Protect your finances if China's debt bubble implodes. Don't let the trade war ruin your retirement plans.

Protect your finances if China’s debt bubble implodes.

When the Western economic world collapsed in 2008 there was only one beacon of light: China.

For decades China has grown at nose-bleed speeds and looked like an unstoppable economic miracle. Now the foundations of that miracle are exposed and the house of cards is in peril. Shadow banks and ghost cities are only the tip of the ice berg.

Speculation over the years of fudged official economic numbers coming out of Beijing is starting to haunt the government there. As 2018 came to a close the government reported the slowest growth in 28 years. This was still a bit north of 6%.

Unfortunately, these slower growth numbers are probably a wildly exaggerated lie. Recently, a former chief economist for the Agricultural Bank of China mentioned a report that two recent studies show China’s economy growing at a mere 1.67% and another showing the economy actually declined.

While there is no doubt China has made massive economic leaps over the past several decades, much of the recent growth is built on a shaky foundation.

In many Western nations an economic crisis can ensue from excessive indebtedness. The difference between Western nations and China is what the debt funding was used for. In the U.S., for example, corporations can over-extend themselves, causing over-production and an inventory hangover. Household debt might be wasted on stuff that has virtually no value. But homes and autos have at least some value and a good amount of utility. Something we will see China wasn’t spending on.


Dangerous Foundation

China is mired in a massive amount of debt. Trustworthy numbers are hard to come by, but many reports claim China’s government and municipal debt are several times larger than the annual economic output of the country.

What China spent the money on is a bigger problem than the excessive debt! The growing mountain of debt is difficult to manage. However, if the debt was used to produce something of value it would be possible to work through the financial problems with only modest economic pain.

China did some of that (spending on productive investments) and a whole lot more creating rubble. 

People inside China have captured videos of buildings built in the last decade tipping over and put them on YouTube. Ghost cities in China are well known outside the country. Whole cities with virtually no people living there. 

What is worse is the quality of construction. A large number (based upon information from people living in China a long time) of buildings only a few years old look like they are more than a century old! It is hard to imagine the crumbling facade and disrepair huge parts of these cities can fall into after only two or three years. Again, YouTube videos allow you to glimpse the slow moving disaster in the works.

The layers of debt these unlivable buildings have is equally ill-constructed. Municipalities borrow so they can encourage growth which generates tax revenue. (The tax system in China is untenable as local governments frequently find the greatest source of funds though the crazy financial deals with developers.) 

Builders, which are frequently state-owned and very inefficient, pile on more debt to build the structures.

Then the final layer of debt is added when individuals buy, believing real estate never goes down in value. People in China buy real estate because they consider it a good investment even when they don’t live there or rent it out.

Renting is also far cheaper than buying a property in the populated areas of China. Rents frequently only cover a fraction of the mortgage payment so ownership is even more financially demanding.


Inside Information

A year-and-a-half ago this blog was one of the few websites allowed inside China by the government. Today it is officially banned!

My oldest daughter spent time in China last year and was able to pull up this blog. She taught English as a second language and lived with a host family. That is no longer possible.

Are you prepared for the collapse of China and the debt bubble? Protect your finances with these 3 simple steps.Many foreigners teaching English as a second language in China are sheltered from the worst parts of China. My daughter, Heather, sought the real experience and got it. Fortunately she had a host family who considered themselves unconventional and enjoyed Heather’s presence. Her friend stayed with a family that wasn’t unconventional and had a miserable experience.

When Heather returned home she stayed in contact with her host family. She grew a bond with the host mom and their 5 year old daughter. 

In the last few months contact has been more difficult. We actually lost contact for over a month and feared the worst. These are good people and we worry about them because they are friends. 

As we started to give up hope of ever hearing from our extended Chinese family the host mom made contact. The story was grim.

This family had another foreign teacher and they had to send her home early over safety concerns. From the inside China has already started to implode.

The government’s solution to the stagnant economy was to set off another round of debt spending. With state-owned firms extremely inefficient and getting a large portion of the additional spending it is like doubling down on stupid.


Reality Test

You can hide fiscal malfeasance for a very long time if the government want the facts hidden. However, the natural laws of economics still apply and eventually assert themselves. 

The growing mountain of debt will eventually cause a crisis. The longer the delay before appropriate remedial action is taken the more pain will be measured out. 

