Globalisation Driving the Nation State to Bankruptcy

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–You know there’s a whole other world out there. Someone might want to tell this to Australia’s political establishment. It’s narrowly focussed on the idea of taxing carbon dioxide emissions as a means to redistribute income in the Aussie economy. But meanwhile, there are some ominous signs from the rest of the world that could spell trouble here soon enough.

–The first example is Greece. Default on Greek sovereign debt, as we’ve mentioned before, is seemingly inevitable. Everything that happens between now and then is a delaying tactic so that select European creditors can sell their Greek debt or otherwise reduce their exposure to the eventually restructuring/de-facto default.

–Ratings agency Standard and Poor’s lowered Greece’s sovereign credit rating by three levels to Triple C. Greece sits at the bottom of the sovereign ladder, now, at least in terms of credit ratings. S&P said it considers a restructure of Greek debt, where creditors take losses and accept a longer maturity, is effectively a default.

–Greece is a prelude to what will happen at local, state and national levels all over the Western world. It will vary in some places, of course. In Europe, nations like Greece, Portugal, Ireland, Spain, and Italy are unable to deal with huge government debt loads with inflation, the traditional way of easing debt burdens. This forces these countries to cede sovereignty to their European money masters, sell off national assets, and accept austerity.

–Greece is the birthplace of modern democracy. There’s probably something fitting about Greece being the first Western nation to deal with a full reckoning of its debt problem.  And of course the debt problem is only the extension of the problems of the Western Welfare State in a globalised world. Globalisation, come to think of it, is proving to be the enemy of the Nation State.

–We’ll save the elaboration of that thought for later this week. For now, even if Australian lenders have no direct exposure to a Greek default, they will have direct exposure to the low-level chaos that ensues in Europe’s banking market, and the general ripples in global capital markets (higher interest rates).

–What about China? That’s a much more understandable and immediate concern to Australia. Reuters reports that China’s money growth has slowed to a 30-month low. Hikes in reserve ration requirements and interest rates are finally starting to bite. That said, the broadest measure of Chinese money supply (M2) was still up 15.1% for the 12 months ending in May. And Chinese banks still loaned $85 billion in new money that month.

–Investment in fixed assets—resource-intensive construction and infrastructure projects—is running at 50% of Chinese GDP. That’s historically high and unsustainable. But we’ve been saying that about China for a while now. So what should you watch for to see that the government has finally popped China’s credit bubble?

–How about the Shanghai Composite, China’s broadest measure of stocks? There’s been a speculative boom in Chinese property, too. But the stock market is the first place you start to see tighter credit growth hit speculators. The Shanghai Composite is down 12% since early April. Check out the 10-year chart below.
shanghai.png

–A 10-year perspective captures a lot of history. You can see that Chinese stocks were not big beneficiaries of the big 2003 interest rate cuts in the Western World. But by mid-2005, the resource and consumer demand those rate cuts had triggered (via liquidity) started to get priced into the Chinese market. And with Chinese interest rates low and government stimulus high, the market took off.

–After the GFC crash the Chinese market recovered more quickly than its Western peers. But since touching 3,500 in late 2009, it’s made a series of lower lows. Now, the 50-day moving average is again in danger of crossing below the 200-day moving average. That’s a bearish short-term sign.

–Is it a bearish long-term sign, though? And does it tell you that China’s credit bubble has popped, with economy-wide deleveraging on the way? It’s too soon to say that. Official Chinese consumer inflation numbers come out tomorrow, though. If the CPI is running hot at 5% or better, expect more monetary tightening by the People’s Bank of China. And don’t expect investors to like that.

–Finally, our thoughts and prayers go out to our readers in New Zealand and especially Christchurch. More aftershocks from September’s quake hit the city yesterday. More are expected. We hope our readers are safe and sound and doing the best they can.

Dan Denning
Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Greece is the birthplace of ancient democracy, not modern democracy.

    philip proust
    June 14, 2011
    Reply
  2. The only place where there is true democracy is Switzerland. Representational democracy is a farce where the normal people have to rely on media(who are in pockets of the big corporations) and the country’s constitution(just look at the USA to see how much of their constitution is still used = none, that’s right, although they all swear by it).

    Politics and majority of laws/regulations are for the weak minded and those who can not to face them selves and admit they are losers in life. And I don’t mean that financially.

    Reply
  3. I am looking forward to Dan continuing his thread on Globalisation (GLN).
    It seems to me that GLN is basically the export of jobs to China in return for cheap imports-which is how it was sold to the middle class . With CEO of Multinationals paying themselves millions for being so clever .
    The tipping point when enough jobs have gone is that the welfare states are no longer viable and is fascinating to watch -although we are watching the ” end of the beginning ” as the welfare states are still running deficits etc .
    In the old days far from importing from Dictatorships with no personal freedoms (like religion, or free speech etc etc ), we boycotted them and had cold wars . How we’ve been duped into moving all manufacturing to China is testament to the financial power of Mulinationals and their lobbyists , and represents a challenge for democracy in the USA .

    Reply
  4. Globilisation was the equivalient of modern-day slavery, but the new slave masters didn’t count on the natives they employed in those monotonous, dangerous jobs copying the products they were asked to produce and then undercutting them on price.

    At first they were cheap and rough knock-offs, a global joke, but now they are on-par with quality and still at a cheaper price. When quality isn’t an issue, price wins every time.

    This resulted in huge flows of money from western nations to the developing nations who produced these products.

    This is the failure of globilsation and when you think about it, only the carbon tax can save us now by either 1) making developing nations pay for the pollution caused by using outdated and dirty, but cheap production methods, or 2) forcing developing nations to buy expensive new technology that isn’t as polluting to avoid paying the pollution tax.

    Note that both of these options will result in the cheap ripoffs becoming more expensive and making more expensive items produced by these countries for western companies more attractive again.
    Ultimately it provides a way of getting some of the money we spent on cheap ripoffs back to where it came from so we can pay our bills.

    When you consider the pollution output of China in a month equalled that of Germany for a year you can clearly see who is going to be most affected by this new global tax. Coincidence? I don’t think so.

    The effect of the pollution on the environment, in my mind, is a secondary issue, but thanks to some “convenient” warm weather for the past couple of decades, possibly temporary, possibly not, (but does it really matter?) we are able to sell the tax to the rest of the world reasonably easily.

    Reply
  5. Grover my dear chap,

    Global carbon tax?? I live in China and haven’t heard anywhere where they are looking to put a price on carbon. They know that will distroy many industries that only just scrape by on extremely low labour rates. It’s only our crackpot government that think they need to “do something” to save us all when all they have to do is look a little north to see how idiotic and totally destructive to the Aus economy their idea is. The Chinese will have no intention of joining any scheme that will damage any part of their industry. Why do you think the yuan isn’t tradable? They’ll jawbone for decades and nothing will come of it until it suits them. Any carbon tax will put us even further behind the competitive curve and relegate us to a has been.

    Reply
  6. I too have not yet heard of a carbon tax in China – perhaps this is a cunning plan by the Western world to somehow coerce developing nations into levelling the playing field?

    It’s interesting that our Prime Mininster has not explained to the populace that carbon tax’ are being implemented by other sovereign nations. It’s as if we are being led to believe that we are the nights in shining armour and the only nation doing something about climate change.

    Gadgetman
    June 17, 2011
    Reply

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