Most economic forecasts suggest that a recession in China will hurt everyone, but that the pain would be more regionally confined than would be the case for a deep recession in the United States. Unfortunately, that may be wishful thinking.
CAMBRIDGE – When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.
.. First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China.
Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse.
.. High Asian saving rates over the past two decades have been a significant factor in the low overall level of real (inflation-adjusted) interest rates in both the United States and Europe, thanks to the fact that underdeveloped Asian capital markets simply cannot constructively absorb the surplus savings.
.. instead of leading to lower global real interest rates, a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy.
.. a significant rise in global interest rates would be much worse. Eurozone leaders, particularly German Chancellor Angela Merkel, get less credit than they deserve for holding together the politically and economically fragile single currency against steep economic and political odds. But their task would have been well-nigh impossible but for the ultra-low global interest rates
.. Today, however, debt levels have risen significantly, and a sharp rise in global real interest rates would almost certainly extend today’s brewing crises beyond the handful of countries (including Argentina and Turkey) that have already been hit.
.. Nor is the US immune. For the moment, the US can finance its trillion-dollar deficits at relatively low cost. But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas. At the same time, Trump’s trade war also threatens to undermine the US economy’s dynamism.
.. Its somewhat arbitrary and politically driven nature makes it at least as harmful to US growth as the regulations Trump has so proudly eliminated. Those who assumed that Trump’s stance on trade was mostly campaign bluster should be worried.
.. A recession in China, amplified by a financial crisis, would constitute the third leg of the debt supercycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.
When Donald Met Vladimir: The Transcript
Guidance from a like-minded leader.
.. But when you of all people criticize the pipeline, you force Berlin to support it is as a matter of national pride and principle!This is the essence of tradecraft: to convince those whom you seek to manipulate that they are thinking and acting for themselves.
.. May we also say how much we admire how you have discredited the F.B.I. and the rest of your so-called deep state? To rally your supporters and confound your opponents by conjuring imaginary enemies is a method we have profitably employed for over a century, most recently in Ukraine.
.. Donald, we have the same goals. We want to defend the great Christian civilization of your Scottish and German ancestors against barbarians from the southlands. Yet we are being stabbed, stabbed in the back, by the exact same people! I mean global capitalists like George Soros and Bill Browder and he-women like Hillary and Merkel and feminized men like Barack Obama who have no will to fight!
We must turn to face these backstabbers, Donald, not let the deep state manipulate us into fighting each other.
Why Merkel Must Go
But Germany has been infected with the temper of the times. The proximate cause is a bitter dispute over asylum laws between Seehofer, who leads Bavaria’s conservative Christian Social Union, and Chancellor Angela Merkel of the Christian Democratic Union, which is the C.S.U.’s more centrist sister party outside Bavaria.
.. That will most likely require setting up border controls and checkpoints, meaning an end to the borderless Continent that is the most visible expression of European unity.
.. The deeper cause of the crisis, however, is that the C.S.U., which has dominated Bavarian politics for decades, is threatened by the growing popularity of Alternative for Germany, or AfD, the bigoted nativist party that is now the country’s third largest. That’s in part because the C.D.U. has dragged its Bavarian sister too far to the left, creating an opportunity for the AfD among traditional conservative voters.
.. But mostly it’s because Merkel created the conditions that gave the enemies of the European ideal their opening. She refused to cap the number of asylum seekers Germany would take and then pleaded with other European countries to take them. That almost certainly gave Brexiteers the political imagery they needed to carry the vote a year later. The AfD was a minor Euroskeptic party before the refugee crisis gave it a rallying cry. The xenophobes of Austria’s Freedom Party, Italy’s Northern League and Sweden’s Democrats have all profited politically from Merkel’s decision.
.. Knowing how to set broad but clear limits is one of the essentials of conservative governance. Merkel’s failure is that she ceased to be conservative.
.. Admirers still speak of Merkel as if she is Europe’s last lion, the only leader with the vision and capacity to save the E.U. There is much that is admirable about the chancellor, but as things now stand she is likelier to be remembered as the E.U.’s unwitting destroyer. The longer she’s in office, the more the forces of reaction will gain strength. And isn’t 13 years in office more than enough?
.. There is still time for the E.U. to be saved. Europe needs a real security policy, backed by credible military power and less dependence on Russian energy. It needs to regulate migration strictly outside its borders so that it can remain open within them. It needs robust economic growth and much lower rates of unemployment, not paeans to the virtues of sustainability and work-life balance. And it needs institutions in Brussels that aren’t mere regulatory busybodies trying to punish member states for being economically competitive.
.. What’s the alternative? A passage from Norman Davies’s magisterial history of Europe suggests the darker possibilities:
“Inter-war politics were dominated by the recurrent spectacle of democracies falling prey to dictatorship.” He continued: “It cannot be attributed to any simple cause, save the inability of Western Powers to defend the regimes which they had inspired. The dictators came in all shapes and sizes — communists, fascists, radicals and reactionaries, left-wing authoritarians (like Pilsudski), right-wing militarists (like Franco), monarchs, anti-monarchists, even a cleric like Father Tiso in Slovakia. The only thing they shared was the conviction that Western democracy was not for them.”
The stakes are too high for a muddler like Merkel to stick around
Can the Euro Be Saved?
Across the eurozone, political leaders are entering a state of paralysis: citizens want to remain in the EU, but they also want an end to austerity and the return of prosperity. So long as Germany tells them they can’t have both, there can be only one outcome: more pain, more suffering, more unemployment, and even slower growth.
.. The backlash in Italy is another predictable (and predicted) episode in the long saga of a poorly designed currency arrangement, in which the dominant power, Germany, impedes the necessary reforms and insists on policies that exacerbate the inherent problems, using rhetoric seemingly intended to inflame passions... Italy has been performing poorly since the euro’s launch. Its real (inflation-adjusted) GDP in 2016 was the same as it was in 2001... From 2008 to 2016, its real GDP increased by just 3% in total... the euro was a system almost designed to fail. It took away governments’ main adjustment mechanisms (interest and exchange rates); and, rather than creating new institutions to help countries cope with the diverse situations in which they find themselves, it imposed new strictures – often based on discredited economic and political theories.. The euro was supposed to bring shared prosperity, which would enhance solidarity and advance the goal of European integration. In fact, it has done just the opposite, slowing growth and sowing discord... Emmanuel Macron, in two speeches, at the Sorbonne last September, and when he received the Charlemagne Prize for European Unity in May, has articulated a clear vision for Europe’s future. But German Chancellor Angela Merkel has effectively thrown cold water on his proposals, suggesting, for example, risibly small amounts of money for investment in areas that urgently need it... In my book, I emphasized the urgent need for a common deposit insurance scheme, to prevent runs against banking systems in weak countries... The central problem in a currency area is how to correct exchange-rate misalignments like the one now affecting Italy. Germany’s answer is to put the burden on the weak countries already suffering from high unemployment and low growth rates... The alternative is to shift more of the burden of adjustment on the strong countries, with higher wages and stronger demand supported by government investment programs... Matteo Salvini, the party’s leader and an experienced politician, might actually carry out the kinds of threats that neophytes elsewhere were afraid to implement. Italy is large enough, with enough good and creative economists, to manage a de facto departure – establishing in effect a flexible dual currency that could help restore prosperity... Whatever the outcome, the eurozone will be left in tatters... It doesn’t have to come to this. Germany and other countries in northern Europe can save the euro by showing more humanity and more flexibility. But, having watched the first acts of this play so many times, I am not counting on them to change the plot.