As we speak, Chinese premier Wen is bopping around Europe with a red cape on. He’s promising the increasingly desperate European socialists that China will come to the rescue with its massive balance sheet and ‘bail them out’.
There are all sorts of lovely fictions in that last sentence, and lovely fiction is what socialists are all about. Can you guess where? How about ‘bail them out’. What that really means is, instead of their worthless debt being traded to the ECB for Euros, their worthless debt will be traded to CCB for Yuan, and a deal will be struck between the Chinese and the ECB to insulate them from any inflationary effects.
But that isn't the only lovely fiction. How about the phrase ‘massive balance sheet’. The Chinese economic and banking statistics have always had a questionable relationship to the truth. And while adding the Greek default onto that shouldn’t cause too much of a stir in the grand scheme of things, it makes an already precarious situation, even more potentially deadly.
In the hedge fund world, we know what to do about a Greek default and even a US ‘technical default’. The word ‘hedge’ means to prepare for events like that, and that’s what hedge funds have done. While the value of Greek debt falls to zero, the value of other things (the US dollar for example) will rise. So while these things will certainly be bad for the common man, the hedge funds of the world will probably manage them without historic pain.
But a Chinese 'hard landing' will be an 'all bets are off' moment for everyone. It will apply global deflationary pressure on an unprecedented scale. And since their economic and banking statistics have been so fictitious for so long, there is no way to hedge against it. You can't protect yourself against something which everyone has been pretending doesn't exist because you don't know what it actually is. It might be a tiger come to eat you, or a train to run you over. What protects you from one does nothing for the other.
So if there is a Chinese hard landing, no one will no what (specifically) it is, and almost no one will see it coming in time to react to it. It will come as a thief in the night – a complete surprise to virtually everyone. And all but the very lucky may end up being crushed by it. So in the end, the red cape that Premier Wen is wearing doesn’t necessarily make him a hero – he may turn out to be a super-villain after all. And the biggest 'lovely fiction' in that sentence may very well be 'come to the rescue'.
As for our own political impasse regarding the debt ceiling, the network news media has begun their campaign to portray the Democrats as the 'grownups in the room'. Personally I find that laughable. Their policy proposal for the debt ceiling is akin to saying that 'if I don’t get to tax millionaires and billionaires more, then I’ll hold my breath till I choke'. Hardly the grown-up sentiment. A better way to describe them is that they’re the toddler with the loaded gun. They want more candy, more ice cream, and more ponies, or someone is going to get hurt. They’ll try to hurt their much hated millionaires and billionaires, but they’ll end up hurting the common man instead.
Democrats seem to believe that the only way to improve government revenue is by putting even more wealth redistribution in place. That will keep unemployment high, and economic growth low. The Republicans on the other hand (the people the press are portraying as the children in this discussion) are saying that it’s better to get the common man a job than to give him a government handout. They’re advocating increasing government revenue by increasing economic growth.
In short, the Democrats want to punish winners, and help the losers, all based on their own idea of fairness. While the Republicans are willing to let the people who help themselves gain the most. They think it’s perfectly fair to set the rules as being the same for everyone, and let people win or lose based on their own efforts. Mark me down as supporting the latter.
But the press will become shrill in the next few weeks, and it will be no surprise how they want to portray things. I think it will be interesting to see how little their high chair banging actually effects the debate. The press doesn’t have the influence it used to (thank goodness). Or every toddler would have a handgun pointed at us. And all those deadly threats wouldn't increase the candy, ice cream, or pony statistics in any way.
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