War is Declared! – China just dropped the warning Yuan!
In the middle of the night, on Dec 6, 2016, silently, China Declared War on the United States by dropping their currency, the Yuan, by 8.8 percent. Most people missed it because it only lasted for a millisecond, but that was enough. They had done this before. This time, the message was received!
The last time the Chinese did this was in August of 2015. The Chinese economy had begun to slow just as the U.S. economy was picking up. The U.S. central bank increased U.S. interest rates for the first time in many years, against the direct wishes of the Chinese authorities. Since the Yuan had been tied directly to the US Dollar, this simple rate increase was seen by China, as an aggressive “Act of War”. On August 12, 2015 the Chinese retaliated. They dropped their Yuan by three percent in two days. This sent all financial markets around the world (including their own) into a tailspin. At the time they had sent an economic message to Janet Yellen. Don’t mess with China!
The Chinese desperately fear that we are entering a period of sustained global deflation. Their fear of global deflation is based on three simple principles:
Deflation can only be fully understood from a global perspective (and in U.S. dollars). They are trying to ‘export deflation and import inflation’.
The forces of inflation and deflation are always in a “tug of war”. On the deflation side are their ageing demographics, overcapacity, and extreme global debt levels. On the inflation side there is money printing, continual expansion of this debt, and government infrastructure spending.
The internet is the “Silent Killer”. It is the greatest unstoppable deflationary force of all time.
Our future will be a counter-intuitive deflationary world where oil prices drop, retailers are reduced to “Showrooms and phones”, banks are formed where nobody pays, and asset taxes replace income taxes. Although this suggests some disturbing economic scenarios, all of them will be made worse by the launch of this Total Economic War by China!
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