China as a Bellwether

Never send to know for whom the bell tolls; It tolls for thee.” John Donne

China as a Bellwether.

What’s a bellwether? In olden days shepherds placed a bell on the neck of a castrated ram who led the flock. So he could find the flock even when he couldn’t see them. Why a castrated ram? You don’t know much about animals, do you. For the same reason, we raise steers, not bulls. And most folks ride mares and geldings, not stallions. Not clear enough? Go ask your father.

China’s financial markets are going through a correction. Actually, the bubble inflated by American consumer spending and Chinese government easy money may be bursting.

Why do we care?

Because we really do have a worldwide economy. The price of oil in Arabia, a hazel nut-killing frost in Turkey, a Russian invasion of Ukraine, or a hiccup in China’s finances really do impact the whole world.

Anyway, the ebb and flow (I hesitate to use “yin and yang” because that would necessitate another tutorial) of China’s finances are important to you and me. And the signs are ominous.

Having the biggest economy in the world (you missed that, too?) doesn’t protect China (anymore than it did the USA) from the fruit of years of dependence on easy money. Easy money, such as our own Federal Reserve System’s Quantitative Easing, is the crack cocaine of the money world. Not only do financiers get addicted easily, but they need increasing applications to achieve the same high. Governments can’t sustain that forever.

According to Keynesian economics, governments shouldn’t need to because the government deficit spending is supposed to jump start the economy, then it continues on its own. That’s the theory. Reality hasn’t quite matched the theory. (Don’t tell the professional economists, they haven’t figured it out yet.)

Listen for the ringing of China’s financial markets.