Econ CRASH and WW3 CAN BE AVOIDED if we STOP TRUMP

Econ CRASH and WW3 CAN BE AVOIDED if we STOP TRUMP

Read my comments to this art at the end.

Rickards Warns "PREPARE FOR A CHINESE MAXI-DEVALUATION"

"Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?"

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Authored by James Rickards via The Daily Reckoning,

China is a relatively open economy; therefore it is subject to the impossible trinity.  China has also been attempting to do the impossible in recent years with predictable results.

Beginning in 2008: 1- China pegged its exchange rate to the U.S. dollar. 2- China also had an open capital account to allow the free exchange of yuan for dollars, and  3- China preferred an independent monetary policy.

The problem is that the Impossible Trinity says you can’t have all three. 

For example, China’s attempted the impossible beginning in 2008 with a peg to the dollar around 6.80. This ended abruptly in June 2010 when China broke the currency peg and allowed it to rise from 6.82 to 6.05 by January 2014 — a 10% appreciation.

After 2013, China reversed course and pursued a steady devaluation of the yuan from 6.05 in January 2014 to 6.95 by December 2016. At the end of 2016, the Chinese yuan was back where it was when the U.S. was screaming “currency manipulation.”

In August 2015, China engineered a sudden shock devaluation of the yuan. The dollar gained 3% against the yuan in two days as China devalued.

The results were disastrous... for the US

U.S. stocks fell 11% in a few weeks. There was a real threat of global financial contagion and a full-blown liquidity crisis. A crisis was averted by Fed jawboning, and a decision to put off the “liftoff” in U.S. interest rates from September 2015 to the following December.

China conducted another devaluation from November to December 2015

The impact these two prior devaluations had on the exchange rate is shown in the chart below.

By mid-2017, the Trump administration was once again complaining about Chinese currency manipulation.

This was partly in response to China’s failure to assist the United States in dealing with North Korea’s nuclear weapons development and missile testing programs.

For its part, China did not want a trade or currency war with the U.S. in advance of the National Congress of the Communist Party of China, which begins on October 18.

China escaped the impossible trinity in 2015 by devaluing their currency.

China escaped the impossible trinity again in 2017 using a hat trick of partially closing the capital account, raising interest rates, and allowing the yuan to appreciate against the dollar thereby breaking the exchange rate peg.

The problem for China is that these solutions are all non-sustainable.

China cannot keep the capital account closed without damaging badly needed capital inflows. Who will invest in China if you can’t get your money out?

China also cannot maintain high interest rates because the interest costs will bankrupt insolvent state owned enterprises and lead to an increase in unemployment, which is socially destabilizing.

China cannot maintain a strong yuan because that damages exports, hurts export-related jobs, and causes deflation to be imported through lower import prices. An artificially inflated currency also drains the foreign exchange reserves needed to maintain the peg.

Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?

The most obvious course, and the one likely to be implemented, is a maxi-devaluation of the yuan to around the 7.95 level or lower.

This would stop capital outflows because those outflows are driven by devaluation fears. Once the devaluation happens, there is no longer any urgency about getting money out of China. In fact, new money should start to flow in to take advantage of much lower local currency prices.

There are early signs that this policy of devaluation is already being put into place. The yuan has dropped sharply in the past month from 6.45 to 6.62. This resembles the stealth devaluation of late 2015, but is somewhat more aggressive.

The geopolitical situation is also ripe for a Chinese devaluation policy. Once the National Party Congress is over in late October, President Xi will have secured his political ambitions and China will no longer find it necessary to avoid rocking the boat.

Both Trump and Xi are readying a “gloves off” approach to a trade war and renewed currency war. A maxi-devaluation of the yuan is Xi’s most potent weapon.

Less dramatic devaluations of the yuan led to U.S. stock market crashes. What does a new maxi-devaluation portend for U.S. stocks?

We might have an answer soon enough.

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Source  http://www.zerohedge.com/news/2017-10-13/rickards-warns-prepare-chinese-maxi-devaluation

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MY COMMENT: 

We wanted war since we placed Thadds missiles in S-K against China-RU.. now we have it at economic level .. that is the base for any military war action at world level.

So, the SunTzu  thesis  on 'Death Ground', from the  'Art of War' applies here perfectly:  'Death Ground' is an untenable position where “an enemy has no recourse but to fight or die, as honorable withdrawal is not permitted."  [ Implicit in this statement is the right of 1^st strike to them ]

The US can fight at economic level, but it will be impossible to avoid the final “crash”.  The financier elite in the US is deeply divided on issue war, and they may start a radical opposition to Trump.

The military action (1^st strike against China & RU or in reverse) has non-sense at all, it will be responded automatically via satellite. It will cause a “mutually assured  destruction” (MAD theory) with not winners at all.

If life remains worldwide .. the victims of such humanitarian disaster will retaliate against US companies, embassies and US billionaires and millionaires at world level.

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