Column

“Not at all. The Chinese foreign exchange reserves currently stand at $2.4 trillion. So that money can always be used to rescue the banks if their loans start go bad. The point I am trying to make is that this forced-investment led growth cannot continue forever and it needs to slow down. And when that happens, the Chinese GDP will not grow at the astonishing rates that it has been growing in the past. If Chinese growth starts to slow down, all the commodity exporting countries will have a problem, given that China alone consumes 40% of the world’s copper, 47% of steel and 30% of aluminum. It is also the second largest oil importer in the world. If steel demand falls, the demand for iron ore also goes down, which goes into making steel. Now take the case of a country like Brazil. Iron ore accounts 25% of its exports to China and petroleum, 10%. What will happen to Brazil’s exports if Chinese demand slumps?”

“So you’re saying that it’s all interconnected.”

“Yeah. And all the firangs who are currently mouthing platitudes about emerging markets like India and China, will be the first ones to sell out of the stock markets in these countries once China’s growth slows down. And where will all the money go? It will first be converted into US dollars. The sudden demand for US dollars will shore up the dollar for a while. These dollars will then be invested in the perceived safety of US government bonds. This in turn will help the US continue borrowing the astonishing amount of money that it has been borrowing. It is widely expected that the US Treasury will borrow $1.6 trillion in 2010 and $1.3 trillion next year to finance its fiscal deficit.”

“Interesting, as always.”

“Yes Mam. And I think you are a bit like songs in the movies of Guru Dutt.”

“And what is that supposed to mean?”

“Songs in Guru Dutt’s movies don’t have any prelude to them. They start just like that!”
(The example is hypothetical)

References:
Zombieland, Bill Bonner, www.dailyreckoning.com, March 5, 2010
No one home, Geoff Dyer, www.ft.com, February 22, 2010
Optical Illusions, “Oil Shocks,” and China’s Headache, Gary Dorsch, www.safehaven.com, March 11, 2010
“And gold will be the last man standing”,
www.dnaindia.com, March 15, 2010