STAFF NEWS & ANALYSIS
What Happens When China Collapses?
By Staff News & Analysis - November 24, 2010

China Inflation `Volcano' May Prove Too Hot for Controls After Cash Surge … China's plans to rein in prices include selling state food reserves, stabilizing the cost of natural gas and cracking down on speculation in and hoarding of agricultural products, the State Council said. Standing near his 12-table noodle shop on Beijing's Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent. "I'm struggling to make ends meet with costs going up like this," said Liu, a native of Sichuan province who pays his workers as much as 1,800 yuan ($271) a month, or 88 percent more than the Beijing minimum wage, to serve up a staple Chinese meal. "Raising prices is the only way out," he said, predicting he won't be able to hold out beyond two months. Premier Wen Jiabao's cabinet last week announced it will sell grain, cooking-oil and sugar reserves, ordered an end to tolls on trucks carrying produce and threatened price controls to rein in a 10 percent inflation rate for food. Because the measures would do nothing to counter the 54 percent surge in money supply over the past two years, the risk is they will prove insufficient to cope with the challenge. "They are just not addressing the fundamental problem at all," said Patrick Chovanec, an associate professor at Beijing's Tsinghua University. With the expansion of credit and cash in the economy stemming from China's response to the global crisis, "you're sitting on a volcano," said Chovanec. – Bloomberg

Dominant Social Theme: China needs to work harder to get it right.

Free-Market Analysis: Yesterday we revisited our prognostication of nearly two years ago that the Federal Reserve was on the way out in its current form – given the vituperation increasingly leveled at that institution. An institution like the Fed, set up by the powers-that-be as an instrument of social transformation, probably doesn't stand much of chance over the long-term in this Internet era.

But the Fed is not the only powerful entity where we've taken a stand: There is also China. In fact, we've been harping on China and Chinese inflation for nearly as long as we've been writing about the decline and fall of the Fed. We started writing about China when it occurred to us that a country that keeps growing at 10 or 12 percent PER QUARTER for 20 or 30 years is not a country in the throes of a normal economy. The boom was long in the tooth by then, and the economy was mature enough so the economic activity was likely being manufactured, enhanced if you will by monetary policy. In fact, we assumed the central bank must be printing money as fast as it could, and we haven't seen any reason to revise our judgment.

In this article, we want to speculate on the fallout of Chinese inflation, as China seems to us to be approaching the point where price inflation is going to have a definitive impact on the Chinese boom – puncturing it either through a form of hyperinflation or via price controls, etc. We will also make the case as well that the Western power elite that has been trying to build world government using various crises and fear-based dominant social themes may have over-reached and is in danger of losing control of a situation it developed and initiated but cannot now rein in.

China first. As regards China, there are three scenarios we can see. The first scenario involves what is currently playing out, a situation where Chinese leaders simply don't seem to know what to do to reduce inflation – but continue to try almost anything. Right now, we can see from the article excerpted at the beginning of this analysis that the power-that-be are threatening price controls – a ridiculous solution in our opinion.

Imagine a glut of widgets lowers the price. Now imagine a government setting a higher price for widgets despite the glut. It simply doesn't work. People will figure out ways around the controls and the price will find a natural level no matter government mandates. What CAN happen is that government is so insistent on its price fixing and so aggressive that people are afraid to purchase widgets at all. In this case the government will have successfully controlled the buying and selling of widgets, but only by freezing commerce and chilling the market.

The second scenario involves the continued ascension of price inflation. As we can tell from the article excerpt at the beginning of this analysis, price inflation is already a most frustrating reality in China. We have pointed out in previous articles that either price inflation or a reduction in China's economic growth is quite dangerous for the Chinese Communist Party that has in our estimation little good will to fall back on. The wealthier populace in our view still recalls brutal Chinese privations at the hands of the CCP; the 400 million or so rural Chinese and migrants workers who still have not participated in the boom will blame the government for diminished opportunities.

We find the second scenario fairly compelling. Not only has the CCP been battling inflation for several years (or more) in our view, whatever they are doing has not prevented price inflation from spreading to Hong Kong. Here's an excerpt from a recent article in Business Insider:

Inflation in mainland China is now clearly spilling over into Hong Kong. The special administrative region's prices just jumped by the most in more than two years, driven by the same food price inflation rocking the mainland and shocking the consensus of analysts … Rental rates rose for the 11th month in a row as well, by 0.24% month-on-month. Expect the Chinese government to blame the U.S. in Bernanke while conveniently ignoring the fact that they have voluntarily pegged their currencies to the U.S. dollar, and voluntarily expanded their money supply on the mainland at a far more dramatic pace than even the U.S.

