Are The US And China Heading Toward War?

Could the US and China be on a collision course or war?

This escalation of currency wars tension comes at a time when there is heightened risk of a real war with China.

 the situation is so unstable and overleveraged, why hasn’t the currency collapsed already? The answer is as President Trump says, China is the greatest currency manipulator of all time.

Soon after his election, President Trump received a congratulatory phone call from the president of Taiwan. That might seem like a routine courtesy, but not from the Communist Chinese perspective.

Beijing views Taiwan as a “breakaway province” and not a separate country. U.S. politicians usually tiptoe around this issue, but not Trump. He not only chatted with Taiwan’s president, but he questioned the U.S. “One China” policy in a tweet.

Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into..

— Donald J. Trump (@realDonaldTrump) December 4, 2016

The Communist leadership decided to send Trump a message by stealing one of our Navy underwater drones operating in Philippine waters, nowhere near the disputed South China Sea waters claimed by China.

Beneath the glossy surface all is not well. Much of China’s growth is completely artificial. It may not even be worth counting if China were subject to more rigorous audit standards.

Now China is again resorting to its currency wars playbook. Since 2014, China has allowed the yuan to devalue from 6.0 to 1 dollar down to 6.9 to 1 dollar. Right now the yuan is poised to break through the significant benchmark of 7.0 to 1 dollar.

The difference between now and 1994 is that the U.S. is paying attention. In particular, President-elect Donald J. Trump has threatened to label China a “currency manipulator” on his first day in office on January 20, 2017.

Most Chinese debt is “off the books” in so-called wealth management products (something like the CDOs that sank Lehman Brothers in 2008), and derivatives. China has a huge “shadow banking” system of provincial guarantees, inter-company loans and offshore transfer pricing schemes. When all of this debt is taken into account, China looks like the greatest Ponzi scheme in history.

The situation gets even worse when you consider the amount of debt being used to finance this wasted investment. China’s bank assets have grown from about $2.5 trillion to $40 trillion in the past 10 years, a 1,500% increase. And that’s just the tip of the iceberg.

Much Chinese investment is completely wasted on “ghost cities” (major metropolitan complexes that are completely empty). As well as white elephant prestige projects such as the multi-billion dollar Nanjing South train station with 128 mostly unused escalators.

China has burned through $1 trillion of foreign exchange reserves in the past two years to accommodate the demand for dollars from this capital flight. China’s holdings of U.S. Treasury debt have crashed from $1.265 trillion in November 2015 to $1.115 trillion as of October 2016 according to U.S. Treasury data.

If China wants to avoid going broke, it only has three choices according to Mundell’s “Impossible Trinity.” It can raise interest rates to defend the currency, slap on capital controls, or devalue the yuan.

How do you feel this will effect the dollar? Leave your thoughts below.

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