Markets were down a couple points last year and started this year looking worse. As my students and followers know, this was expected. I have been worried about the Fed rate hike and a China collapse for some time.
Today on This Week with George Stephanopoulos Nobel Laureate Paul Krugman finally started to agree with me. Unfortunately, he still is a step behind.
Here’s what he said, followed by my take.
“PAUL KRUGMAN, NOBEL PRIZ-WINNING ECONOMIST: Well, China is really, really messed up. I’m definitely buying into the hard landing for China story now. It looks like a bad mess. Looks like Japan, when it had this big bust up only worse without the social cohesion. So China looks bad.
The question is whether you can make that a story where the rest of the world gets dragged down. And the numbers make that a hard story to tell. Now even now, even with all the globalization, the United States only sells about $1 in $7 of what we made to other countries and most of that is to Canada, Europe not to China.
So it’s a little bit hard sell that story.”
He’s finally on the same page with me on the hard landing. And his point on the lack of social cohesion in China being a problem captures the crux of why the collapse will be so significant.
I can’t tell if he’s biased and acting as a TV pundit pushing a political agenda or he’s a really confused. But when it comes to the impact, I don’t think it’s a hard story to tell at all.
Here’s my story, you be the judge.
China collapses. It’s markets tank. They stop their considerable buying from foreign countries. As the second largest economy in the world, every country that has been selling to them will slow. While we in the US may not be selling a lot directly, indirectly our global companies do see significant indirect economic value in the China purchases.
So it’s not about how much we sell to China as Nobel Laurette Krugman would have you believe. It’s about McDonalds, Coke, and all the other global companies that earn far more money offshore than onshore. We will watch their sales fall globally with a strong correlation with China’s demise.
Their earnings decline will drag our markets down and that will crush confidence. At that point, we will have to wonder what is the Fed, or anyone else for that matter, going to do to get us going again?
So its not be our direct demand, but the end of China as the driver of global demand that will drag down the global economy and impact our lives.
That’s my story, it wasn’t hard to tell, and I’m sticking to it.
Dr. Douglas Rice 