“We’re in the such late stages of a game that is the largest global imbalance I’ve ever seen in my life. When you look at on balance sheet and off balance sheets, you look at on balance sheet in the banks, you look in the shadow banks. The number of total credit in the system, China is right at $40 trillion. Think about the number I just said. $40 trillion. And that’s using an exchange rate of call it 6.7 to the dollar, right? So it’s grown 1,000% in a decade. And we’re on a $40 trillion credit system on $2 trillion of equity on maybe $1 trillion of liquid reserves.” – Kyle Bass
“We are talking about a steady erosion of the dollar as a reserve currency. I think that is most likely. The only thing that could make that really go fast is some kind of war. The United States and China, we got to keep our eye on this because Trump has been threatening a trade war with China. China responded and said if you do that, we may dump the dollar. . . . So, there is all this trade and financial back and forth and maybe even actual war at some point… China has the ability to really impact the dollar in a big way on the world stage. We better hope it does not come to that because a slow erosion we can adjust to; a quick erosion is going to really roil the markets and maybe blow a few of them up.” – Chris Martenson
China’s Communist Party congress is set for October 18th. Remember that date. President Xi Jinping is expected to receive a second term as the ruling Communist Party’s top leader.
Orders have been sent out by the communist party in China that nothing is to rock the markets prior to the congress. The communist party has even gone so far as to allegedly issue a travel ban for brokers and such. Stability until October 18th is paramount to Xi.
What will happen after October 18th is a matter of great speculation. Xi will have won another five year term to rule China. Some smart people believe Xi will quickly address China’s problems with radical change in the economic and perhaps political and foreign arena. Some smart people believe that post-congress there will be a significant devaluation of the yuan. Why would Xi want to do that? Because China is spending upwards of a trillion dollars a year in foreign reserves defending the present off shore peg of the yuan. Some smart people also believe Xi will address the monstrous Chinese debt load – much of which is in the shadow banking system.
Depending on what and how Xi acts it could have a significant effect on the global economy. There is also no assurance that what Xi may decide to do will succeed internal to China. The Chinese shadow banking is a plate of financial spaghetti and no one knows where changes to the system may lead. The potential for unintended consequences abound.
The elephant in the room is what changes Xi may make in the relationship between China and the United States. Trump has indeed been threatening the economic punishment of China, due to North Korea and what are perceived as unfair trade practices. It is possible that Xi may pro-actively strike the United States economically by dropping dollars. Xi may be of the opinion that the United States economically needs China at least as much as China needs the United States and he would probably be correct in assuming that. Xi may choose to drive that point home before Trump can institute meaningful sanctions against China. The consensus seems to be that after October 18th Xi will be much less accommodating toward the United States and Trump than he has been.
If this is the path Xi will pursue then the potential for unintended consequences in this setting also abound – but the potential unintended consequences are much more meaningful for the globe as a whole. How will Trump react if Xi drops dollars? There is potential here for mutual assured economic destruction that could lead to actual physical destruction in the form of war between the two countries.
Change is in the air and potentially changes that will impact your life in a meaningful way. We do not know what Xi will do, we only know that after October 18th he will have the political freedom to do it.