Pouring It On

China joined in the global stimulus party overnight with strong measures to awaken its struggling, over-leveraged economy. The immediate reaction was a predictable 4% rise in Chinese stocks and drop in Chinese interest rates. Chinese policymakers promised further stimulus if needed - and it will certainly be needed because the plans announced last night are likely to prove insufficient to dig Beijing out of its deepening debt-driven hole.

China’s debt problems dwarf those of America which is saying quite a lot since America is on the road to a debt crisis. China is reportedly now spending over $700 billion annually on its military in efforts to assert hegemony in Asia and counter US influence around the world while wrestling with insolvent banks & local governments. China suffers from believing its own press releases about its power while ignoring its dangerously shrinking population and unsustainable economic model. Chinese stock markets are depressed as a result of Beijing’s anti-business regulatory assault and Beijing’s flaccid reaction to the country’s sharp economic slowdown. It is going to require much more stimulus (which means much more debt) to get the economy growing at high rates again (if that is even possible). And that debt will only make things worse in the long run (in a place where the long run really matters).

Stronger Chinese growth also portends higher global oil prices which means higher global and US inflation. The dark side of stimulus is the higher cost of capital it brings. In a debt-encumbered world, that higher cost means higher percentages of government budgets needed to service debt and deficits. Chasing their tails is one of the few things government are good at doing. Higher inflation may also keep a higher floor under interest rates than markets are expecting at the moment.

The US and China are now leading the world into another easily cycle against a backdrop of rising global tensions and war. This is a recipe for economic turbulence including higher inflation, trade barriers, debt defaults, & market dislocations. Lowering interest rates in such an environment may seem sensible but is actually the trigger point for chaos. What is needed now is policy stability and pro-growth policies based on settling geopolitical disputes before they collapse into expensive and uncontrollable conflict.

These are all reasons to buy gold to protect yourselves.