In the month since everybody woke up to what a disaster the Coronavirus pandemic is, it’s been interesting watching people use it as an excuse to push the same things they were already pushing. Conservatives, Socialists, Environmentalists and Nationalists, all of them are eager to tell you that this confirms everything they have been saying all along, and proves that their particular policy priorities should be enacted immediately. Some of them may be right. But one of the most important Washington, DC lobbies is looking a little silly right now. The Military Industrial Complex, that monstrosity that gets close to a trillion dollars a year to keep us safe… did nothing to stop the greatest calamity to befall the homeland since the war of 1812.
But this hasn’t stopped them from pretending that they are still relevant after this extraordinary failure. In alliance with a Trump administration that is desperate to find another scapegoat, they are calling for a deepening of the “New Cold War” against China. They seem to believe that China is “winning” the pandemic somehow. China had what looks like a competent public health response after all, and now it’s flying stuff all over the world to help other countries. Well today’s video is here to tell you that that suspicion is ridiculous. China is not winning this thing. In fact, they are likely to end up the biggest losers.
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Video Transcript after the jump…
Hey there. Greetings from the upper Manhattan hit zone. There are a lot of people in the United States who think we should be super focused on China right now. This is mostly an attempt to cover up for the fact that Donald Trump just pulled 9-11 times 1000 on his own country, but I do understand the instinct to blame China. The virus did come from there, and if you read a lot of Chinese propaganda it’s possible to get the sense that they might be winning this Coronavirus thing. That’s nonsense. Nobody is winning in the time of corona. China least of all.
China’s response to the Coronavirus has been draconian and impressive. Even though you would be foolish to believe China’s official figures it is likely that they have done a much better job than any western country. South Korea, whose numbers I do trust, had extraordinary success, and it did so as a free democratic country. China’s authoritarian nature probably helped with quarantines. Even if China’ coronavirus cases and deaths are three or four times higher than reported they have still done a better job than most. They will not do a good job with what comes next.
If you have a retirement account, I don’t have to tell you that the economic effects of this crisis are extraordinarily dire. And I don’t think markets or policy makers have truly woken up to just how dire they are. International trade is stopping. Yeah China is more oriented to non infectious stuff than it is to people based services, but nobody’s buying cars or cellphones either.
One of the surprising developments of the past few years is how durable China was in the face of Trump’s trade war. It’s not the 1990s or the oughts anymore. As recently as 2008 a full third of China’s GDP relied on exports. In the world before coronavirus it was down to 20%, and China’s own internal consumption was a much bigger driver of growth. Trump’s tariffs weren’t great, but in practice it just meant that other countries took China’s exports. Coronavirus is something else entirely. There isn’t anywhere else to export. This 20% isn’t impacted. Outside of certain essentials it’s gone. Just gone.
But China still has that awesome 80% of growing non-export GDP right? Not really. I may find China’s Coronavirus casualty counts more credible than most, but its reports of economic resurgence are pure fantasy. Lockdowns may be being lifted in some places, but it’s clear that nothing like normal economic activity has been been restored, and certain renewed services are already being cancelled. This situation requires economic stimulus, which is where China has a problem.
It’s a little recognized fact, but China probably did more to drag the world out of the 2008 crisis than anybody else did. The US and Europe initially did a lot of stimulus, but by 2010 at the latest they backed off in the name of fiscal stability, and fell into the anemic economic growth we have experienced ever since. This wasn’t an option for China’s Communist party. Their whole justification for power is rapid improvement in living standards, so they pulled out all the stops to keep things going. As a centralized authoritarian government they could do things other countries couldn’t. The central government put a ton of debt on its own balance sheet, but it also forced local governments and state owned enterprises to do the same. State control of banks also insured a growth saving explosion of money lending, that also carried most of the rest of the world along with it. The problem is that this debt burden is completely unsustainable, and unlike the United States, China doesn’t get to print the dollars the world runs on. China’s annual growth has gotten smaller as they have tried to take steps to deal with the debt load. Now that the next crisis has arrived, China has a much smaller toolbox than last time.
The story of the world economy for the rest of 2020 will be one of large economies doing progressively more and more ridiculous sounding things to keep the economy going. Last week the US federal reserve announced that it was going to spend unlimited amounts of money backing up markets for bank debt. This week it’s widely expected that it will start printing money to buy up the bonds of shaky US corporations.
I think this is probably the last crisis where we will be able to get away with this, but at the moment we are getting away with it, because the Fed is quietly bailing out most of the other rich countries as well, through a mechanism called swap lines that give central banks in places like Japan and Germany access to tens of billions of dollars as well. Countries like the UK and Denmark that are just going to pay everybody’s salaries until the crisis is over are doing so with US backing. China should probably get a swap line too, but it probably won’t for political reasons. The US dollar, for now is this weird unlimited resource that everybody has just decided to believe in. If China decides to dump The 5% of US debt that it owns, the Federal Reserve will probably just print the money necessary to buy it.
Every other rich country in the world will be playing progressively more surreal currency games with US support, while China is stuck in what we used to think was the real world. China does not have the ability to do a serious 2008 style stimulus. It can’t even reduce its interest rates to zero the way everybody else is doing. As its economy shrinks, and foreign trade largely disappears, the chances of a serious economic crisis in China will continue to rise. What’s more, as China’s increasingly desperate recent propaganda illustrates, Everybody is going to be very, very angry with them.
Everyone will turn on them. Once we are free of the US clown president, Europe and the United States will be scrupulously polite and politically correct as we claw back all our supply chains, starting with Medical. It’s not clear whether Africa and Asia will be saved by warmer weather and proactive measures, but my hunch is that they won’t be. The disasters in some countries will be extreme, and the reaction against China will be neither polite nor politically correct.
China is a powerful place, filled with brilliant hard working people who could stun the world in the way they respond to this adversity. But at this point they pretty much have to. I am not saying it’s guaranteed, but I am saying a serious political crisis in China this year or the next is very possible. China is likely to end up the biggest loser from the Coronavirus crisis, as well as the first.