China's Economic Crisis
The Dynamic Wealth Report
November 10, 2008
The China Bailout - And What It Means For Your Money
by Brian T Mikes, Managing Editor
This morning we awoke to an economic giant flexing its muscles. The
Chinese government decided to pump additional stimulus into their
economy . . . $4 trillion Yuan worth. That’s about $586 billion US
Dollars. They say they’re doing it to help the world, but everyone knows
that’s a lie.
The real reason they’re spending so much money . . . more on that in a
minute.
Part of the reason behind China’s action is their decision to follow in
the footsteps of the global economic leaders. Just last week we
witnessed the latest battle in the credit crisis war. Major amounts of
stimulus were injected into the global markets by the largest central
banks.
The European Central Bank (ECB) cut interest rates by 50 basis points.
They’re trying to loosen up the credit log jam and stimulate greater
economic growth. The ECB was concerned about runaway inflation. That’s
why they held rates so high so long. Now CPI numbers are lower for the
third straight month (indicating little threat of inflation) and the
economy’s starting to contract.
As an example, Spain has been growing for more than 15 years. This
quarter they reported their first economic slowdown.
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The ECB wasn’t the only central bank working hard.
The Bank of England (BOE) stepped up big slashing rates by 150 basis
points. This put the interest rate at 3% - a level not seen since 1955.
Much like the ECB, the BOE is concerned about credit and economic
recession.
Everyone follows the Fed.
Both of these actions followed the US Federal Reserve’s recent rate cut.
They continue to flood the US markets with stimulus. The $700 billion
bank rescue package is starting to be distributed. Everyone’s watching
the credit markets closely.
So back to China.
China’s stimulus package held overtones of the great works projects the
US implemented in the 1930’s. Their plan calls for more roads, airports
and increased spending on infrastructure. But that’s not all. Farmers
will be getting support as will the health and educational sectors.
They didn’t leave anyone out; even high technology is getting part of
the stimulus package.
What’s driving this stimulus? If you listen to the PR folks, it’s their
desire to help the world. In reality it’s much more self serving. Business in China is suffering.
Think about it. Global spending is slowing. Not only are we tightening
our belts here in the US, but it’s happening around the world.
China exports many of the cheap goods the rest of the world consumes.
If nobody's buying, then factories start to close and workers get laid
off. It happens here in the US, and it certainly happens in China. According to official estimates, growth slowed to its lowest levels in
five years. Some are projecting economic growth in China to
eventually fall to zero.
This presents a scary scenario. If growth slows enough, and more
and more factories close, large portions of their workforce
will be unemployed. And that can lead to one thing . . . civil unrest.
That’s the scenario the central planners in China foresee. That’s the
big fear. They’re going to do everything they can to keep it from
happening. Their first step is massive stimulus. (This won’t be the last
of the China Bailouts).
How does this impact you?
China’s a major global exporter. Their economy is closely tied to almost
every other country in the world. If their economy starts to falter the
world will feel their pain. Much like when the US struggles so does the
rest of the world.
This tells me the place for our investment dollars is in safe
investments.
Overseas economies are going to be hurt much more than the US. We may
see a few currencies devalue in the coming months. This will scare the
rest of the world into safe investments. And the safest investment is
the US Dollar.
Now, don’t get me wrong, the US Economy is in a tough spot. Factory
orders, a measure of demand for manufactured goods in the US, fell 2.5%
in September. A clear sign companies are cutting back on spending. The
job market also reflects this cautionary view. We’ve lost more than 1.2
million jobs in the US this year. Amazingly 50% of them were lost in the
last few months.
Despite these concerns the US Dollar will be one of the strongest
currencies in the world. Economic turmoil that’s rocking the US markets
is hitting the rest of the world even harder. And we’re seeing it in
China right now. This is a trend that will continue until global credit
markets stabilize.
To learn more about our thoughts on global economies and how to profit
from trading currencies check out
Currency Options Insider.
• Iron & Steel Industry (Down 60%)
In the last 3 months, the Iron & Steel Industry’s been on the ropes. The
entire industry is off from its highs because of falling global demand
and falling commodity prices. The industry is lead by companies like
US
Steel (X) and Nucor (NUE).
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