What Chinese Market Turmoil Tells Us About 2016

Since the last financial crisis, I have repeatedly said that the most important economy in the world was now China. China is the world’s largest manufacturing nation. It is probably the world’s largest economy. It is the largest market for commodities, which many of the world’s nations rely on as their primary exports. Because we have gone to a world system which encourages manufacturing overseas for First World nations, this is unsurprising.

China has been creating, publicly and privately, more money than the US, Japan, and Europe combined. Multitudes of it.

Even when it hasn’t been the strongest growing economy, it has driven the growth of many other nations; direct trade with China might not dominate trade for some nations (for example, Brazil), but China determines the price of key commodities which many nations sell.

Some economists will argue that because trade is a small percentage of a particular country’s economy, it does not matter. This is like saying that since the food I eat is a small percentage of my body weight, eating less and worse food doesn’t matter.

Activities at the margins determine prices, economic growth, and employment/unemployment. China is the lynchpin economy which determines these things for much of the world.

So, we’ve had an ongoing commodities price crash, ongoing for some time, with most of the attention on the price of oil (now down to 2003, Pre-Iraq war prices). But commodities overall have crashed, and even countries which have maintained GDP growth (like Australia) have taken huge hits in their labor markets.

With prices down, growth stagnant or down, there is simply much less demand. This is your standard vicious cycle: The Chinese can sell less manufactured goods to the rest of the world, therefore need less commodities, etc.

The Yuan is becoming a reserve currency, and that means it is being unpegged from the dollar, regardless of whether most people can admit this or not. So the decreased exports are putting pressure on the Yuan, everyone’s money is running to the currency of last resort (the US dollar), and people are trying to get out of volatile Yuan denominated assets.

All of that is a long way of saying: This is the year the shit hits the fan.

We never left the depression after the financial crisis. We did, however, still have a business cycle. There was a recovery, expansion, and so on. Now we’re (and by “we,” I mean the entire world, with some exceptions) heading into recession.

That’s a recession within a depression, wherein many First World nations’ median income actually fell, and where employment in core nations never recovered in terms of population percentage.

This is going to hurt.

This is going to really, really hurt.

I’ll discuss specific consequences later, and what you can do. Do not assume this won’t come home to the US. A lot of the pain is being concealed in the US by the flight to the dollar and the oil price collapse, but it’s still going to hit and the pain is still going to hurt.

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