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Surely It Is All About Ripping Off China?

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I have written a little essay on this. I'm no expert, and I am a STR wanting to keep my STR fund in good order.

What do you think? (keep to the big picture please).

My view is that the west has created the housing bubble to generate huge amounts of liquidity (cash + debt) with the intention of getting China to sell loads of goods in return for this money.

Then once China tires of this, the west will simply inflate the debt away.

(when I refer to "the west" I mean the governments and financial institutions of the US, UK, and other major western countries.)

Introduction

===================================================

We all know that house prices have risen a great deal over the past 10 years, so that the ratio of house prices to wages is now around 5, whereas historical averages have it as 2.5 or so.

The cause of this, as I think is generally agreed, is a combination of a house price speculative bubble, with a long history of low interest rates in the west.

But what has not been discussed is what is the cause of these low rates. Why did the west choose to have these low rates for over 10 years or so? Why has this huge speculative property bubble been allowed to grow? And why is it so much bigger than bubbles that have grown in the past?

I think the answer is China.

Strategy to rip off China

===================================================

I think the west recognised 10-15 years ago that the combination of China's desire to become a major manufacturing power combined with a predisposition of Chinese people to save money rather than spend (and a traditional aversion to debt) meant basically that they could be stung for a lot of "money". i.e. coerced into providing a huge amount of merchandise and not be paid very much for it.

The Plan to buy products from China on credit, then inflate away the debt

===================================================

I think the plan to do this was and is the following:

1. In around 1990 The west starts buying Chinese manufactured goods.

2. The west lowers interest rates to make it easier for consumers in the west to borrow lots of money cheaply, and establish a culture that it is OK to borrow loads of money.

3. This will cause a vast increase in demand for products made by the Chinese for export to the west. The Chinese are paid for these products by western currencies (dollars/pounds) that have been loaned by consumers from western banks.

4. The Chinese use the dollars/pounds they receive to buy treasury bonds/UK Gilts, thereby keeping the money effectively as savings.

5. The west saw that the Chinese were content to save more and more and more, and work more and more and more to earn more money for treasury bonds. So the west saw that they could reduce rates even more to get more stuff out of China.

6. So we had a situation where western banks loaned more and more money to consumers who build up greater and greater debt. The consumers pay the dollars/pounds to the Chinese who buy treasury bonds/UK Gilts.

As this situation continues, the west is receiving massive amounts of physical products from the Chinese, in exchange for treasury bonds.

This is the current situation as in 2009.

7. In the end (when?), the west simply prints lots of money to devalue the size of the debt by devaluing the dollar/pound, and carries on as if the Chinese had never done business with them in the first place. Game set and match.

Inflation is the end result, but when?

===================================================

So the question is what event(s) precipitate a move from 6. to 7.

With the MASSIVE amount of dollar assets and treasury bonds that China possesses, why would the west NOT choose to inflate away the debt? By inflating away the debt you please western voters who are in debt, which is most of them. Conversely you anger the Chinese as well, but they don't vote in western elections.

The damage to the reputation of the west as a result of inflating away the debt by money printing would be significant, but I would argue that the benefit of not having to pay back several trillion dollars/pounds is greater than that, so is the course of action that the west will undertake.

Basically China was stupid in going into credit by such a large amount of money - they should not have allowed this.

Now if the intention of point 7. is to inflate away most of the debt, then the end result is that China will have manufactured several trillion dollars worth of goods without the US as a whole having had to pay for any of it (OK they have paid for some of it but only a fraction). So from the west's selfish point of view, doesn't it make sense to try to prolong period 6. for as long as possible, to maximise the amount of ill-gotton gains that can be extracted from China? I would say the answer is yes.

So for this reason stage 7. will be initiated by something that China does, not something that the west does.

So the question is: What event(s) precipitate the move from 6. to 7., and what can the west do about them?

Well until 2007 the west didn't need to do anything to keep the gravy train running.

But then the housing bubble started to burst, and house prices started dropping in the west (down 20% in the UK ,and more in the US), and a recession started.

Then what happened in 2008 was that the west dropped interest rates to try to recover this situation, and also QE - quantitive easing to do this.

China can smell a rat - how can we placate them?

===================================================

The current situation in 2009 is that China is starting to smell a rat - becoming worried about the possibility of the debt being inflated away as a result of this QE (which affects them because the inflation would reduce the value of their treasury bonds as a result of the reduction in the value of the dollar, even if the dollar value of the bonds remains unchanged).

So it seems that the overriding intention of the actions of the west now, to prevent stage 6. moving on to stage 7, is to:

a). Persuade the Chinese that their treasury bond assets are safe and will not devalue.

b.) . and as part of a), take actions with the western economy to try to achieve a) above.