China had started steps to resolve the issues. It would have taken a long time to fix the worst of the financial problems. However, the risk was high China would implode before they resolved the worst of the imbalances. The world community, knowing the approximate depth of the problems, quietly played along. What other choice did they have.

Unfortunately for China, the new American president had no patience for such slow resolutions. The trade spat exposed the underlying weakness of China’s economy quicker than expected and might be the trigger to set off the avalanche. 

The Los Angeles Times recently reported China announced more than $600 billion of economic stimulus. The goal is to fix the problem as fast as possible before catastrophe strikes. More debt seems a poor choice of ointment.

China’s history in not encouraging if the slowdown is too fast and/or a currency or debt crisis occurs before adequate safeguards are in place. 

The debt may be too large for an economy the size of China’s to navigate to calm waters. Many Chinese banks are insolvent because they can hide behind government censors. In a true capitalist economy these banks and other companies would have been shuttered long ago. So the inefficiency of the system trudges on and deepens.

Normally I would have an optimistic option at this point. And while I think this could be the next financial crisis to strike, I don’t think it will be the end of good times forever. All I’m saying is there will be a few moments when people get really scared if China collapses.


Preparing for the Storm

Dinny McMahon in his book, China’s Great Wall of Debt, does a better job digging deeper into the debt issues in China. This short post can’t cover the details the way a book can. The issues are deeper than I mention with shadow banks and incredible debt loads even greater than the government in China understands since they also know much of their data is faulty. I recommend reading this book. 

The risks posed by China should not cause undue alarm. Planning for the possibility is wise, but no one knows when, or even if (the miracle could actually be a miracle), the boom will drop. 

Is China's debt bubble about to burst? Learn how to protect your investments before it's too late.Since timing a crisis of this nature is impossible you can’t sell all your investments and hope it is the right move. The investments you sell might benefit from the Chinese crisis or the market could rally for years before the flood of Chinese debt consumes the news feeds.

There are some steps you can take to protect yourself if China implodes and if it doesn’t will bolster your financial situation regardless.

The 2008 financial crisis that started in the U.S. was a debt crisis. Home lending was out of control. Appraisals were based on fantasy and fake documents. Almost sounds like what China is dealing with today. 

Debt crisis are always painful events. Companies fail and jobs are lost. People with money hold it tight for fear things will never improve. 

As we saw in 2008, a financial crisis in a major world economy spreads. Very few parts of the world went unscathed by the 2008 events in the U.S. Even China was affected. 2008 set China on a massive borrowing for growth scheme they can’t seem to get off. Once the lie starts you need bigger and bigger lies to keep the charade going. 

Since debt is the cause of so many financial crisis I suggest you insulate yourself by reducing or eliminating debt. (I prefer the elimination of debt because the seriousness of the China issue is large enough to harm virtually anyone holding debt.)

Reducing debt is an easy (relatively) and simple (relatively, again) way to insure your fiscal soundness if China stumbles. Like all debt, it takes time to pay off. Today is the best day to start the process. When the tsunami is visible on the horizon it’s too late; there will only be time to grab something solid and hold tight.

A second security procedure is to keep some of your finances liquid. Most of your money should probably be invested in broad-based index funds all the time. Market timing just doesn’t work. Having two years of spending in a money market fund might also be a good idea. This is a similar tactic people in or near retirement use so they don’t have to dip into investments when the market is down.


Final Planning Tips

I wish I could share more, but I fear if I was totally blunt it might harm my friends in China. 

This is a serious issue China works hard to keep from the press around the world. It is easy to think China is loaded with cash since they hold so many U.S. Treasuries. In a crisis China may have to sell large amounts of these Treasuries to defend their currency causing an interest rate spike in the U.S. This would be economically disruptive even if the Federal Reserve fights to counter the effects of such a liquidation. 

The most serious issue happened when we lost contact with Heather’s host family for over a month. They only contacted us because they were traveling outside China. This is very concerning. When things get really bad (and usually just before), totalitarian governments clamp down hard. Foreigners in China have been learning this. The security alert for Americans traveling in China is elevated and travel there is not recommended. This is not a warning to be disregarded.

If the same thing happened in Russia it would be less an issue since their economy is so much smaller. Even with inflated numbers, China’s economy is still one of the largest on the planet. If China stumbles we will all feel the ground quake, especially since some of the debt is in U.S. denominations.

