Part IV (last part) - Great Depression No. 2 coming ?? Prepare your Noah's Ark

Therefore, it is clear that China travels today the road to Depression. How severe this depression will be, will critically depend on two developments. First, how much longer the Chinese government will pursue the inflationary policy, and second how doggedly it will fight the bust. The longer it expands and the more its fights the bust, the more likely it is that the Chinese Depression will turn into a Great Depression. Also, it is important to realize that just like America’s Great Depression in the 1930s triggered a worldwide Depression, similarly a Chinese Depression will trigger a bust in the U.S., and therefore a recession in the rest of the world.

Unless there is an unforeseen banking, currency, or a derivative crisis spreading throughout the world, it is my belief that the Chinese bust will occur sometime in 2008-2009, since the Chinese government will surely pursue expansionary policies until the 2008 Summer Olympic Games in China. By then, inflation will be most likely out of control, probably already in runaway mode, and the government will have no choice but to slam the brakes and induce contraction. In 1929 the expansion stopped in July, the stock market broke in October, and the economy collapsed in early 1930. Thus, providing for a latency period of approximately half a year between credit contraction and economic collapse, based on my Olympic Games timing, I would pinpoint the bust for 2009. Admittedly, this is a pure speculation on my part; naturally, the bust could occur sooner or later.

While I base my timing of bust on the 2008 Olympic Games, Marc Faber, the foremost Austrian authority in the world on Chinese economic development, believes that the bust will occur sooner. According to him, the U.S. is due for a meaningful recession relatively soon, which in turn will exacerbate already existing manufacturing overcapacities in China. This, coupled with growing credit problems, makes him believe that China will tip into recession sooner than the Olympic Games. In other words, Dr. Faber believes that a U.S. recession will trigger the Depression in China. Indeed, that very well may be the trigger, but if so, it still remains to be seen whether the Chinese government will let the bust run its course or choose the route of a “crack-up” boom, come hell or high water.

We should also consider another possible trigger for a bust, namely trade surpluses turning into trade deficits due to the accelerated rise of prices for resources, such as commodities, which China must import. Faced with trade deficits, China may decide to dishoard surpluses by selling U.S. government bonds, or it may decide to abandon its peg to the dollar. In either case, this will exacerbate the problems of the ailing U.S. economy, which in turn will boomerang back to China.

Finally, the bust may be triggered by a worldwide crisis in crude oil supplies. Peak oil supply is around the corner, if not already behind us, and Middle East or Caspian instability could sharply cut oil supplies. Historically, oil shortages and their concomitant rise of oil prices have always induced a recession. China’s growing dependence on oil ensures that should an oil crisis occur, it will slip into recession.

To summarize, the likely candidates for a trigger to the Chinese depression are (1) a worldwide currency, banking, or derivatives crisis, (2) a U.S. recession, (3) the containment of runaway inflation, (4) the disappearance of Chinese trade surpluses, and (5) an oil supply crisis.