The global financial system has come unglued, and the opening waves of competitive currency devaluations by Japan and China are bound to wash up on U.S. shores, according to David Stockman, White House budget chief during the Reagan administration.
In a column on his Contra Corner blog,
Stockman said spend-thrift central bank policies globally – from the U.S. to Europe and Asia – have set up a bout of industrial deflation that is bound to be devastating.
“In short, there is a tidal wave of industrial deflation coming down the pike — owing to two decades of world-wide central bank financial repression that has fueled vast mal-investments in mining, manufacturing, transportation and trade," he said.
“That, in turn, will trigger a monetary race to the bottom by the central banks — a race that is already under way owing to Japan’s Halloween Massacre of the yen. Soon the rest of East Asia — and especially China — will have to join the exchange rate plunge or find their export based economies hitting the shoals,” Stockman predicted.
Stockman was especially critical of fresh vows by the European Central Bank (ECB) and China last week to pump in even more monetary stimulus to keep their economics from sliding into recession, a step he said that amounted to “monetary heroin” and that pushed the S&P 500 up a leg to 2,070.
He said Europe’s real GDP is no higher today than it was in the third quarter of 2006, even while Europe’s consumer prices have risen by nearly 20 percent during the same period. From that standpoint, he suggested the ECB’s effort to pump more inflation into the system to avoid deflation is likely to harm the Continent’s economy even more.
As for China, Stockman noted Beijing’s “colossal money printing spree” has fueled over-building, over-investment and unsustainable real-estate speculation throughout the country.
“The real downward trajectory in China is tracked by the canary in the iron ore pit. Like almost everything else, China’s iron and steel industry is massively overbuilt. It has 1.1 billion tons of capacity but in the order of 600 million tons of sustainable sell-through’ demand.”
As a result, Stockman predicted China will soon embark on the biggest steel-dumping campaign the world has yet seen.
Stockman said competitive currency devaluation around the world is likely, as nations try to keep their exports competitive.
However, he predicted the latest central bank stimulus announcements from Europe and China “were the starting guns for a monetary implosion that will soon shock financial markets and real production, trade, employment and incomes on a world-wide basis.”
Stephen Roach, former chairman of Morgan Stanley Asia and now a Yale University lecturer, wrote in a column for Project Syndicate that China’s economy is “caught in the crossfire of structural and cyclical headwinds.”
Roach suggested China may take more steps toward stimulus to keep its own economic ship afloat.
“With the recent monetary easing, the Chinese authorities seem to be drawing a line in the sand to prevent an excessive drop in growth. This suggests that they now view a cyclical disruption as a real threat to the country’s longer-term structural-reform agenda. To the extent that those fears persist, additional monetary easing can be expected,” Roche predicted.
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