As part of a) we had Ben Bernanke of the US Fed saying that the recession is ending last week. And Geithner went to China to reassure them also.

And I think that as part of b.) in a few months or even weeks the west will stop QE and might even increase interest rates to support the value of the currencies.

So at this stage, at the end of 2009, the Chinese are reassured, and continue to trade with the west, and continue saving, and puchasing treasury bonds.

But of course what effect does this have on the housing market in the west, and the economy in general? Of course the answer is that it crashes both.

We can keep the Chinese going, but at some point the pain gets too much for the west

=============================================================

But at some point in this crashing process, there will be pain for people in the west. What form does this pain take, to the country as a whole? Answer is that the Chinese still have to be paid interest on their treasury bonds. This has to be paid by western governments, so makes the west poorer.

And of course many people feel poorer because they have lost money on their houses, so this is bad politically.

(it is also true that things will not be as bad because the Chinese will simply reinvest the dividends received on buying more treasury bonds, so returning the money effectively)

But eventually the pain will be enough that the west will choose to gradually introduce lower interest rates/some QE again to stop or reduce the extent of the crash.

Which will reduce the value of the dollar.

At this point the Chinese will lose all faith in the west, and realise that they have lost several trillion dollars worth of money. They will stop trading with the west, and stop purchasing treasury bonds (because they know that the treasury bonds are now not worth the money they are printed on).

If anything they will start spending them, and that is bad because it involves them taking real things from the west, and not just pieces of money paper.

This action by the Chinese triggers point 7. in the plan above.

Once China stops buying treasury bonds

=====================================================================

Once point 7. has been reached, the value of treasury bonds collapses. This is perhaps Denninger's "bond market dislocation".

The result of this is that interest rates shoot sky high (because selling bonds is the way that mortgage credit is generated, and if they are cheap then you have to sell more of them to raise a certain amount of money, and if you have had to sell more of them, you are committed to paying out a larger amount of money every month on them - a higher percentage = higher percentage interest rate).

So to offset the higher interest rates the central banks of the west print money (QE) to buy treasury bonds, and in fact become the only buyers of them. This supports the price of them and keeps interest rates low, and helps to stop the house price crash.

But this money printing causes inflation (or will cause inflation in the future) which devalues the dollar/pound against other world currencies.

And the western governments do this a lot and over a long period of time

This means that although the Chinese are still being paid money for their treasury bonds, this money is worth a lot less.

So the Chinese have been ripped off, which is the end game.

Aftermath

=======================================================================

After the US has expanded the base money supply by, say, 300% by doing this point 7., what will be the state of the US?

My opinion is that the state will be similar to what it would be had they not decided to trade with, and rip off, the Chinese.

In other words it will become a protectionist scenario with the two nations choosing not to trade with each other.

Will there be a depression or recession? Yes, but not as bad as it at first appears: If the dollar is devalued then oil prices denominated in dollars will rise. However the actual price of oil measure against a world basket of currencies will reduce because of the two countries producing less stuff because of the recession.

With a very weak dollar other countries, perhaps even China themselves, might start purchasing western domestically manufactured products. This will cause wage inflation in the west.

So the net result of all this is the same as if America and China had never traded with each other in the first place, the only difference being the US receiving trillions of dollars of goods manufactured by China for free (ok not free, but 2/3rds off the price), and major wealth movements between people in the western countries.

If we continue to hold dollars and pounds we will become the unwitting victims of this bigger game.

Conclusion

=======================================================================

I think we will see a house price crash soon, but only until the pain this causes to the west gets greater than the benefit to the west of the free goods coming in from China.

When China loses confidence, which will happen at some point in the next 1-2 years, then point 7. is reached, and the west will start massive money printing to ditch the huge debt, and disown China.

Edited by Thread Killer

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:)

Top stuff.

I'll add - the chinese aren't stupid. They want us to do this, because it removes the west geopolitically. They've fed the strong man until he has become lazy, weak and fat.

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One solution would be to give the Chinese 100,000 or so of our state-repossessed houses. Keeps their price up by not flooding the market, we get a partial solution to demographic timebomb, the debts get repaid swiftly without trashing the currency, China gets to export a bunch of workers to here and ideally we'd get nurses/carers to look after our octogenarians as the natives won't do that sort of things.

Edited by Pick It Down

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:)

Top stuff.

I'll add - the chinese aren't stupid. They want us to do this, because it removes the west geopolitically. They've fed the strong man until he has become lazy, weak and fat.

