‘Mandate of Heaven’ in Jeopardy — Economic Impact of the Coronavirus
The US–China trade war has taken up more ink than I care to remember. I’ve been writing about it for over a year now.
And even though there is some sort of stage one deal happening…it’s far from over.
But don’t take it from me, take it from Jim, as he writes in Aftermath:
‘China feels that its economy is sufficiently strong and resilient enough to weather a trade war with the United States. China can always buy soybeans from Canada and aircraft from Airbus. It is betting that the United States has more to lose than China if the trade war escalates.
‘China is wrong in its estimate.
‘Both sides my lose in a trade war, but China has far more to lose.’
While the trade war is far from over, it’s still not the whole picture of the economic disruptions we are facing…
…rather what’s happening in China is a critical part of what happens next.
That’s after the coronavirus stops hogging headlines. After the trade war peters out. Well after we are forced to face our global buildup of unsustainable debt…
Jim calls it ‘Reset 2020’.
If you click here, you can read Jim’s warning about what will actually happen after the next crisis, and how you can help protect your wealth from it.
Now, read on for more.
Until next time,
‘Mandate of Heaven’ in Jeopardy
The US markets were closed on Monday for Presidents’ Day.
But one event is taking centre stage in the world that affects not only basic survival for millions of people, but the health of the global economy overall.
Of course, I’m talking about the coronavirus outbreak currently playing out before our eyes in China.
China’s economy was slowing substantially before the outbreak of the highly contagious and deadly virus last fall.
This slowing was the predictable result of excessive debt levels, Trump’s retaliation in the trade wars, and China’s encounter with what development economists call the ‘middle-income trap’.
Stuck in the middle-income trap
Developing economies can grow at double-digit rates as they move from low-income (about $3,000 annual per capita income) to middle-income (about $10,000 annual per capita income).
The main requirements are limits on corruption, a large pool of available labour, and an attractive legal environment for foreign direct investment.
Once investment is used for infrastructure and labour is mobilised, large-scale basic manufacturing can commence.
This powers growth and the accumulation of hard currency reserves from export earnings.
The difficulty begins when an economy tries to move from middle-income to high-income (about $18,000 annual per capita income).
That move requires more than cheap labour and infrastructure investment. It requires applied technology to produce high-value added products.
Only Taiwan, South Korea, and Singapore have made this transition (excluding Japan after the Second World War, and oil-exporting nations).
This explains why China has been so focused on stealing US intellectual property.
Trump has been closing that avenue. China cannot generate the needed technology through its own R&D. China is stuck in the middle-income trap and a slowdown in growth is the inevitable result.
Coronavirus rippling effects on the Economy
The story gets worse for China.
As of Friday, the total reported number of people infected by the coronavirus was 64,435. And the death toll was up to 1,383, including three people outside of China.
Those figures are official statistics released by China and other countries around the world where the virus has spread.
However, there is substantial medical, anecdotal, and model-based evidence that the actual infection rate and death rate may be 10–20 times higher than those official statistics.
Over 60 million Chinese in several major cities are under ‘lockdown’ where individuals are confined to their homes and may only leave once every three days to buy groceries.
Streets are empty, stores are closed, trains and planes are not moving, and factories are shut. The Chinese economy is slowly grinding to a halt.
This not only affects China’s economy as a whole, but the contagion filters down into individual companies that are dependent on China both for supply chain inputs and final sales.
And it will have a rippling effect on the US economy also. This story has a long way to run.
All the best,
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