Printed money won’t save us, nor will China

Moneyweek Sept15

I have just recorded a new interview with Merryn Somerset Webb, editor-in-chief of MoneyWeek (the UK’s best-selling financial magazine) and a regular contributor to the Financial Times.  The previous interview has so far been watched by over 75000 people.   It covers key issues such as the impact of China’s New Normal policies on the global economy and commodity markets, as well as the outlook for financial markets and the European refugee crisis.  Please click here to view the video, or click here to download the published interview in MoneyWeek.  

Merryn: Hi, I’m Merryn Somerset Webb, editor-in-chief of MoneyWeek magazine, and I’m here today with Paul Hodges. A lot of you watched my previous interview with Paul, so we’re just going to update a bit on that. Paul is the author of The PH Report and also the chairman of International eChem. Now, Paul, things have been going your way. Last time we met we talked about the slowing of China’s economy and we wondered when other people would begin to notice that China wasn’t growing at the speed it was before now. I think they’ve noticed.

Paul: They seem to have woken up, don’t they, in the last year or so.

Merryn: And so, has anything changed to bring that to people’s attention?  Anything changed in the Chinese economy, or is this just a manifestation of what we were talking about before?

Paul: I think when we first talked, what we were discussing was this great unwinding of policymaker stimulus, and if you go back to the post 2008 period what you saw was that all the major economies were doing stimulus in one way or another. And so that was mutually reinforcing. Now, of course in the west and in Japan central banks are still doing stimulus, but once one major government starts to go in the other direction the weakest chain, if you like, in that stimulus programme starts to unwind.

Merryn: OK, so is this possibly connected to a rise in US rates, which would signal perhaps the beginning of the end of stimulus?

If you go back to 2007, every dollar of lending gave you about 83 cents of GDP growth. You are destroying value, but you can probably live with it. By 2013 that dollar is only getting you 17 cents of GDP growth

Paul: Well, you can’t ignore the concept of them rising, but I think what one has to do is look more at the fundamentals of what’s happening in China’s economy. If you go back to 2007, for example, every dollar of lending gave you about 83 cents of GDP growth. So, not great. You are destroying value, but, you know, you can probably live with it. By 2013 that dollar is only getting you 17 cents of GDP growth.

Merryn: OK, so that’s very intense value destruction.

Paul: Very intense. And you can do a chart like that, and you can say, if you carry on, this isn’t going to work. Secondly – and I think people are starting to pay attention to this as well now – if you look at China’s foreign reserves, they have peaked. So what you’ve got… we’ve had 400 billion taken out of them. That’s only 10%, if you like, but 10% is 10%, and more importantly what it is, is it’s unwinding the system. If you’ve got an asset bubble, which is what we’ve seen created by the stimulus programmes, you have to keep blowing more air into the balloon. Once somebody, somewhere starts to say, “no, I want to take air out of the balloon”, which is China, then of course the whole thing starts to ricochet around. So, that’s why I think a year later people are now becoming much more focused on this. And the other thing which I’m sure we need to talk about a bit is the commodities position, because this is where it’s really starting to connect across to the rest of the world.

Merryn: OK, so it’s the fall off and demand for commodities from China that’s really sending the domino effect around the world. What you call the Ring of Fire, right?

Paul: Exactly, and if you look at it this is the third great bubble of our lifetimes, if you like…..

Please click here to view the video or read the full transcript, or click here to download the published interview in MoneyWeek

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