This post is not about inciting panic, rather the opposite. Risk is high and even the U.S economy looks to be softening. Smaller refund checks this tax season means people were enjoying a slightly higher take-home pay during the previous year. That could lead to a softer U.S. economy for a while.

You can weather almost any economic storm without debt. Even in good times debt can be a burden. 

I worry because a family in China close to my heart is living dead center of where the storm will strike. I wish them and all of China well. 

We are all in this together. So take precautions, reduce debt, increase your financial cushion and be well.



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U.S. Yearly Inflation Since 1900Media continually warns of impending inflation due to all the money printing by central banks around the world. The concern is real. If inflation spikes bonds will suffer massive loses and stocks will also suffer a painful decline. It is past time we look at the facts about inflation, how fast it rises, and what causes prices to spike.

Planning for retirement and when reviewing investments, inflation is a consideration. A review of historical inflation data will help in the decision-making process. By reviewing the historical data also clearly shows why inflation accelerates, including solutions to protect yourself. We will focus on inflation data in the U.S. I have reviewed price data for other countries and further back than the U.S. data. The conclusions are the same.

Recent Inflation/Deflation Dilemma

The current deflation started in the stagflation days of the 1970s. Back then unemployment and inflation were both high. Economists were beside themselves on what to do. How can you have high inflation (caused by excess demand) and high unemployment (caused by low demand)? Except they had it all wrong. Demand was high and businesses were not incentivized to increase production, thereby creating high unemployment and high inflation at the same time.

Paul Volcker at the Federal Reserve and President Reagan applied a two-prong approach. Volcker raised interest rates to kill inflation and Reagan pushed supply-side economics through Congress, providing tax incentives for businesses to ramp up production. It took time to steady the economy, but within two years inflation was down and the economy was humming.

Supply-side economics has been in vogue since the success of the early 1980s. Unfortunately, the medicine required by the economy back then is different from today. Supply-side policies puts downward pressure on prices as it encourages more production. The economy today needs the incentive of mild inflation. Worldwide production potential will keep a lid on prices for the foreseeable future. As much as we all like tax cuts, they will not salve the woes of low inflation or deflation. Supply-side policies have gone as far as they can and may do more harm than good if pushed further.

Where Did All the Money Go?

If central banks around the world have printed so much money, where has it gone? Trillions of dollars, euros, yen, et cetera, should have caused massive price increases. The reason inflation has not accelerated is because most of the money printed sits in bank vaults of money center banks and at central banks around the world. The additional money created was used to improve balance sheets of banks. Money not in the system cannot cause inflation. You can see this in the velocity of money numbers. Historically each dollar changed hands about 16 times per year. That number is now around 4, lower than during the Great Depression. If velocity increases to historical norms inflation is sure to follow since the Federal Reserve increased their balance sheet from $800 billion to $4.5 trillion.

InflationChartSpeed of Price Changes

Prices have fluctuated wildly in the past, oscillating between bouts of inflation followed by gut-wrenching deflation. The illusion of modest price increases over long periods of time is recent. The bout of inflation in the 1970s was not followed by deflation until now, 35 years later. Inflation has remained steady under 4% for most of the last 35 years.

Price changes tend to be orderly under normal circumstances. It takes a shock to the system to send prices rocketing higher. The backside of an inflationary spiral is a deflationary period allowing prices to find an equilibrium. The recent deflation in the U.S. is mild compared to price declines of a century ago.

Official inflation records began in 1913 in the United States. The numbers I use here are the change in prices from the same month the prior year. I’ll start at the beginning. The U.S. decided to start tracking prices due to inflation caused by World War I. In September of 1915 there was mild deflation at -1.0%. By October 1916 inflation reached double digits at 10.8%. In April of 1917 the U.S. entered WWI with inflation hitting 20.4% in June of that year. Then the war ended and the expected deflation arrived. It took a while for inflation pressures to subside. Inflation for 1920 was still a whopping 15.6% as the returning troops increased demand for consumer goods. The next year prices declined 10.5% followed by a 6.1% reduction in prices of goods and services in 1922.

The remainder of the 1920s inflation picture in the U.S. looks a lot like the last decade of price changes today. Inflation in the U.S. from 1923 to 1929 was modest; 1925 had the largest price change with inflation at 2.3%. 1925 was the only year with no month of data showing deflation during the 1920s.