Now an argument can be made that the HKD, being linked to the USD, is being infected by US monetary inflation. But nonetheless the regional proximity of Hong Kong to China certainly makes it vulnerable to the larger monetary trends of its titanic neighbor. In fact, Chinese price inflation will likely have a ripple effect throughout Asia, as countries may print more currency in order to maintain competitive ratios with the yuan.

The third scenario we will present is by far the most controversial. Many who read the alternative 'Net press today are suspicious generally of what is going on in the larger, global economy. These individuals suspect that the West's power elite, an intergenerational group of impossibly wealthy banking families and associates, is determinedly crashing the world's economy in order to drive it towards a kind of New World Order – a single global government with a single central bank and single economy.

The idea of global governance is not merely hypothetical anymore. It has been mentioned by such luminaries as the head of the International Monetary Fund, Dominique Strauss-Kahn. In numerous articles and interviews, Strauss-Kahn has called for greater centralization of the EU and an expanded role for the IMF as a kind of global central-bank-in-waiting. There has been speculation that the IMF wishes to convert its SDRs into a hypothetical world currency called the bancor, backed perhaps by an underlying basked of currencies and commodities.

How does China fit into all this? An economic crack-up in China would likely put paid to any "recovery" the West might hope for over the next few years. It would have a chilling effect on Asia, as well, and leave India and perhaps Brazil as the two engines of the world economy. With the West and Asia suffering twin economic breakdowns it is most doubtful that the outlook for the global economy would be anything other than dire.

Add to this, world forecasts of rapidly rising food costs and one begins to see the outline of significant economic tribulations that will surely include political turmoil and civic unrest. In fact, there is already a good deal of unrest in Europe and we assume that the tribes of Europe will continue to make their feelings known, especially as the European powers-that-be continue to try to implement "austerity" among the Southern PIGS.

There is no doubt that central banking economies crash, and crash regularly. The system is purposefully set up to fail. And there have been plenty of comments by European leader to the effect that they expected an economic downturn that would help solidify the European Union and give it more powers over its member nations. But we have also observed that the downturn was likely worse than the powers-that-be expected and has stressed every coping mechanism of modern Western economies.

It is perfectly possible that Western elites expected and anticipated a global downturn, but what has occurred is off-the-charts in our view and it is not over yet. The central banking system that the elites created 100 years ago has a long ways to go to reflate and a Chinese crash would probably end hopes of a potential reflation anytime soon. In fact, we think reflation is a faint hope anyway. The EU is struggling with a series of PIGS defaults, one larger than the next, and the US is facing an intractable Greater Recession that shows no signs of easing.

All of this, of course, is playing out on the Internet. This is perhaps, from our point of view, the defining (anomalous) factor. We have explained in plenty of articles (and just yesterday again) that the elite did not expect what the World Wide Web has become and was woefully ill equipped to combat it after nearly a century of almost total media domination. Even today Western elites have not been able to control the Internet and the extremely damaging flow of information that has exposed nearly a 100 years of plotting and scheming to create a global government under their control.

There is no doubt that the Chinese "miracle" is going to end badly. We would venture to say that India, anyway, is not far behind China in terms of being unable to control its inflation. The question, we suppose is one of timing. When the Chinese economy crashes, or deflates, especially if it does so in near term (and granted it could be a kind of slow motion crash) we will see just what effects it will have on the world's economy and especially Europe and America.

If the event is coupled with rising food prices and a kind of artificially imposed trade war that further freezes goods and services worldwide, then the results could be truly catastrophic for millions, even billions. This is when we will begin to see whether the powers-that-be are truly Machiavellian in terms of their strategies and goals. This is when we will begin to find out if there is a workable plan to introduce a one-world financial system, and even one-world government. China may be the trigger.

The economic system that the elite imposed on the world via central banking was bound to end in the kinds of implosions that we are seeing today – in the US, in Europe and sooner or later in China, India, etc. The wild card, however, is the Internet. We do not believe the power elite had any idea of the amount of antipathy that would be generated by this new communication tool. We believe, in aggregate, it is still in shock.

In past decades, popular rage was always turned against imaginary private sector enemies. Wall Street was blamed for economic disasters, or even the "bankers." But today's finger-pointing includes a primary dominant social theme of the power elite – central banking. Additionally, governments are coming in for their share of the blame.

After Thoughts

Governments and central banking are at the center of the mercantilist control that money power has exercised over the West. If these two levers of control are damaged or made inoperable by public outcry, the elite's larger, global goals will likely become even more unfeasible. China may indeed be the trigger, but the truth-telling of the Internet may in the end be what sinks elite's current drive toward world dominance.

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