How long until we might see a trigger that could tip the global economy over the edge? Not long at all.
Looking at other comments from Xie, the trigger could come from Japan (if not elsewhere first):
The yenâs looming day of reckoning
As Japan looks set to weaken yen, China must brace for impact
Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japanâs major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30% to 40%.
It will be a big shock to Japanâs neighbors and its distant competitors like Germany. The yenâs devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japanâs neighbors must have a strong banking system to withstand a bigger devaluation of the yen.
No bubble is sustainable. While the Japanese can always take care of business within, they cannot control the outside world. The countryâs Achilles heel is losing trade competitiveness due to the destructive impact of deflation on business confidence and the strong currency itself. When a trade deficit emerges, it signals the beginning of the end.
Japanâs trade balance may swing into surplus from time to time, but the negative trend is irreversible. Japan will face rising trade deficits. That makes foreignersâ views important because Japan would need foreign money to fund its deficit. When foreigners change their views, which they surely will, the yen will crash.
Yen devaluation is likely to unfold quickly. A financial bubble doesnât burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the governmentâs solvency could lead to a collapse of the JGB market. Of course, the government will collapse with the JGB market.
The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then.
Implications or rather, serious repercussions on other neighboring countries:
A yen collapse will impact China and South Korea most, just like in 1998. It will trigger substantial weakness in their industries. If a banking system succumbs, the shock can bring down an entire economy, as South Koreaâs experience in 1998 demonstrates.
Both China and South Korea have weak banking systems. South Koreaâs banking system is one of the most leveraged in the world due to high level of household loans. In 1998, a similar shock sank its banking system that was overleveraged with industrial loans. Now it is overleveraged with household loans. A shock could sink it again.
Overinvestment and a property bubble make Chinaâs banking system very vulnerable to such a shock. Unless China substantially increases the capital in its banking system, a big yen devaluation could cause Chinaâs banking system to sink. China suffers from overinvestment and a property bubble, as Southeast Asia and South Korea did in 1997. In terms of the magnitude of leverage, Chinaâs situation is much worse. Hence, a yen devaluation could wreak havoc to Chinaâs economy.
http://www.marketwatch.com/story/the...ry_latest_news
Together with a weakening global economy and jittery European debt crisis, if something of this magnitude could unfold, itâs probably pretty safe to say that the entire global economy will collapse in spectacular fashion much worse than it did in 2008. It would be rendered completely beyond repair with far fewer monetary funds and policy tools remaining in the toolbox.
(My thanks to Steve for introducing me to Andy)
Looking at other comments from Xie, the trigger could come from Japan (if not elsewhere first):
The yenâs looming day of reckoning
As Japan looks set to weaken yen, China must brace for impact
Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japanâs major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30% to 40%.
It will be a big shock to Japanâs neighbors and its distant competitors like Germany. The yenâs devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japanâs neighbors must have a strong banking system to withstand a bigger devaluation of the yen.
No bubble is sustainable. While the Japanese can always take care of business within, they cannot control the outside world. The countryâs Achilles heel is losing trade competitiveness due to the destructive impact of deflation on business confidence and the strong currency itself. When a trade deficit emerges, it signals the beginning of the end.
Japanâs trade balance may swing into surplus from time to time, but the negative trend is irreversible. Japan will face rising trade deficits. That makes foreignersâ views important because Japan would need foreign money to fund its deficit. When foreigners change their views, which they surely will, the yen will crash.
Yen devaluation is likely to unfold quickly. A financial bubble doesnât burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the governmentâs solvency could lead to a collapse of the JGB market. Of course, the government will collapse with the JGB market.
The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then.
Implications or rather, serious repercussions on other neighboring countries:
A yen collapse will impact China and South Korea most, just like in 1998. It will trigger substantial weakness in their industries. If a banking system succumbs, the shock can bring down an entire economy, as South Koreaâs experience in 1998 demonstrates.
Both China and South Korea have weak banking systems. South Koreaâs banking system is one of the most leveraged in the world due to high level of household loans. In 1998, a similar shock sank its banking system that was overleveraged with industrial loans. Now it is overleveraged with household loans. A shock could sink it again.
Overinvestment and a property bubble make Chinaâs banking system very vulnerable to such a shock. Unless China substantially increases the capital in its banking system, a big yen devaluation could cause Chinaâs banking system to sink. China suffers from overinvestment and a property bubble, as Southeast Asia and South Korea did in 1997. In terms of the magnitude of leverage, Chinaâs situation is much worse. Hence, a yen devaluation could wreak havoc to Chinaâs economy.
http://www.marketwatch.com/story/the...ry_latest_news
Together with a weakening global economy and jittery European debt crisis, if something of this magnitude could unfold, itâs probably pretty safe to say that the entire global economy will collapse in spectacular fashion much worse than it did in 2008. It would be rendered completely beyond repair with far fewer monetary funds and policy tools remaining in the toolbox.
(My thanks to Steve for introducing me to Andy)