Many have been falling over themselves talking about the problems in Greece. Its default and probable exit from the Euro sparked panics and sent chills through the markets on both sides of the Atlantic. Like a page from the the mouse that roared, little Greece set the world on its heels. Never mind the fact that Greece would probably be better off out of the Euro and back with the Drachma, at least then it could start to correct its balance sheets. Greece is a micro economy, its whole GDP amounts to less than that of Louisiana. Staggering debt it might have, but staggering for a country with an economy less than 1/6th that of Texas.
Meanwhile, the markets in a true Giant were quivering as well. China’s markets dropped precipitously but not due to the Greeks voting against more Euro-centrism. China traders were/are in the midst of a panic, and government attempts to soothe their fears has been largely ignored. Since mid-June stocks have lost a staggering 1/3 of their value. In response China infused billions into the market to shore it up, dropped interest rates and even suspended/halted trading of 50% of the market. Despite all of this, the stocks continued to slide until the government itself started the wholesale buying of stocks to slow the fall into oblivion. The result was modest gains but no assurance of stability.
Greece on the other hand, has been given a reprieve of sorts. The red line in the sand was washed away by Greek voters, and a new one was ignored as well. As the Greeks continue in their attempt to negotiate a better deal, the ECB is wondering how many times they must lend the Greeks money so they can give it back to them in the form of debt repayment. The patience of Germany, the one pulling most of the strings, is wearing thin but its partners seem willing to let this charade of a plan go on forever (or pretend as if it can). In the mean time, lots of anxious statements, and predictions of dire consequences, are being heard. Doom and gloom on the world is foretold if some agreement on continuing the absurd dance is not consummated. Yet, the question no one asks, if a minor player of questionable economic influence can bring the European continent to its knees, what does that say about its viability as a union? While the answer to this question remains unanswered, the truth is a Greek default probably would be a good omen. It would mean that reality has sunk in and the rebuilding of the European economies can begin.
While the fears of a Greek contagion might be overblown, the looming threat of a Chinese pandemic is largely being played down. The amount of unrepayable debts held by municipalities and businesses on China dwarfs what the west had in 2008, it has real estate and equity bubbles that are of an unimaginable size, and the government’s investment based economic model is at the end of its rope; these combined with an inflexible patriarchal power structure means huge challenges ahead. Of course when it comes to China, it is always the government that’s one has to watch. It is the source of the woes (much as it was in the West, but on steroids), by constant tinkering and manipulation, it distorts economic reality and creates a constant flow of moral hazards. These hazards transmit into bubbles it than tries to cover up rather than deal with.
Many experts predicted that the Chinese economy would hit a brick wall of reality this year. So far it seems they might be right. Despite this, the true extent of the danger poised by China to the world economy is largely ignored. Greece falls off the map and the resulting pin prick would be felt by the world for a moment before all fell back to normal. On the other hand, the downfall of China would impact the world in myriad of ways, many unpredictable. Such an event could even be the catalyst for political upheavals that could have repercussions all their own.
The reason for the placid attitudes toward China could be an overwhelming belief that the Chinese government will be able to keep things held together. This faith may not be well placed. The government created the bubbles it now faces, the idea that the can now make lemonade out of the crop of lemons they have cultivated is questionable. If China continues to slide and the convulsions turn into a catatonic state, the world will pay a price for ignoring the red giant.
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