What’s The Fundamental Problem In China, The US, And The EU?

Authored by Mike Shedlock via MishTalk.com,

Here’s a Tweet that caught my eye regarding the “fundamental problem” in China. What about the US and EU?

Fundamental Problem in China

“The fundamental problem — that Chinese people paid excessive prices for real estate because they thought the price would always go up — remains. And that means that someone will eventually have to take the losses.”@Noahpinionhttps://t.co/I7m7fd3eWc

— Michael Pettis (@michaelxpettis) June 3, 2023

“The fundamental problem — that Chinese people paid excessive prices for real estate because they thought the price would always go up — remains. And that means that someone will eventually have to take the losses.”

Someone Will Have to Take the Losses

Noah accurately comments that “someone will eventually have to take the losses.” 

In China, the government refuses to support consumption. Instead, it repeatedly turns to real estate and exports for growth, pilling on losses upon losses in State Owned Enterprises (SOEs).

In the US we have commercial real estate problems, overprices houses, and  overpriced equities. 

Someone will have to take the losses, notably pension plans that are massively underfunded despite three consecutive stock market bubbles. 

But is That the Fundamental Problem?

Hardly. The fundamental problem everywhere is an unsound currency system that promotes bubbles as a means of growth. 

The fundamental problem propagates differently in different place.

China has massive property bubbles. The US has untenable deficit spending issues and many bubbles, yet, still tries to be the world’s policeman, while weaponizing the US dollar on top of it all.

In the EU, Germany and Northern Europe largely dictate what happens in a core vs periphery issue.

The EU has an additional problem: The Maastricht treaty, the EMU, and EU  rules make it nearly impossible to fix anything without unanimous consent of all the nations involved.  

Central banks everywhere are guilty of promoting bubbles and busts of increasing amplitude. 

The Fundamental Problem

The fundamental problem is best viewed as a combination of unsound currencies, unsound central bank policies, and unsound fiscal policies that manifest in different ways in different countries.

But every country has the same thing in common: “someone will eventually have to take the losses.” 

That we are in such a quagmire over that unavoidable truth is not the problem. It’s a symptom of the primary underlying problem, unsound currencies, everywhere.

Global Japanification and a Currency Crisis on Deck

A fundamental strength of capitalism is ability to succeed and fail. 

We do not have capitalism when central banks and governments act to prevent losses. Nonetheless, the losses and distortions continue to mount or are papered over at taxpayer expense.

Japanification of the global economy has largely been the result, more so in Japan and the EU, than the US. Japanification of China is happening now.

A currency crisis of some sort awaits, as every country, but in different ways, is hell bent on preventing someone from taking the losses.

I think that the crisis starts outside the US. Likely places include Japan, China, or the EU, but it could start anywhere. 

Dollar Weaponization Will Speed Up the Crisis

One thing I am certain about is dollar weaponization by the Fed will speed up the timeline.

For discussion, please see Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US

Also see Central Banks Are Buying Gold at Record Pace, What Does That Mean for Inflation?

Just don’t expect immediate results. We have been on an unsustainable path for decades. 

Don’t underestimate the willingness or ability of central banks to kick the can down the road. No one knows when, or what the trigger will be. 

Do expect more global Japanification.

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