China and Asia going forward, what’s next? (cash, corporation, invest)

[TimAZ]

The Chinese and Japanese central banks have opened the money spigots to prevent economic and social turmoil. Large injections of money via loans and guarantees, but their economic output is way down. This is the very definition of inflation — too much money in the general economy chasing too few goods. It looks like the ECB and Federal Reserve are also willing to do “whatever it takes” to keep the wheels turning in our financial markets.

So how do you see this playing out? Prices for consumer goods are definitely headed higher. Brave talk about repatriating production here to the USA will take years, and will also raise retail prices. Have we ever seen a situation where inflation is taking off at the same time that interest rates are near record lows?

We aren’t in Kansas anymore.

[aridon]

We've been waiting for inflation for decades now and it hasn't shown up. Interest rates have been on a steady slope down to zero and we have some serious demographic issues which is causing a demand side problem. We also have excess capacity, excess supply of commodities etc.

The idea that supply chains or production is returning to the USA is a pipe dream. If it moves out of China it will move to another Asian country, it is unlikely we see any serious return here. The reasons are plentiful, biggest is Asia is going to dominate the world economy of the future. It might take several decades but eventually it is going to happen and there is little reason to move supply or production to a country of 300m when nearly everything is already setup to service an area that accounts for the lion share of the world population. Costs, environment, regulations etc also play a role as well as the fact that they have several decades of technology development on both production and extraction on us.

As for central bank injections, these are meant to pacify markets as much as provide liquidity to prevent financial dislocation. The current theory is recessions are mostly caused by financial market dislocations, people need to borrow but can't or banks are unable to lend or remain solvent due to bad debt. With the Fed providing nearly unlimited liquidity it alleviates much of the stress we might have seen decades ago which might have wound up imbalances to the point where a liquidity issue caused the markets to simply not work anymore. Additionally, super low rates (virtually zero) relieve a lot of stress that might otherwise cause corporations to fail as well as fuel government spending.

Now there are risks to unlimited liquidity. Risk assets obviously are preferred during times of low to no interest rates and we can see significant imbalances form. Low rates obviously boots housing prices which can cause issues. There is also a larger and larger gap between the haves and have not. People that are able to invest on Friday with a lot of cash obviously made bank and likely will continue to make bank because the markets simply want to go higher. They need to go higher and passive investing is driving them as well as the fact that there isn't any other option that is as attractive.

How it all ends is anyone's guess but until then the ride is going to be pretty epic. Eventually the government debt is going to have to be written down, devalued or otherwise dealt with but in the end we are playing with monopoly money. Most of the world is in the same position. Everyone wants to believe in the system and that on its own enough to keep things going. We can debate why inflation isn't showing up (demographics / demand degradation / over capacity) and we can talk about why deficit spending 1.1T during "best economy eva!" is probably bad. End game though the Fed can simply buy anything and keep things afloat so long as everyone nods their head and plays Journey's Don't Stop Believing in their heads.

Now that we have moved further and further to the digital world manipulating the economy has become easier and easier. You can say it isn't right, you can say it will collapse (everything ultimately comes to an end) but reality is if you have the choice between bullets and gold moment or believing in the system and kicking the can down the road most people are going to do the latter and there is a very long road ahead of us.