As pretty much anyone with at the very least basic economic know-how can confirm, our globalized as well as (or especially) over-leveraged economic system isn’t exactly “built” to withstand shocks such as a significant recession. To understand or even internalize this quasi-axiom, we would recommend simply heading over to a GDP evolution chart and taking a close look at the Great Recession period. It will be hard not to notice that the (in)famous Great Recession, which risked “breaking” the worldwide financial system, seems to be nothing more than a blip on the chart in question.
In a nutshell: we need consumption and debt-fueled currency creation for the status quo to be maintained because in the absence of these two forces, the current economic system would implode. An economic system which, as you might have noticed, revolves around the exact opposite of what used to be the “responsible” thing to do (keeping debt in check, being a saver, etc.) and on the contrary, we are firmly in “paradox of thrift” territory.
In other words, if enough market participants would do what used to be considered the responsible thing and let’s say start toning it down a notch or two in terms of consumption so as to perhaps pay off their debt sooner, the financial system wouldn’t be able to withstand such a shock because due to the over-leveraged nature of it, there is simply too much debt in the system and even if individuals would use 100% of the currency at their disposal to re-pay it, we’d run out of currency and the debt would be anything but close to being paid off.
Simply because in 2020 and beyond, debt is money. To put it differently, there is absolutely no difference between the $100 your grandparents have kept under their mattress for decades and the $100 which were created out of thin air as a result of a credit card owner deciding to buy a useless item. Needless to say, there is a lot more of the former than the latter in the system at this point in time and therefore, responsibly paying off debt is anything but scalable.
As such, from China to the United States, the authorities are left with two broad choices:
- Put an end to the party by letting the current system collapse, in the hope that we can replace it with a more sustainable one, an option recommended by economists who are on the very conservative side, for example “hard money” economists (who advocate a return to the Gold Standard), libertarians and so on. Needless to say, this is an option that would result in enormous short-term disruption but it is the hope of those who advocate going down this road that in the mid to long-term, we will all be better off
- Kick the can down the road indefinitely by creating new debt so as to pay off existing debt, in the hope that humanity will ultimately figure out a way out of this mess. This is the option preferred by the overwhelming majority of economists at this point in time, especially economists who hold official positions and want to do everything humanly possible to avoid having the entire status quo financial framework collapse on their proverbial watch. In contrast to the previous option, this enables those who want the current system to survive no matter what to experience short and mid-term relief, accepting the fact that the long-term implications can be quite problematic but hoping it does not come to that
For the most part, as far as pretty much all governments are concerned (from “communist” China to the Republican-led United States and yes, even countries on the very conservative/prudent end such as Germany), the topic of which choice to make isn’t even up for debate anymore… it has already been established that choice #2 is the way to go and with each financial and/or economic crisis episode, we dig ourselves deeper into the proverbial choice #2 trenches.
For example, to combat the effects of the Great Recession, the Federal Reserve increased the monetary base by as much as $85 billion per month at the height of the US monetary easing efforts, more currency creation in one year than in the almost 100 years before that, from 1913 up until the Great Recession.
To combat the effects of the 2020 economic crisis, more of the same but on a larger scale is being done. The tone was set by none other than China, which made it clear right from the beginning (back when the coronavirus/COVID-19 threat was considered regional at best and most Western nations downplayed the possibility of experiencing difficulties at home) that it intends to provide as much liquidity as necessary to offset the severe economic shutdown effects. And, indeed, the effects in question were more than dramatic, with for example auto sales dropping by more than 90% in February of 2020 compared to the month of January and the same principle being valid when it comes to a wide range of industries.
As such, while absolutely nothing is certain in the oftentimes volatile world of economics, the ChinaFund.com team considers it highly probable that China will join what is shaping up to be a global currency creation trend (or, to be more precise, the continuation of an already-existing trend involving aggressive monetary policy), for reasons which range from combating the economic effects of its severe lockdown period to retaliation, should various countries choose to step it up a notch (or more) from a currency war perspective, let’s not even refer to potential forms of retaliation should the trade war dimension kick in (with China, more likely than not, resorting to aggressive stimulus in the event that the world will go through a meaningful supply chain complexity reduction scenario, at the very least when it comes to products/services that are deemed to be crucial from a national security perspective).