Doomsayers: This Is the Domino You Have Been Waiting For

Krugman: Chinese Spillovers
Overall, I’m not convinced of the Buiter thesis; China still seems to me not big enough to bring down the rest of the world. But I’m not rock-solid in that conviction, largely because we’ve seen so much contagion in the past. Stay tuned.
If there is any contagion it will spread through the currency market and it will dwarf the 1997 crisis by an order of magnitude. The devaluation of the yuan will lead to a collapse of emerging market currencies, Australian and Canadian dollars, followed by the yen, the euro and, finally, the U.S. dollar.

Doomsayers have been predicting the collapse of the global financial system and the dethroning of the U.S. dollar as reserve currency (or at least a severe real devaluation of the dollar versus gold and other other hard assets) for years. They have been wrong to date because the thesis was predicated on pre-2008 trends continuing. There was a significant change in 2008. First, a regular cyclical shift from inflation to deflation. In addition, demographics across the developed world and China likely are part of an order of magnitude larger cyclical shift. We are in the deflationary downturn of a larger deflationary shift, almost the mirror opposite of the 1970s cyclical inflationary boom amid the 1945 to 2008 larger inflationary boom. Central bankers have tried, in vain, to push the global economy back to the pre-2008 inflationary trend. Those predicting collapse for the greenback also argued China was the strongest economy, instead of one of the worst serial money printers in the entire world running up a credit bubble that looks to be the largest, and one of the most poorly invested, in history.

My position has been and remains that the fiat currency system will burn from the periphery to the core. China's currency has been artificially propped up since 2011, arguably since 2008 since the Chinese stimulus debt binge was the main driver of a rebound in commodities and emerging markets. The deflationary downturn was aborted globally by concerted central bank action in 2008 (and since). Imbalances have only grown since. China printed money at a rate that falls in the same category as Argentina, Russia, Brazil and Turkey. Those four currencies have all collapsed to varying degrees. China's currency is not immune to the laws of economics.

When the yuan devalues, it will start a fire that will consume the world's monetary system. It is the first big domino because when it falls, it will cause torschlusspanik.


  1. mainstream people simply do not understand doomers' arguments
    doomers have always argued that hyperinflation is not simply a very high rate of inflation, but it's the end result of deflationary collapse.


    1. FOFOA is a great blog, I've read everything on there. I wasn't thinking of him though, but folks like Peter Schiff who are saying the Chinese yuan is going to rise versus the dollar.