We Are All In The Same Boat?

Posted at 11:15 AM (CST) by & filed under Bill Holter.

Dear CIGAs,

No doubt the financial and economic stresses are building. Without even looking at the various and very weak economic reports, talk of and implementation of “negative interest rates” should tell you all you need to know. We looked at this last G-20 meeting as a possible venue for some type of concerted action or even the announcement of some sort of re set or major change. Instead, they “publicly” agreed on nothing.

Earlier today, Zerohedge put out an article regarding China’s shadow banking system

http://www.zerohedge.com/news/2016-02-29/china-faces-15-trillion-bombshell-shadow-banking-sector-collapses and the gross leverage involved. It has also been reported of China’s real estate market, true bubble conditions exist. “Flippers” are lining up for days or even weeks to queue up and hilariously a 65 square foot “closet” just sold for $585,000! The latest news is a layoff of about 6 million workers http://www.reuters.com/article/us-china-economy-layoffs-exclusive-idUSKCN0W33DS, does this maybe sound like a burst to the bubble?

Without getting into the “micro” of the shadow banking numbers and the massive/exponential build ups they are experiencing, let’s look from a macro perspective. $15 trillion is nearly the size of the purported U.S. GDP. It also represents about 10% of China’s GDP …yet only the “shadow” banking side of it and not including official banking. No doubt China is a debt bubble on the verge of or already bursting. The recklessness with credit will probably be looked back upon as insanity …but I am here to tell you it is not!

First and foremost, China looks VERY long term down the road in generations rather than years or quarters. I have said before I believed China was building ghost cities via credit use because they do not care about a financial collapse as they will be left with real and new infrastructure. I still believe this and now even more so. It is my opinion China made a decision a few years back (maybe as far as 2009) that the West, led by the U.S. had an untenable financial system and the over use of debt would not only be a burst bubble but would lead to systemic change. In other words, China joined the party even though knowing it would end very badly!

To further explain this thought process and why, we need to look at where we are and what options are available. Basically, the world is in a position where too much debt exists everywhere and has invaded every nook and cranny. Somehow, some way, the world needs to “reflate” but adding more debt and outright monetization has not worked. The only way the debt will become payable is to “devalue” which is what the current currency wars is all about. What needs to happen is ALL currencies need to be devalued at the same time!

This leads us back to China, I believe they fully understand this. They also understand that global currencies will have to (be forced to) devalue against “stuff” primarily gold because it is “money”. This is why China has been importing so much gold for the last 5-10 years, they saw this coming. I believe when the implosion comes, China will devalue their yuan versus gold. This in turn will de facto devalue all other currencies including the dollar as these currencies are in the same debt laden Titanic. If/when China implodes, they will take the entire global financial system with them. Please do not mistake, China is not the only blasting cap in the bag. If “one” goes, ANY one, they will ALL go!

A devaluation by China versus gold will do something very positive …for those nations who do actually have gold. It will RECAPITALIZE their treasuries! In other words, China will in effect make a policy decision that makes their holdings worth much more in value and allow them to move forward with much of their debt wiped out and the remaining debt more easily serviceable. Nations who do not have gold in their treasuries will be at a distinct disadvantage.

To wrap this up, were China to actually follow this path and I believe they will, they will end up with much debt defaulted, a newly stocked treasury and lots and LOTS of brand new infrastructure that cost a small fraction of the original build cost! If you are laughing at this concept, please ask yourself this one very simple question. If you could possibly do this for yourself, your company or your nation …wouldn’t you do it in a heartbeat? China has the ability to do this, I believe they will!

PS: -UH OH!  Moody’s Downgrades China’s Credit Outlook From Stable To Negative – Full Text

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome  bholter@hotmail.com