Thanks :)

But does it remove the west geopolitically? Yes they have fed the strong man, and he is certainly lazy, weak, and fat, but the west can recover. And if they do they can start manufacturing again and build up a thriving export-led industry. Trouble is it will take a major major amount of re-adjustment to do this. The question is is there the political will to do this?

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I hope you guys can live without all your electronic gizmos because some of the metals required are ONLY available from china. Lets see how well the US military copes with roaming the world beating people up without computers and GPS.

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Guest UK Debt Slave
Thanks :)

But does it remove the west geopolitically? Yes they have fed the strong man, and he is certainly lazy, weak, and fat, but the west can recover. And if they do they can start manufacturing again and build up a thriving export-led industry. Trouble is it will take a major major amount of re-adjustment to do this. The question is is there the political will to do this?

My thesis is somewhat different

I believe the Chinese central bank and government is actually part of the same global conspiracy and has been ever since Nixon and Kissenger negoitated the first big trade deals with China in the early 1970s..........which coincides rather neatly with the collapse of the Bretton Woods system and the end of the gold backed dollar.

There's no reason why China would accept trillions of dollars of western debt knowing full well it would never be paid back unless they were in on the whole scam. I'm absolutely certain they are part of a global conspiracy to destroy whatever remains of free market capitalism, democracy and our comfy IKEA furnished, bull$hit lifestyle. The Chinese are an integral part of the New World Order. The bankers and masons have used Chinese slave labour to bring down the western democracies. It has been the first world war ever fought exclusively with monetary and financial weapons of mass destruction in preference to nasty, messy guns, tanks and bullets.

And what makes anyone think the Chinese government or the Chinese central bank gives a flying fekk about their slaves who created all the wealth? Anyone who understands how governments in the 'free world' operate should know better. They are selling out their own people in exactly the same manner as our western governments use and abuse us.

It's all just a big global club............and we ain't in it! We are NOT in the club.

It's just a huge heist, the asset stripping of the people before the New World Order and the global totalitarian state kicks starts in earnest.

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I hope you guys can live without all your electronic gizmos because some of the metals required are ONLY available from china. Lets see how well the US military copes with roaming the world beating people up without computers and GPS.

Nope - just the current working mines are in China and they have just put a limit on their exports. There are other sources of rare earth materials.

Any country that bases it's prosperity on the unlimited demand from other countries will get fooked. China will be the textbook case in years to come.

In a couple of years China will become the second biggest economy but GDP will still be 1/10th of the US. Do the sums.

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Well until 2007 the west didn't need to do anything to keep the gravy train running.

But then the housing bubble started to burst, and house prices started dropping in the west (down 20% in the UK ,and more in the US), and a recession started.

Then what happened in 2008 was that the west dropped interest rates to try to recover this situation, and also QE - quantitive easing to do this.

China can smell a rat - how can we placate them?

===================================================

The current situation in 2009 is that China is starting to smell a rat - becoming worried about the possibility of the debt being inflated away as a result of this QE (which affects them because the inflation would reduce the value of their treasury bonds as a result of the reduction in the value of the dollar, even if the dollar value of the bonds remains unchanged).

Why would the West 'alert' China by using QE instead if as you say they wanted to stay in phase 6?

Nice by the way.

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My thesis is somewhat different

I believe the Chinese central bank and government is actually part of the same global conspiracy and has been ever since Nixon and Kissenger negoitated the first big trade deals with China in the early 1970s..........which coincides rather neatly with the collapse of the Bretton Woods system and the end of the gold backed dollar.

There's no reason why China would accept trillions of dollars of western debt knowing full well it would never be paid back unless they were in on the whole scam. I'm absolutely certain they are part of a global conspiracy to destroy whatever remains of free market capitalism, democracy and our comfy IKEA furnished, bull$hit lifestyle. The Chinese are an integral part of the New World Order. The bankers and masons have used Chinese slave labour to bring down the western democracies. It has been the first world war ever fought exclusively with monetary and financial weapons of mass destruction in preference to nasty, messy guns, tanks and bullets.

And what makes anyone think the Chinese government or the Chinese central bank gives a flying fekk about their slaves who created all the wealth? Anyone who understands how governments in the 'free world' operate should know better. They are selling out their own people in exactly the same manner as our western governments use and abuse us.

It's all just a big global club............and we ain't in it! We are NOT in the club.

It's just a huge heist, the asset stripping of the people before the New World Order and the global totalitarian state kicks starts in earnest.

I can possibly see that the Chinese may want to destroy the world of free market capitalism, but I am certain that the leaders in the west don't (they enjoy their perks too much). So I don't agree that there can be a "global conspiracy".

