Rather than trust markets to heal themselves, the world's central banks have polluted markets with flawed economic theories and trillions of dollars of debt. Rather than ignite economic growth as they had hoped, however, they have suffocated the global economy.
It began with the U.S. Federal Reserve's move to lower interest rates to zero seven years ago, followed by several bouts of quantitative easing.
This was followed by Mario Draghi's August 2012 declaration to do "whatever it takes" to defend the euro.
And then there were the Bank of Japan's kamikaze moves last Halloween to buy not only every Japanese Government Bond being sold, but even stocks and ETFs.
China is late to this central banking party, but it still managed to rock global markets last week when it devalued the yuan.
Central banks have launched a massive assault on markets that has sucked out their liquidity and distorted normal pricing mechanisms beyond recognition. What we've seen so far is only a taste of what central banks will do in their desperation to prop up over-indebted economies…
The Last Best Hope for Growth
China, of course, has been the primary engine of world growth since the financial crisis.
Unfortunately, it has done so while destroying its environment and drowning its economy in debt. We now know that China's debt grew from $7 trillion in 2007 to $28 trillion in mid-2014, according to the McKinsey Global Institute.
We also know that China grew by first inflating a real estate bubble, then a bubble in financial products sold through its shadow banking system, and finally an epic stock market bubble that saw its three major stock exchanges (the Shanghai, Shenzhen, and ChiNext) rally by between 200% and 300% in less than a year.
The final – terminal – stage of this bout of bubble blowing was actively aided and abetted by the Chinese government, which encouraged millions of uneducated Chinese farmers and others to open margin accounts and borrow themselves into permanent insolvency.
The government also propagandized the stock market bubble as a sign of the regime's economic genius, leading to such epic stupidity as telling people to buy stocks on Chinese leader Xi Jinping's birthday.
When Chinese stocks finally hit a wall a few months ago, fantasy hit grim reality and, like in Game of Thrones, the Red Wedding began.
Chinese economic growth began to slow in early 2014, something that astute investors noted as they began backing away from commodities. The commodity sell-off is directly tied to China, which has been the marginal buyer of all major commodities since the financial crisis as it built massive ghost cities and tried to create a consumer economy overnight.
Even Apple Inc. (Nasdaq: AAPL) has benefitted from massive sales of iPhones in the China market, which have now slowed and (for now) nicked the stock of the most highly valued company in the world.
Commodity investors are among the most economically sensitive in the world, and when they see the prices of iron ore, aluminum, copper, and oil start weakening, people should pay attention.
While commodities are also getting badly hurt by the strength of the dollar, Chinese economic weakness is a major contributor to the 50%+ declines in prices in these key products.
Devaluing the Yuan May Have Been the Only Option
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.