet the excess capacity, or the myth of ever expanding growth. And finally neoliberalism has the myth that competition is always good, when in reality a co-ordinating oligarchy can most easily prevent excess capacity. That’s why I think this paper is interesting, even if it is from 13 years ago.

  4. VietnamVet permalink
    January 14, 2016

    This post is right on the mark. There is a huge amount of denial but the chart in this Washington Post article explains a lot:

    https://www.washingtonpost.com/news/wonk/wp/2016/01/13/this-may-be-the-most-important-chart-for-understanding-politics-today/?wpmm=1&wpisrc=nl_wonk

    The jobs of the western working middle class were moved lock stock and barrel to China and SE Asia. The difference between the higher wages in the West and lower cost Asia were seized by the rich. The upper middle class real income increased but this was the crumbs that trickled down from the grand total of all the wealth seized and the price of goods fell. This is enough for the establishment to decry voters’ anger. The western ruling elite refuse to acknowledge all that has been lost of what we once had.

  5. V. Arnold permalink
    January 14, 2016

    This from the Telegraph;
    http://www.telegraph.co.uk/finance/economics/12093807/RBS-cries-sell-everything-as-deflationary-crisis-nears.html

    And then there is this stunner;
    http://www.zerohedge.com/news/2016-01-13/canadians-panic-food-prices-soar-collapsing-currency

    Governments, especially the U.S. government, have uncanny ways of defying economic gravity; but even that slight of hand will fail.
    Get your fiscal house in order asap; it will be a slow bleed, but arterial bleeding is difficult to control with no doctors in the house…

  6. asdq permalink
    January 14, 2016

    The jobs of the western working middle class were moved lock stock and barrel to China and SE Asia.

    A consequence of inter-elite competition. The American elites were determined not to be pushed aside by a bunch of swarthy upstart Asians, so they took steps to ensure that the economic modernization of Asia, which would have happened one way or another, would happen solely under their aegis. Thusly they outsourced like mad and punished any among themselves who wouldn’t get with the programme.

    The U.S. middle class was to them simply economic cannon fodder.

  7. asdq permalink
    January 14, 2016

    Oof. The first line was a quote from VV, obviously.

  8. asdq permalink
    January 14, 2016

    I’ll also point out that working and middle-class Asians, whose countries were reduced to glorified American branch plants, and who like most everyone else would generally have preferred a local boss (who one way or another could be held to account) to a foreign one (who basically couldn’t), got utterly shafted in the deal as well.

  9. V. Arnold permalink
    January 14, 2016

    asdq
    January 14, 2016
    I’ll also point out that working and middle-class Asians, whose countries were reduced to glorified American branch plants, and who like most everyone else would generally have preferred a local boss (who one way or another could be held to account) to a foreign one (who basically couldn’t), got utterly shafted in the deal as well.
    ~~~~~~~~~~
    Obviously, you do not know what you are talking about.
    I’m a long term resident of S.E. Asia, and they are anything but American (I gather you mean the U.S.) sycophants/puppets.
    Please find another meme about which you actually know something…

  10. Kathryn in MA permalink
    January 14, 2016

    One thing we can do is localize our economy – see Transition Town, a movement started in England in response to peak oil, climate change, and economic turmoil. Do google to see if your town is already working to set up local food exchange, tool exchanges, etc.

  11. S Brennan permalink
    January 14, 2016

    17 cargo ships pollute as much as all the vehicles in the world.

    Exporting heavy industry from the US [and to a lessor degree, Europe] unleashed global pollution as environmental regulations were essentially discarded.

    Necessary trade is…well…necessary, but trade, for the purpose of wage arbitrage, is evil, not only for moral harm of slavery, but for it enormous environmental harm.

    Any person who is for “globalization” is also for ripping the environment to shreds.

    There other pollution vectors in transoceanic trade for the purpose of wage slavery, such as recycling, but what puts mercury in the blood of polar bears is the detritus from moving industry from a regulated environment to an unregulated.

  12. Ian Welsh permalink
    January 14, 2016

    While Canadian grocery prices are definitely up they aren’t as bad as that article suggests EXCEPT in remote places, where they are terrible, but then always were. If you live in Nunavit, you’d better be rich, or you’d better be living off the land and eating the few things produced locally (aka. meat/fish. Sorry children, that’s what the arctic produces, and not a lot else). (Which is a lot harder than it used to be. We did the Inuit very little favor when we put them in housing, but with climate change, perhaps they were screwed either way.)

    Certain things are still cheap, the stuff we grow ourselves. Squashes, potatoes, even carrots. Time to make stew, etc…

  13. asdq permalink
    January 14, 2016

    I’m a long term resident of S.E. Asia, and they are anything but American (I gather you mean the U.S.) sycophants/puppets.

    I’m not sure that I can answer, without a specific objection to what I wrote.

    The problem may be that current economic arrangements have been so aggressively normalized that it’s become very difficult to communicate objections to them in a way that can be clearly understood.

    That is to say, U.S. economic strong-arm tactics and corporate dominance, like gunboat diplomacy and NSA spying, are now supposed to be regarded as “just the way things are” and presumptively “bracketed out” of any assessments of democracy or national sovereignty. But to do so, it seems to me, is to give up on the possibility of any meaningful discussion of alternatives.

  14. Jerome permalink
    January 14, 2016

    Well, the Chinese are very good at managing, so it’s not like they don’t have a plan during this slowdown. Supposedly they are embarking on a mass-consumption model. Buying shit is going through the roof… You know what personal debt is in China? It’s pretty damn low.

    That, and taking the manufacturing to lower developed countries is the plan. Who knows if it will work or not…

  15. January 15, 2016

    S Brennan: “Necessary trade is…well…necessary, but trade, for the purpose of wage arbitrage, is evil, not only for moral harm of slavery, but for it enormous environmental harm.”

    Word. Well said, and a sentiment all too seldom expressed.

  16. someofparts permalink
    January 15, 2016

    sleight of hand

  17. different clue permalink
    January 18, 2016

    Free Trade isn’t fair. And Fair Trade isn’t free. It never will be. It never was.

    In much more crudely simplified terms:

    Free Trade is the new Slavery. Protectionism is the new Abolition.

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