Why has China thrown caution to the wind?

December 1, 2014 06:22 AM

I noticed that the recent precious metals price bounce was attributed to the decision of the European Central Bank and the Peoples Bank of China (PBOC) to go ‘all in’.

Both central banks made new official stimulus announcements. I don’t think the events were related to price. However, China is far from disconnected from that which will ultimately drive value.

China, almost by definition, is a heterogeneous entity. There is no way to properly elucidate or define such a large, complex, and ever-changing entity. China can be understood or described by using only the broadest of strokes and a sterile canvas.

Economics and finance can serve as one such portrait. China will lurch toward achieving first world status - but it will not go without spillover effect with the surround.  Hence the wars will go on.

The PBOC’s latest round of rate cuts appeared to spark a mini precious metals rally. Observers were taken by surprise by the news. Yet another central bank going all in - despite the so-called, popular recovery.

Why has China thrown caution to the wind?

China has a capsizing real estate. A middle class-driven shadow banking system that makes the U.S. subprime debacle look as good as the rating agencies fantasized.

China's stuck between a rock and a hard place. Overall economic consumption (consumer spending) is low (30%); versus 71% for the U.S. infrastructure investment remains high as the moneyed elite continue to build empty cities.

How will they bridge the gap - convert to a consumption based, rather than an investment focused economy? Sounds like a worthy idea. Let them spend the dollars before they lose their value. But spending them too fast could trigger a positive feedback - money velocity of international dollars.

Exponential dollar transactions worldwide would be enough to flame the fires of currency wars. No doubt, eventually they will. And there is a collective "will" of the masses.

The U.S. suffers from the opposite problem. We need to get to higher rates without crashing. We need less spending and more private-capital driven infrastructure investment. We need the return of real money. But that's impossible.

Higher rates would create another financial meltdown. Falling equities would only be the visible side. The chain reaction would lead to a credit implosion, breaking the financial system permanently and crippling the economy.

Maybe this is 'the plan’? Or perhaps the crash comes from some unforeseen - exogenous event - a black swan. An event that will 'appear' as if it were planned. It will generate all sorts of conspiracies in retrospect.

There are more than one thousand ways to trigger a crash. One reason why committing to one is a fool's game in and of itself. Anyone one of them could seem plausible in retrospect.

I think people will be shocked by the social unrest that comes with it because we never truly purged the ills of finance that were built up before the last crisis.

The average man, outside of the limelight, has carried around a chronic level of frustration and debt; a lack of real economic recovery, growth, and opportunity combined with the new layers of bureaucratic dependence and higher cost of living.

It's only so long before an excuse comes along and blows the lid off.

About the Author

Jeffrey Lewis has been an advocate for silver purchasing for the past six years. He writes regularly about it at silver-coin-investor.com