In the coming weeks, the contagion will spread from real estate to the
whole of the financial sector and to U.S. household consumption, bearing
severe consequences on the results of various economic sectors in the
United States and on the U.S. market.
Global systemic crisis / Housing, financial institutions, stock markets, consumption, currencies: The contagion is spreading!
- Public announcement GEAB N°13 (March 16, 2007) -
As anticipated by LEAP/E2020 in the past months, the United States are
really sinking into the 2007 « very great depression », with a tipping
point of the global systemic crisis coming up in April as indicated in
last month's GEAB (GEAB N°12).
In the coming weeks, the contagion will spread from real estate to the
whole of the financial sector and to U.S. household consumption, bearing
severe consequences on the results of various economic sectors in the
United States and on the U.S. market. Simultaneously, these tendencies will
accelerate the winding up of the trans-Pacific trade war which, as
early as December 2006, LEAP/E2020 anticipated would be a dominant
feature of the year 2007.
The contagion spreads in four directions:
1. Global stock markets: First victims of the China-U.S. trade war.
2. Housing crises: Besides subprime mortgages, all financial players operating on the U.S. market are dragged into the infernal spiral.
3. Dollar (and related currencies): Another nose-dive in April 2007.
4. U.S. consumption: Large companies' exodus out of the U.S. market
.
In this announcement, LEAP/E2020 chose to make public the first of those four directions.
Global stock markets: First victims of the China-U.S. trade war
According to LEAP/E2020, it is not by chance that the current stock
market crisis started from China with the Shanghai stocks falling
steeply (close to 10 percent) following the release of Chinese
declarations aimed at restricting stock speculation. Besides the fact
that global stocks diving after Shanghai illustrates the central role
played by China in the global economy, it would be very surprising that
Chinese authorities triggered this crisis by unintentional mistake
precisely on the eve of U.S. Treasury secretary Hank Paulson's arrival in
Asia. It is obvious that the content of Paulson's Asian tour was deeply
transformed by the surge of a global stock crisis: he came to moralize
U.S. economic partners in the region and to teach lessons of good
financial and monetary management to China, but in the end he spent
most of his week restoring Asia's confidence in U.S. economic health and
the absence of any monetary or financial risks resulting from Wall
Street's dive and from the subprime crisis.
Rest of the World Holdings of US Financial Assets
Remember that it is upon declarations by the Chinese central bank's
governor on the diversification of the country's currency reserves out
of the dollar that the U.S. dollar tumbled against all other
international currencies last November (and more specifically that the
EUR/USD exchange rate climbed above 1.30), at a time precisely when
another tour of Hank Paulson and other U.S. representatives in China was
being prepared. By the way China seems to persist in this direction as
Beijing authorities recently formed an investment fund with a view to
make better use of the country's currency reserves (1).
In doing so Chinese leaders are
probably sending signals about the risk for Washington to engage their
country in protectionist policies with direct consequences on Chinese
(but also Japanese) (2) exports. It is indeed in the very next weeks
that the U.S. Congress, led by the Democrats with the support of part of
the Republicans (and the rather explicit support of Fed's president Ben
Bernanke), prepares to vote for a whole array of protectionist measures
specially designed to hinder part of Chinese exports, such as for
instance those -– emblematic -– aimed at protecting U.S. paper mills (3).
The message thus sent by Beijing will nevertheless only contribute to
the « action / reaction » spiral and reinforce the trans-Pacific trade
confrontation.
China's Foreign Exchange Reserves (mostly held in US$ until now)
As highlighted by the U.S.-China Business Council, the trade limitations
the United States considers to undertake can only endanger the two countries'
trade relationships altogether (4). LEAP/E2020 indeed abundantly
described in the previous issues of GEAB (GEAB 8 & 9, in
particular) why Washington's elites were fundamentally incapable of
changing this course of events, on the one hand for electoral reasons
(to protect U.S. employment is now the only way for the democrats to keep
their majority in Congress, not mentioning the chances of their
candidate in the 2008 presidential election) ; and on the other hand
due to blind Democrat and Republican leaders incapable of taking the
measure of the level of dependence and frailty of their country and its
economy compared to the rest of the world and more particularly to
Asia. In summary, U.S. leaders are taking
steps to « teach a lesson » to China (and to a lesser extent to Japan's
car makers) without realizing (despite Beijing's warnings, resulting in
the current stock crisis) that not only they are in no position to «
teach any lesson » to China, but in doing so they are triggering a
trade conflict that will contagiously spread to the financial and
monetary sectors. It is indeed now in Beijing that the value of U.S.
dollars and treasury bonds is determined (not mentioning the value of
Fannie Mae's and Freddie Mac's shares, in the past few months massively
purchased by Asian investors thus following the advice of their U.S.
bankers, knowing that Ben Bernanke himself now acknowledges that the
amount of their engagements conveys a “systemic risk” for the U.S.
economy). The United States have somehow become
an enormous hedge-fund whose leaders have decided to confront by the
end of April the bank lending them the money they need to go on with
their highly risky business (i.e. China). Of course their idea is that
the “banker” is doomed to go on playing by fear of losing everything.
At this level of the game (with billions of people and thousands of
billions of U.S. dollars involved), it is a very simplistic idea,
especially when the banker begins to realize that nearly all the
“securities” provided in the past years are worth no more than bits of
papers. That is indeed what the housing crisis' contagion to the U.S.
financial sector is revealing to the whole planet. China's USD 200 billion trade surplus
with the United States must be compared with a 10 percent drop of the U.S. dollar's value
over one year on China's currency reserves, i.e. USD 100 billion. To
think that Beijing will kindly accept to lose on all fronts and not
trigger any retaliation, is a sign of great intellectual naivety
similar to when four years ago everyone in Washington was convinced
that the Iraqis would welcome U.S. troops with flowers.
GEAB N°13 (on subscription)
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Notes:
(1) « China forming fund to invest reserves”, Yahoo News, 09/03/2007
(2) On that matter, LEAP/E2020 reiterates the anticipation made at the
end of 2006 (GEAB N°10) in which they described why they thought Japan
would have to make jointly liable with China in this trade war with the
US.
(3) The « Paper Mills » battle could
indeed be the trigger of a whole range of trade measures and
counter-measures between both sides of the Pacific Ocean. Contrary to
other topics (such as car imports for instance), this « battle » is
popular because it stars small producing units scattered across US
hinterland. « US threatening tariffs on paper from China », International Herald Tribune, 28/02/2007.
(4) « US-China Trade Relations », US-China Business Council, 02/2007