Thread by @hendry_hugh

At last !!
A new Acid Capitalist Podcast...

With the indomitable, @Brad_Setser, a senior fellow, no less, of the Council of Foreign Relations
And boy !
Do I have things to get off my chest...
I will complete this tomorrow
So much to say, so little space

Now what doesn't Brad know about foreign trade and the conduct of sovereign nations ?? What doesn't he know about how they conduct themselves in this merry-go-round of economic bedevilment ? He was the perfect and most generous host to titivate my curiosity.

Brad's a master at throwing light on those nations that suppress the scale of their surplus savings and FX exchange balances. The real QE masters that have driven our asset prices to the sky...
And he's not afraid to speak his mind.
Just what could we possibly have to discuss?

I'm on a mission. I'm trying to explain why #Macro is broken, why macro hedge funds have been so-so these last ten years or so, and why policy makers have been downright clueless. If only I had these insights when I was managing Eclectica, if only. But this is the power of NOW.

I believe that economics changed radically 25 years ago with the Asian Tiger, no, not hedge fund, but Asian sovereign crisis. Economics hasn't been the same since and we're all experiencing the fallout. With yet more to come. It is the cornerstone of my bullish thesis on Tilts...

If economics is the examination of equilibrium, or perhaps better said, the process of returning and establishing equilibrium, the last 25 years have been very challenging for the dismal science.

Entropy is a key concept in economics. It's the measure of the quantum of disorder in the economy. An ordered system has low entropy, while a disordered system has high entropy. Today's global economy, I contend, is hugely entropic and vulnerable. We've built a volatility machine

De-Dollarisation...please

The system will break only if the US comes to reject this global state of affairs

Presently, it is held in check by the knowledge of the vast destruction such a change would unlock

We'll discuss

Here's my visualisation of the principal entropic agent in today's economic landscape. China is the disturbance in the force that seems untreatable, what cosmologists call “the arrow of time”, the movement from order to disorder 🔥🔥🔥

Our world is highly unusual. I'm gonna try explain why. Ordered systems - think of global trade and the economy - can become more disordered and energy changes forms, I'm already feeling the searing heat, soon I fear many others will be sweating.

Consider the difference between a clean room and messy room. The clean room, China, has perceived low entropy. Every object is in its rightful place. A messy room, the US, is disordered and has high entropy. You have to input a hell of a lot of energy to clean up a messy room...

The US seems to lack the energy or resolve to clean up its global stables, the exorbitant burden. Its dithering will likely tear us apart But this isn't first and foremost a problem of its own making. Well actually it is, allowing China's uncontested entry into the WTO in 2001 😂

But my focus is rather on how China organises its engagement with the RoW. The same applies to the Asian satellite mercantilists of Taiwan & Singapore, the petro$ bloc etc but its China, owing to its sheer scale, level pegging with the EU's GDP, that demands the most attention.

But first, I've got to dial down something I said in the podcast. The persistency, the near perpetual state, of China's trade surpluses, is prima facie evidence that something's not right in the world of economics and the return to equilibrium. Just hold on a second, mister...

A review of economic history suggests its rather the norm when a significant economic block embraces the industrialisation of its resources. By the turn of last century, the U.S. trade surplus in manufactured goods grew, and its overall trade surplus persisted for 70 years...

So its not the persistency of China's trade surpluses pers se but rather their sheer scale. Prior to the unresolved crisis of 2008, their surplus in manufactured goods approached 20% of gdp. I think of this as the deflation monster. It is truly without precedence.

Consider the US when it was China. Peak US with regard to international trade occurred with the destruction of Europe's capital stock with WWI and the swathe of innovations that raised productivity levels in the US during the 1920s. It was the undisputed world champion of trade.

US gdp closed the decade at a trillion $s according to a presentation by the California State University, Northridge. I say that hesitantly because I don't know which year of billion $s they used but its close to FRED data using 2012 $ billions

British data suggests that UK GDP was a quarter of that in 2018 £ billions and it rhymes with the chart of global share of gdp in the second chart

So the US was a big deal and its trading partners had been wiped out by conflict. So let's look at PEAK manufactures surplus to gdp. The highs corresponded with the two global wars and yet never exceeded 6% of US gdp. Hmm🤔6% versus China's almost 20%; today is without precedent

Am I boring you, merde, I don't mean to bore you...its just that the deflation monster is back. 1Q23, China's exports grew 8.4 % and imports only 0.2 %. With property busted, its one of their only policy determinants to print gdp growth. They're going for it once more, big time..

China experienced a very nasty and mostly concealed economic tremor back in 2015. I taped another Acid Cap Pod with @rampagingruss yesterday. Patreon subscribers will be able to view this tomorrow. I'll return to Patreon, later. Russell argues that China should have devalued then

Imagine it had...the mind boggles. China last devalued almost 30 years ago with the inauguration of NAFTA. The CNY was set at 8, today its at 7...that 12.5% reval seems puny versus the insane improvement in their competitiveness.

Still, consider what geopolitical friends such as Taiwan get away with. They shocked the world in 1998 when they were the last to devalue their FX. But unlike the others, they had huge reserves and little $ debt. Like spiders in Aesopian fables, they were born that way...

So much to say, so little space left. Deflation Monster ? Consider Europe. 23 yrs ago, China was a $1trn economy, today it rivals them. Their trade deficit is blowing out, the German juggernaut is stuttering. This is the monster that can only grow; it can't stay one size.

DONE