Then moving on to the first bolded text above, actually yes I CAN imagine that the Chinese leaders might be willing to accept trillions of western debt knowing that it could not be paid back, because (from the perspective of the chinese LEADERS personally) it is not their work that has gone to produce it - it is the work of their slaves, the Chinese people, who they keep in the dark.

What the Chinese leaders do benefit from is the power, albeit temporary, that the trillions of US treasury bonds gives them. Power to hang on to political power and get what they want politically.

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Thanks :)

But does it remove the west geopolitically? Yes they have fed the strong man, and he is certainly lazy, weak, and fat, but the west can recover. And if they do they can start manufacturing again and build up a thriving export-led industry. Trouble is it will take a major major amount of re-adjustment to do this. The question is is there the political will to do this?

There won't be any political will for it until the crash is total.

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Why would the West 'alert' China by using QE instead if as you say they wanted to stay in phase 6?

Nice by the way.

Because it knows that it can probably get away with it to prop up the economy for a short period by spinning the line that the QE is only for a short period of time to support the banks etc etc, and that it will not need to be extended.

Of course this isn't true - the only solution that supports the value of the Chinese's money is an economic depression (which is highly undesirable for the majority in the west), but the west knows that it can probably get away with "blinding them with (economic) science" for a bit (before the west really does turn on the money taps, and trash the value of the Chinese's treasury bonds).

Edited by Thread Killer

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I can possibly see that the Chinese may want to destroy the world of free market capitalism, but I am certain that the leaders in the west don't (they enjoy their perks too much). So I don't agree that there can be a "global conspiracy".

Then moving on to the first bolded text above, actually yes I CAN imagine that the Chinese leaders might be willing to accept trillions of western debt knowing that it could not be paid back, because (from the perspective of the chinese LEADERS personally) it is not their work that has gone to produce it - it is the work of their slaves, the Chinese people, who they keep in the dark.

What the Chinese leaders do benefit from is the power, albeit temporary, that the trillions of US treasury bonds gives them. Power to hang on to political power and get what they want politically.

If tesco was acting to bankrupt asda - would they be all that bothered if when asda finally bit the dust they still had some of asdas vouchers?

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If tesco was acting to bankrupt asda - would they be all that bothered if when asda finally bit the dust they still had some of asdas vouchers?

But it is not QUITE the same because tesco (China) does not produce the actual goods that it sells to asda (the US). If Tesco also owned the farms that produced the food, and prior to Asda going bankrupt had sold over 50% of their entire farms' output over 15 years to Asda, and been paid in Asda vouchers, then I could imagine that Tesco would be rather annoyed if the only thing they held after this were some worthless Asda vouchers.

And they would be annoyed some more if Asda started up afresh having dumped its debts as a new company named "Asda-rt again" and started competing with Tesco afresh.

But the point her is that although Tesco managers would be aware of the loss, the Tesco farms workers, who have been paid only in tesco clubcard points that buy only a small fraction of what the Asda vouchers bought, would likely not know about this or care at all.

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Good thread. I've been thinking along fairly similar lines lately, but with a slightly less dark and conspiratorial perspective.

I found my way to this via Dr Bubb at the other place:

http://financialsense.com/fsu/editorials/2005/1003.html

The relevent bit is the diagram of 'Greenspan's money machine'.

No doubt this basic mechanism is well known and well documented. But its obvious what's wrong: the west grows its debt as China grows its reserves. Or China gets richer at the west's expense. But otherwise its a virtuous circle. Employment increases in China, living standards improve there; the west benefits from re-investment from China as well as lower priced manufactured goods produced there - so living standards increase on both sides.

The trouble is it looks unsustainable. Surely the west's debt can only grow so far (i.e. slightly beyond its ability to repay) before something breaks? I still think so, but now I'm not so sure.

I wonder if it just doesn't work that way any more. If near-zero interest rates can be maintained for a long, long time then it could go on for a long, long time? If in the west can just continue to pile on the debt because we only have to be able to service it and roll it over, and with ZIRP that's easy.

And the big game in reality is improved living standards on both sides.

No doubt it breaks down eventually, but when? 200 years from now? It just has to keep going until living standards are equivalent all over.

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Nice article.

I know the Chinese aren't at all happy with our quantitative easing and the US weren't happy with China's unwillingness to up it's currency against the US dollar. The US and UK can now achieve the same result as the Chinese putting up the value of the Yuan with quantitative easing reducing the value of the pound sterling and US dollar. It is a good way of reducing debt but it is very difficult for people who have saved money as low interest rates and currency devaluation will mean savers get hit hard.

