THOUGHTS ON CHINA FROM JOHN MAULDIN:

The visible impact of all this will be mostly within China, but its macro effects will be global. Such wealth destruction should be intensely deflationary. That may be part of the goal, in fact. Chinese consumers are feeling significant inflation in food, housing, and other living costs. Demographic factors, particularly population aging, will increase this pressure. Decades of the one-child policy reduced working-age labor supply, which raises wages and other prices.

But it won’t stop there. For years, China’s voracious appetite for energy and materials underpinned prices worldwide. At the same time, its low manufacturing prices basically exported deflation. Hence we saw little or no inflation in most finished goods but a lot of inflation in commodity-intensive services like food, energy, and housing.

In short, China is losing its role as the world’s lead manufacturing exporter. Government policies aren’t helping, but George Friedman notes this is actually a cyclical process. He wrote a thoughtful piece (which I shared with Over My Shoulder members here) about the apparent 40–50 year pattern in which a nation takes on this role then loses it. The US did so in the 1890s, then it was Japan, and China since the 1980s. . . . The end of this period is traumatic. The US marked it with the Great Depression, and Japan with its 1990s downturn, but both countries adapted and recovered. (You might even say they “muddled through.”) George expects the same for China.

Well, some of the muddling was pretty ugly.