May 10, 2016

China Trade And The Inevitability Of Systemic Reset

Throughout 2014 and even into 2015, the word “decoupling” was resurrected to try to calm growing unease about the direction of global growth. It’s first broad usage was during the first part of the Great Recession, as economists were sure that emerging markets then would be able to weather the “slowdown” of 2008 believed at that time confined to the US and Europe. It was an absurd suggestion but perfectly consistent with orthodox economics and its idea of closed systems.

When the word was brought back in 2014, it was under seemingly far more happy circumstances. China was acting curiously and places like Brazil were wrote off as if they had their own problems, maybe even big problems, but the US, Europe, and even Japan were supposed to be finally back on track. Again, the idea of closed systems propelled this “logic.” As I wrote in September 2014 under the headline China Profoundly Disagrees with FOMC Assessments:

That more than suggests not only a widespread slowdown, but also why Brazil and Australia are enthralled by recession. The larger question in a world obsessed by some ephemeral and eternally positive “global growth” construct (at least economists as they are in setting forward predictions about specific growth regimes) is how that Chinese slowdown fits within more unique circumstances about specific systems. When the first vestiges of Chinese production deceleration became apparent in early 2014, it seemed very curious to the mainstream because everything about “global growth” was headed in the “right direction.”

Since China’s economy was built to manufacture everything global growth could buy, it set up this major disagreement. How could industry in China be decelerating sharply and to lower and lower levels while economists saw only economic achievement for the US and the other developed markets? If economists were right particularly about the US, then they would have to explain why rapid US growth had suddenly forgotten to buy much from China.

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