It’s on Like Donkey Kong: The Rise of China is Over

Dear Reader,

Yesterday, the Federal government revealed a forecast budget deficit of $184.5 billion, pushing total net debt to $850 billion.

Yet, everything is relative in the broken monetary system we live with. Despite the dramatic rise in debt, Australia’s position is relatively sound.

As Adam Creighton writes in The Australian today:

The $280bn deterioration in the federal budget last financial year and this caused by massive spending and revenue writedowns will push net federal debt almost to the equivalent of 36 per cent of GPD, the highest level in a generation, but still far short of that of other nations.


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Reagan proved that deficits don’t matter’, Vice President Dick Cheney famously said in 2003 when President Bush pushed for another round of tax cuts.

When you’re the issuer of the world’s reserve currency, that is certainly the case. The dollar-based system that emerged from Bretton Woods is all about debt. Debt drives and sustains it. In this system, debt is credit and credit is money.

That it will also, eventually, destroy the system is kind of obvious.

The proof is in the pudding.

Ever since the 2008 bust, the monetary system we operate in hasn’t been able to produce self-sustaining growth. It needs constant support, which in turn makes things worse. And because central bankers are too dumb to see this, they go on supporting it…and making it worse.

The problems of this system are a topic for another day.

For now, let’s focus on what it means for Australia. And you.

It’s true that in the modern monetary system, deficits don’t matter. Sort of. What I mean by that is there is no market mechanism to discipline a profligate country in the short term.

Instead, everyone is ‘disciplined’ in the long run.

Taking on debt now just borrows growth from the future

Therefore, it’s not surprising that we’re in a low-growth world. And it shouldn’t be a surprise that we’ll be in a low-growth future for a long time. It’s just that our elected and unelected ‘leaders’ are too dumb to see it.

Our low-growth future is why bond yields (as I pointed out yesterday) aren’t responding to the explosion of ‘money printing’. Because it’s not really money printing, at least not as far as the real economy is concerned. Bonds know this central bank response is due to a huge hit to economic activity. It is merely making up for what is already lost.

It’s the same with Australia’s huge increase in debt. It is merely making up for the economic damage that’s already been inflicted.

At least we’ve got China though, right?

I mean, thankfully, they’ve tapped the old ‘fixed asset investment’ accelerator which has boosted demand and prices for iron ore. Without that, we’d be even more in the hole. From Glenda Korporaal at The Australian:

Continued strong world iron ore prices have underpinned Australia’s economic growth and helped cushion the cost of the multi-billion-dollar COVID-19 rescue measures, according to the federal government’s latest economic and fiscal update.

The update has pushed out the timing of the government’s expectations for a fall in the iron ore price to $US55 a tonne from June this year, made in the mid-year economic outlook issued in ­December last year, to the end of December.

The economic statement says the higher-than-expected price assumption would effectively add about $2.2bn to government receipts over the next two financial years.

This comes as a result of the $9bn boost to nominal economic growth in the current financial year from the assumption of another six months of higher-than-expected iron ore prices.

That’s great. Thank goodness for Chi…

Wait, what?

The rise of China is over…

The government expects iron ore prices to HALVE over the next six months!?

Perhaps that’s as good an argument as any to think prices remain high. The government rarely gets it right.

Unfortunately, I’m with them on this. China is already four years into a stimulus/expansion program. It kicked off in early 2016 after China tried to wean itself off debt-fuelled growth during 2013­–15.

Needless to say, that didn’t really work. China too is a part of the US dollar-based system. Debt-fuelled growth is the only option.

But as I point out in a special report (out later today) China cannot continue doing this. It is now bumping up against restraints.

If iron ore prices halve, what’s that going to do to the share prices of Fortescue Metals Group Ltd [ASX:FMG], BHP Group Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO], for the resources sector, or the market in general?

I address all these issues in my forthcoming special report. As I said, it’s out later today, so keep an eye on your inbox.

And then there’s the much bigger picture swirling around all this. The increasing belligerence between the US and China. In an overnight speech, US Secretary of State ripped into China.

From CNBC:

“The truth is that our policies, and those of other free nations, resurrected China’s failing economy, only to see Beijing bite the international hands that fed it,” Pompeo told an audience at the Richard Nixon Presidential Library in Yorba Linda, California.

“We opened our arms to Chinese citizens, only to see the CCP exploit our free and open society. It sent propagandists into our press conferences, our research centers, our high-school and college campuses,” the nation’s top diplomat said Thursday, adding that the Chinese government had also “ripped off our prized intellectual property” and “sucked supply chains away from America.”

What can I say? It’s on like Donkey Kong.

Australia is siding with the US. We too will reassess our relationship with China. Things will never be the same again.

The rise of China is over…


Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

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