Brexit and The Changing Face of
the EU - Part 3
Here is part three of this mini-series. And this is where things
start to get messy. Iím sure youíve all been following the
Shanghai Accord. Alright, you havenít. Not to worry. Iíll try to
explain how it works. Itís all rather obvious really. China has
been on a tear since the early eighties. They started selling
stuff to the Americans, to Europeans, to anyone who would buy
it. It got totally out of hand. The wages in China were on the
floor. There were tens of millions of willing workers, and
therefore the goods got made, usually very badly, at a very
cheap rate, and exported round the world. China racked up huge
reserves, and the country lurched into the twentieth century
over the course of a decade, and into the twenty-first within a
The problem was that this lurching forward didnít happen like it
did everywhere else on the plant, in fits and starts, with
plenty of crashes. China hasnít had a crash. China hasnít had a
recession. This means mistakes werenít corrected, in fact, those
mistakes were built upon, and the economy is now in a serious
What usually happens in an economy is that people work hard and
build up wealth. They then realise that economics can work in a
different way. The work ethic is fine, but slow. When there is a
store of wealth, that wealth can be used to leverage
development. You use the cash to jump start a business. You can
open a supermarket on day one if you have the cash, you no
longer have to work your way up from barrow boy, to local shop,
to more shops, to a supermarket chain like Mr Cohen did during
the last century.
And when enough people have enough cash to put for safety in a
bank, that bank can start to loan money as well, so the leverage
to develop ramps up. This is all wonderful (itís capitalism) as
long as the money is put to a productive use. Itís fine as long
as loans can be repaid out of the profits of the developments.
Unfortunately, in China developments have been started using
borrowed money, and they are not producing the funds required to
pay back the loans. The country is now stuck with a serious
problem. The banking system is in crisis. The big number
everybody is watching at the moment is the percentage of Non
Performing Loans (NPL).
If you look at the number of NPLs that are more than 90 days
overdue the percentage is 5%. That doesnít sound too bad, but if
you add in the revolving loans, those that are taken out to
repay existing loans, the number jumps to 8.6%, which is getting
a trifle scary, but probably containable, despite the fact that
in cash that represents $3 trillion, or the size of the whole of
the UK economy. However, if you then add in the loans made
through Chinaís shadow banking system the total runs up to 21%.
In actual cash, that equals $34.5 trillion. Thatís twice the
size of the US economy. Put another way, it is roughly half of
the whole planetís economy. In terms of non performing debt that
is insane. That is not repayable, and not containable. It is a
figure that is set to completely crash the Chinese economy.
Enter the Shanghai Accord.
This was an IMF brokered meeting of the G20 nations back in
February to try and do something about this mess. After all, the
Chinese economy is the second largest on the planet and for the
past 25 years it has been the worldís engine of growth. Thatís
over. With the world economy on the ropes, and debt levels
throughout the world at astronomical levels everyone is
frightened of the coming crash.
The Shanghai Accord wonít stop that crash, but itís a vain
attempt at doing something. The idea is to devalue the Yuan,
which will help make Chinese goods cheaper, but by devaluing the
currency, it will also make the debt levels shrink.
The idea is to let the Yen and the Euro strengthen while the US
dollar and the yuan weaken. This is why at the last Fed meeting
the US interest rate level did not increase as was widely
expected. Itís why the Bank of Japan did not increase itís
stimulus package a couple of weeks ago.
There is another layer within all this jiggery-pokery which
relates to the issue of SDRs, but I dont propose to enter that
particular mine field at the moment, although that is set to
kick in next year according to my own time-line.
What I take away from all this is three main points. First, we
are in a false economy where politicians are manipulating
everything from the value of money to the way we all trade, and
making a bloody awful mess of things.
Second, as part of the Shanghai Accord the euro is set to
strengthen. That will impact adversely on EU trade. Look for the
local economies to weaken, which in turn means worse borrowing
conditions, higher interest rates on those borrowings and more
fierce austerity. This will tip countries like Greece and
Portugal further into the mire, and further under the control of
Brussels and the European Central Bank.
Thirdly, it means that a squeeze on borrowing is going to get
worse, and that bodes ill for real estate across the union. Now
is not the time to be buying real estate anywhere in the EU.
SDRs? Yes, they are coming to a country near you probably
sometime next year, or very soon thereafter. In fact, they will
probably flood the world, and trash local currencies. Thatís
when the real pain begins if you are unprepared. Iíll talk about
that in another blog.
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