Greenspan Warnings on China Unheeded?

by Lear Capital EditorialDecember 09, 2015

Greenspan missed signs of US collapse, learns from hindsight.

Former Federal Reserve Chair Alan Greenspan famously missed all signs of the housing collapse that happened in his own backyard in 2007/2008. He has been contrite about this oversight, admitting that his fundamental views on how the economy works were wrong in the past. (Ron Paul, Peter Schiff, and Nouriel Roubini all voiced their dissenting opinions.) His own policies greatly contributed to the run up of the crisis, but he has shown after the fact that he can be taught. 

Warning signs Greenspan is sounding the alarm on now.

After much analysis and hindsight, he has come to better understand the imbalances that existed in our economy. He has used that corrected knowledge to see the same alarming problems in China right now, even as the IMF has given them a huge stamp of approval.

Greenspan warned in Business Spectator magazine over a year ago that all of the problems that led up to the US crisis are well ensconced in China’s economy right now. Too big to fail, moral hazard, risky investments pyramided on worthless underlying assets; all of that is happening in China:

"The problem with the Chinese economy is, as I see it, that you had a very major expansion in debt in the so-called shadow banking system that has been well beyond anything which is stable and continuing.

“… the risk involved in taking on these types of credits is minimal. Why? Because in fact you have this near $4 trillion in reserves and that is readily available and very liquid. And a large chunk of it is in US dollars and euro."

Why, he sounds like Peter Schiff circa 2006! But, much like Schiff’s warnings were ignored, the world’s economic leaders don’t seem to be listening to Greenspan’s either.

Instead of the world insulating itself from rotten currencies, the IMF has given China a place of honor and respect on the world economic stage.

Back in 2008, China was the outsider, fiercely critical of the composition of the IMF World Reserve Currency basket. With the US dollar as the most strongly weighted currency in that basket - it comprised 40% of the basket's weight - China argued that was way too much importance to place on one currency. And then when the US central bank behaved badly and brought that currency to the brink of collapse, the IMF and the rest of the world should have had to grudgingly admit that China had a point.

They should have reduced the impact one currency can have on global economies.

But, no. That’s not what is happening. Instead of learning from the past and heeding Greenspan’s warning about the Chinese economy, mistakes are being repeated and exposure is being doubled down. The renminbi has just been given a very robust 10.92% weighting in the IMF basket of world reserve currencies. To make room for that, the weighting of the euro has undergone a big downgrade from 37.4% to 30.9%. The yuan has made its debut in a stronger position than yen at 8.33% or the British pound at 8.09%

China can’t beat them, so joins them.

China has been angling for admission into this exclusive currency club for years. Every 5 years the IMF reconsiders the composition of this basket – or more formally known as currencies with “special drawing rights” with the IMF. 5 years ago, China was denied for not meeting the criteria. China then focused on loading up on gold reserves to placate the IMF, and now we will be on the receiving end of that same exposure to monetary malfeasance that China complained about.

China is plummeting headlong into the same housing quagmire we are still not totally recovered from. What will this increased global exposure to China mean for us and the rest of the world?

If we had listened to the Ron Paul’s and the Peter Schiff’s of the world, we wouldn’t have been surprised by the 2007/8 crisis and we might have avoided a good deal of the pain. But even now, we could listen to the "coulda woulda shoulda’s" of a humbled Greenspan, who HAS learned from all this and is saying loud and clear that China has the same problems we had. China won’t listen. The IMF won't adapt. But can you?

Can you see the writing on the wall when it’s right in front of your face? 

On some deep level, the world's bankers know what's afoot. China has been buying gold, the IMF insists on gold reserves for admittance. Gold matters as a backstop to economic crises. They know how important it still is for monetary stability. It matters to entire economic systems and it matters in your portfolio for similar reasons, but on different scales. Are you protected?

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