I would like to know how long is it before inflation kicks in and when it does are BoE interest rates going to go up or would they still stay low?

Can the UK manage without investment from foreign countries if we lose our credit rating?

When the government borrows money, who does it borrow it from?

Are the people they borrow it from going to be very rich when/if they get it paid back?

Edited by PSmith

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Good post Thread Killer. I would like to add some further points which are often missing in discussions of the US-China relationship. You are right that there has been a flow of physical products from East to West and a flow of paper money the other way. However, these are just two layers of what is going on in this complex affair.

One point is that the 2 trillion USD foreign exchange reserves held by the Chinese State is just the tip of the iceberg. Chinese businesses swap their USD for RMB at a bank which then by law has to deposit a certain proportion of these USD at the central bank which in turn purchases US Treasury instuments with them. However, this leaves aside vast sums of wealth not held at the Chinese central bank but is part of the greater banking system and also in the hands of Chinese businesses and citizens. These other entities can do what they want with their USD without the scrutiny of the whole world upon them. In fact, they probably love the fact that everybody in the West harps on about the size of the foreign currency reserves and how they are or are not spent leaving them in peace in buying up assets around the globe.

Chinese citizens are quietly buying up prime properties and assets all around the world, for example most of the harbour-view properties in Sydney are being snapped up by them in the last few years. Also, Chinese businesses have been investing enormous sums in places like Africa and South America developing natural resource locations. The long and the short of it is that due to the current arrangement, the Chinese have garnered a lot more than just the 2 trillion dollar reserves.

Also, not to be overlooked is the massive transfer of information and technology from the West to the East over the past three decades. Before the market reforms began in 1978, China was one of the poorest and most backward countries in the World. Certainly it had no industry or technological sector to speak of. Now, just 30 years later, China has many high tech industries such as green energy, nuclear and transport. Most of this technology has been transferred from Western companies in partnership with Chinese companies under the business rules laid down by the government.

Bottom line is that the Chinese are not as stupid as you think, neither the Chinese government nor its people. Also, living amongst them, I have grown to know their culture, their strengths and weaknesses. It is a Western myth that the people are content to live as slaves. Nothing could be further from the truth, they are hard workers and can put up with a lot of pressure and strain in order to make money. They willingly do this and are not forced to. In a land where the national anthem begins with its first line as "Arise! All who refuse to be slaves!", you will find a hardy and resilient people.

The way I see it is that in historical times, China has always had a large share of the World's GDP and wealth and as recently as the early 19th century, China had as large as 33% of the World GDP on an inflation adjusted basis. The last 180 years has been a trough in the cycle of fortune that stretches back 5000 years. The 21st-22nd centuries will see a peak coming and combined with new technologies, the future may belong to them. As an aside, have you ever read David Wingrove's series of science fiction novels called "Chung Kuo" which was written in the 80s/90s? Before the rise of China came onto the radar, he predicted a futuristic Earth ruled by 7 Chinese Emperors in a vast Empire spanning the whole planet called Chung Kuo, i.e. China or the Middle Kingdom. The series spans nine books and over 5000 pages, I'm just started on the first one. What once seemed absolutely ridiculous and far-fetched when the books first came out still is, but only slightly less so.

Best,

L

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My thesis is somewhat different

I believe the Chinese central bank and government is actually part of the same global conspiracy and has been ever since Nixon and Kissenger negoitated the first big trade deals with China in the early 1970s..........which coincides rather neatly with the collapse of the Bretton Woods system and the end of the gold backed dollar.

There's no reason why China would accept trillions of dollars of western debt knowing full well it would never be paid back unless they were in on the whole scam. I'm absolutely certain they are part of a global conspiracy to destroy whatever remains of free market capitalism, democracy and our comfy IKEA furnished, bull$hit lifestyle. The Chinese are an integral part of the New World Order. The bankers and masons have used Chinese slave labour to bring down the western democracies. It has been the first world war ever fought exclusively with monetary and financial weapons of mass destruction in preference to nasty, messy guns, tanks and bullets.

And what makes anyone think the Chinese government or the Chinese central bank gives a flying fekk about their slaves who created all the wealth? Anyone who understands how governments in the 'free world' operate should know better. They are selling out their own people in exactly the same manner as our western governments use and abuse us.

It's all just a big global club............and we ain't in it! We are NOT in the club.

It's just a huge heist, the asset stripping of the people before the New World Order and the global totalitarian state kicks starts in earnest.

This is 100% correct. Guaranteed.

UKDS, please keep up the excellent analyses of the NWO conspiracy.

Edited by urban commando

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