Rising prices are new to people who don't remember the recent past or 1970s. Prices can climb rapidly once pushed by a catalyst. Once prices start climbing, it's hard to slow them down. #prices #inflation #yieldcurve #interest #inerestrates #wageinflationThe shock of the Great Depression kept prices falling. It took until WWII for inflation to make any kind of showing. WWII had inflation, but the real inflation came after the war, similar to WWI, when the troops returned home and ramped up demand. 1947 saw 14.4% inflation.

The 1950s and 60s were a time of modest price changes. The difference was the lack of any real deflation after WWII. Cumulative price increases became large as prices never adjusted back down due to the Federal Reserve providing additional liquidity to the system. This was done out of fear the Great Depression would resume after WWII spending ended. The recession of the early 1950s only pushed prices lower from September 1954 to August 1955. Vietnam War spending caused inflation worries toward the end of the 1960s.

The money supply growth, government borrowing, and Vietnam War spending only caused 5-6% inflation in the early 1970s. It took a shock to the system to ignite the inflation most readers are familiar with. The first oil embargo pushed consumer prices up 11.0% in 1974. Inflation pressures soon eased to 4.9% in November 1976. The second oil embargo reinforced the inflation pressures supported by past government money printing, borrowing, and spending. Double digit inflation for calendar years 1979-1981, were the worst since WWI at 11.3%, 13.5%, and 10.3% respectively.

That is where we came into this story. Fed Chairman Volcker and President Reagan broke inflation and stagnant economic growth with their one-two punch and for 35 years we have seen declining inflation and lower interest rates. Never have prices been so stable since records began in the U.S.

We fear deflation—and rightfully so—even having never experienced serious deflation in our lifetimes (unless you are a very old reader). Inflation pressures have not ignited for a long time. The charts on this page clearly show we are lucky to be living in such stable economic times. Those times could be ending soon and here is why.

The Rise of Inflation

Prices bounce around modestly as sellers try to get more for their goods and services and buyers try to get the best value for their money. Inflation arises when buyers become scared good and services will not be freely available in the future or the price will likely be higher later. This causes an inflationary spiral. It takes more than a nudge to get inflation feeding on itself. War is the biggest catalyst of previous inflation. Even the 1970s inflation sparked by the OPEC oil embargos was fueled by a decade of massive government military spending.

Your investment portfolio counts on prices remaining relatively stable. Slight inflation, say the Federal Reserve’s 2% target, seems to be a Goldilocks zone for maximizing economic growth incentives for businesses and consumers. Slight deflation is more painful than slight inflation as even modest price declines quickly feed into a ‘wait until tomorrow’ attitude for buying.

The real question centers on how to determine when inflation will rear its ugly head again and the steps necessary to protect your net worth from the consequences. Past bouts of inflation provide valuable lessons. Deflation of -1.0% in September 1915 turned into double digit inflation in thirteen months. WWII had similar results. The 1960s saw inflation pressures building slowly without a spike in prices; the inflation was annoying, but not destabilizing. Annual inflation in 1972 was 3.2%, by 1974 it reached 12.3%.

The lesson to learn is that inflation, when it happens, happens fast and then burns itself out after a few years as consumers lack the money to keep pushing prices higher. This time could be different as the amount of money created is larger than any time in modern history. Out of control money printing reminds us of Germany between the wars or Zimbabwe. I am unable to find any instance where a world power, along with most of the rest of the world, engaged in such massive money creation.

One thing is certain, inflation will come again. Will Durant, the great American philosopher, said history is inflationary. My research affirms his statement. Inflation has a tendency to recur. We are overdue. All the pieces are in place for a massive inflation spike. All we need now is a spark.

MoneyHiding Places

When you see the spark ignite the first one out the door wins; the rest get trampled. Bonds will get killed in an environment of rising prices. Stocks suffer, too. Until Chicken Little starts screaming about the sky, index funds are about the only game in town. Inflation, when it returns, will require a powerful response from central banks. Moving money from equities to short-term bonds of safe sovereign debt when inflation returns is the only alternative until price begin to ease and equities are the place to be again. Or you can ride out the storm in equities. Companies will bust tail to protect their interests. The stock price will not reflect all the value created by companies, but the dividend yield should expand, providing ample cover until the dust settles.

Perhaps the only choice is an index fund and wait. Nobody can predict the next inflation outbreak until it is well on its way and then it is too late. Since businesses will protect their interests, and hence investor’s interests, it is best to keep your money with the largest and most successful enterprises on the planet.



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Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant for a bonus. Call 888-844-8910, email or read my review.

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