Global Financial Crisis 2.0

Back in 1992, George Soros successfully broke the Bank of England by launching a massive speculative currency attack against the British pound. The resulting collapse forced the British government to pull the pound from the European Rate Mechanism (ERM).

Fast forward 24 years, and another speculative attack against a currency is building. And this one could leave the global economy in shambles.

You see, China has been struggling to contain an economic downturn that risks forcing the country to make choices its leaders are completely unprepared to make. But any failure on the part of the Chinese leadership to act could lead the country into a crisis that dwarfs the American financial crisis of 2008.

And evidence of the gathering storm is growing as Wall Street speculators are betting heavily against the Chinese renminbi – bringing to mind the British crisis in 1992. Recent filings indicate hedge funds are making significant bets that will pay enormous dividends if the yuan and the Hong Kong dollar fall over the next couple of years.

This has led some speculators to suggest the Chinese currency could plummet by as much as 40% over the next three years. While that seems overly pessimistic, it’s likely we’ll see devaluations of at least 15-20%. In either case, such a devaluation would be catastrophic for the global economy.

You see, any such move by the Chinese will inevitably guarantee cheaper Chinese goods flooding the globe. This will lead to pressure on Emerging Markets (EM) to devalue their own currencies in an effort to compete. From there, it’s a race to the bottom.

The bottom line is that there is a price to pay for Keynesian foolishness. China allowed its total debt load to swell to 280% of its GDP in an effort to bring prosperity to the masses. And all they have to show for it are millions of empty apartments and other unused capital assets.

They have no choice but to devalue. The alternative is politically unthinkable. The only question that remains is to what extent their folly decimates the world economy.

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