The prevailing theory about China, widely accepted both there and here, is quite unique:
“China’s economy has been expanding so fast for so long,” they say, “even if it suffers a slowdown, it will still be a lot stronger than most other countries. So instead of yearly growth rates of 10%, we could see growth rates of 6% or 5%. What’s so bad about that?”
There’s just one pesky problem with this theory:
It has no basis in history, fact or logic. It’s one of the greatest fallacies of our time. And that single error could soon emerge as a dominant factor in the destruction of wealth.
High-growth countries almost always behave like high-flying stocks. When things turn sour, they don’t just slow down. They crash.
Take Russia, for instance.
From 2000 to 2007, its GDP was flying along at an average turbo speed of 7.2%. Then, when the global bust hit in 2008, its leaders proudly flaunted the fact that, despite a slowdown, it still grew by a hefty 5.3%. But they spoke too soon. In 2009, the Russian economy contracted 7.8%. It didn’t just slow down; it crashed.
In the same region and at the same time, higher-growth countries got slammed even more dramatically:
- Estonia, which had reached a peak growth rate of 10.2% in 2006, shrunk by a shocking 14.7% in 2009.
- Neighboring Latvia swung from an 11.9% “miracle” to a 14.4% disaster in the same years.
- And Ukraine, up 12.1% a few years earlier, was crushed by 14.8%.
In contrast, other countries, also in the same region, also during the same years, prove my point in reverse: They were growing at a far more modest pace. So when bad times struck, their decline was also a lot more moderate: The Czech Republic contracted by 4.8%; Bulgaria, by 4.2%; Hungary, by just 1.7%; and Poland, not at all.
Just an Eastern European phenomenon? Heck no!
It’s the same exact pattern all over the world and as far back in history as the data will take you.
Go to Peru in 1986 and 1987. The economy grew by a whopping 9.4% and 9.7%. Then, suddenly in 1988 and 1989, it got walloped with collapses of 9.4% and 12.3%. Ditto for Chile a few years earlier.
Jump over to the United Arab Emirates in the late 1970s and early 1980s. For three out of four years, its GDP expanded by a breakneck 21% per year. Then, suddenly, it collapsed by 15%.
Or visit Iran in 1969. Fantastic growth rates in the 10%-15% range later gave way to twin mega-collapses of 12%-21.6% yearly.
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I don’t even have to go that far. From here in South Florida, I can just cross over to the Bahamas 80 miles away and see the same thing: Growth rates holding steady at about 9% or 10% year after year in the 1960s, only to be followed by disastrous wipeouts of 16.8% and 14.8% in the 1970s.
And of course, I need not remind you about the grave consequences of high growth rates in U.S. history: After the roaring 1920s, America’s GDP plunged 11.9% in 1930, 16.1% in 1931, and 23.3% in 1932. After just three years, nearly HALF of U.S. GDP was gone.
In each of these case studies, I’m sure historians can come up with “unique destabilizing factors” to explain away the economic collapses:
Speculative booms and busts. Social and political upheavals. Wars and revolutions.
But that’s the whole point. Rapid growth always comes with rapid social and political change, which, in turn, inevitably leads to social and political disasters.
Here’s just a glimpse into what ails China today.
According to Foreign Policy Magazine …
“No other large economy in history has grown so fast for so long [and] some of the methods used to maintain that rise are now proving counterproductive. …
“Bubble 1: Exports. Now at 23 percent of national income, exports have been the mainstay of Chinese growth since the early 1980s. However, exports could never have achieved that status without subsidized credit from the government-controlled banking system and an artificially low exchange rate. … and the credit subsidies have led to overcapacity among exporting firms. The dilemma is how to shrink these firms without creating widespread unemployment or further impairing the banking system with non-performing loans.
“Bubble 2: Real Estate. The oversupply of housing and commercial real estate in China’s major cities is a direct result of government policy. … Ghost cities abound: Jing Jin — located between Beijing and the industrial city of Tianjin — has thousands of unoccupied villas.
“Province and city leaders created new office towers as a way to attract companies and entrepreneurs who would employ local residents and pay taxes. An added attraction was that builders usually shared their profits — corruptly — with government officials who supplied permits and provided land, energy, and water. …
“Banks that made loans for underutilized buildings could face a new crisis in non-performing loans. So, there are big problems ahead for the banks and developers, especially of commercial office space.
“Bubble 3: Excess Infrastructure. After the early 2000s recession and the Great Recession in 2008, Beijing maintained its country’s growth rate by a massive public works program. … China’s toll roads reportedly lost $25 billion in 2014. Many of the costly Olympic facilities in Beijing lay fallow. … Worse, party officials pressured state-affiliated banks to lend billions for these projects. …
“Bubble 4: Rigid State-Owned Enterprises. [These] exist in dozens of sectors, employing tens of millions of people and generating roughly 40 percent of China’s GDP. In many cases, they are either monopolies or oligopolies. [But] it is extremely difficult for even the central government to cut them back. …
“Since many are uncompetitive in an open global economy, and are getting deeper in debt, they will ultimately require a bailout similar to the refinancing of the state banks in the 1990s.”
All this is very familiar to me. I’ve seen it all over Latin America, Eastern Europe and Asia. My dad told me about similar episodes of it in the early 20th century. I’ve studied many more in the 19th century and before.
The End of Social Security?
Congress and President Obama just took a potential $60,000 in Social Security benefits away from you…
That’s like losing two months’ worth of checks every year for the next 20 years.
But, there is a small sliver of hope…
The law leaves a short window of time open for seniors to claim their money — or lose it forever.
To me, the outcome is obvious: What initially looks like just a “slowdown” will turn into a massive crash that breaks the back of an already-fragile global economy.
Don’t let China hit you by surprise. Start preparing right now by raising cash and building a strong hedge portfolio.
Good luck and God bless!
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