Timing is key, as China party leadership head into their fall meeting. Expect some face-saving "reset" rather than outright default. But still, very bullish for dollar vs emerging markets. And adding to already deflationary picture for global macroeconomy.
Kyle Bass' original analysis of the China credit bubble is also worth revisiting.
The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance
I want people to remember US in late sixties. If somebody has good enough memory, he will recall that US citizens were legally forbidden from owning gold and even simple golden jewelry until 1974 (Nixon struck the gold standard just 3 years before).
The schizophrenic policy was "We redeem FX dollars in gold, but not let any of our own citizens have it. Instead, the treasury will own your own gold for you."
China tries to do the same trick with savings and assets of its citizens and companies.
Except that for gold and silver, we have luxury apartments, lumps of jade, exotic industrial commodities stockpiles, bitcoins, FX certificates, and other novelties.
gold jewelry was not illegal until 1974. It was "hoarding" of gold coins or bars worth over $100 (1933 dollars = ~$2000), and rarely enforced. any actual use of gold as a part of something was exempt.
>actual use of gold as a part of something was exempt.
Certainly not in its entirety, the same "articles containing gold clause" was used very creatively by courts to issue confiscation orders for jewelry for sure. That was my BLAW101 essay subject, something I spent few hours on digging court records.
The "rarely enforced," does not mean that it had no effect. Effectively, people were forced to sell their trinkets, and buy stuff on the market with that money if they didn't want to loose all of the value of their savings.
I don't see why not. There's plenty of 'collectors' items that do hold actual value - A copy of many first-run comics, for example, make good display pieces but are also valued in hundreds of dollars by collectors, and only go up as they get farther from first printing.
A good book on a similar topic was “The Chastening” by Paul Blustein. This was about the currency disasters of the late 90’s, which interestingly also took place at a time people thought we were in a tech bubble (we were).
This time period was also known as the “Southeast Asian Financial Crisis”. To this day there are still empty 60 story skyscrapers in Bangkok because of how bad it was.
A big lesson from that event are that foreign currency reserves are never enough.
Korea had something like $300 billion in foreign currency reserves and was wiped out in days. $3 trillion is a lot, but adjusted for China’s population, and the fact that they will need to use those reserves to last 1 year maybe 2, and they start to look much smaller.
Also this kind of a crisis would not be like a tech bubble. Tech Bubbles are bad, but they do not invoke the banking system. If the banking system falls, the general rule of thumb is a minimum 10 year recovery.
It’s worth noting that this is the position adopted by George Friedman in his book “The Next 100 Years” where he predicts the fall of China and also North Korea by 2030 at the very latest.
Also check out “This Time Is Different: Eight Centuries of Financial Folly” by Carmen Reinhart from Princeton University Press.
Kyle Bass' original analysis of the China credit bubble is also worth revisiting.
The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance
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