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“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.”
                                    Ogden Nash

Commentary & Analysis
How do you say “tick … tick … tick …” in Chinese?

My old boss, Ross Perot (yes, it’s true), used to say that giant sucking sound you hear is the sound of jobs leaving the country thanks to NAFTA. Despite all the criticism from the free-market mantra clowns on the right, Perot was indeed proved correct, regardless of what you may think of the man. I would say now, that giant ticking sound you now hear isn’t a clock, but a time bomb about to explode, aka the Chinese credit bubble.

I agree with Moody’s and recently said in this daily missive that China’s debt is a lot worse than most realize, even Chinese authorities. That is because what China has isn’t really quite a banking system; it is a set of loosely organized financial institutions that funnel payments to select persons/companies/locales based on direction from the central committee and other cronies. In short: their banks are politburo money and credit conduits that lack anything resembling western banking.

It is no secret that western banking standards of risk/credit evaluation are much better than China’s system, which is still developing, to be fair. But the scary part is we now know just how dismal western banking handled free-credit when it was available; all they did with their free credit was almost destroyed the entire global financial system with their greed and incompetence. Imagine what the Chinese conduits must be engaged in? Yikes!!!

Remember the linkages I have discussed…

US → China → Germany (eurozone)

And of course there is feedback in both directions…

A few charts to keep this simple and in the theme of imbalances being slowly shaken out due to private deleveraging in the US, normal slowdown in China as it tamps down on credit, and the reverberation through to Germany at a time when slowing German growth is the last thing the eurozone needs …

First, US Consumer Credit Absolute Change Monthly: This chart on a yearly basis has turned south for the first time since 1940 – yup … 1940. This is bad news for China as the US consumer is the biggest demand source. Austerity across the eurozone, meaning European consumers ain’t exactly in buying mode adds to a decline in Chinese demand. Thus, why China is so keen on propping up Europe is called self-interest!

This decline in US demand can also be viewed via the US Current Account Balance that has been perennially declining, but is now improving fast. I said a couple of years ago US Current Account Deficit would go positive thanks to the process of deleveraging trigged by the credit crunch. Not there yet, but I stick to that view because I believe there has been a secular shift in the habits of the US consumer … and there is one other way to view this, as US dollar liquidity being withdrawn from the global economy. If the Fed is really done QE2, it may be another downer for those needing constant credit.

China Imports from Germany: And we all know who the paymaster is for the eurozone–Germany. And we all know Germany is blowing and going. Well, a big part of that blowing and going is thanks to a massive upswing in exports to China. I have said, not an original thought, these exports represent advanced tools that China will of course copy and re-sell in the open market, putting pressure on German manufacturers and putting many out of business. But before that happens, we will likely see a big decline in demand from China that will dampen German growth and raise the hackles even further of those inside Germany who are tired of playing paymaster to countries who will never pay back the taxpayer money being transferred to them.

I just Googled the word “tick” in Chinese, and got this 打勾 … so now I can write it, but still can’t say it:

打勾 … 打勾 … 打勾

Anyway, if you see a headline that looks anything like that above in the Xinhua news site, it may be time to tighten some stops.