This blog covers the general topic of financial markets.

Gavekal Clash of Empires

first posted: 2019-04-10 16:01:39.461589

As usual, Gavekal research delivers an insightful macro view with their book Clash of Empires


The authors skills at arranging macro-economic facts in a well-ordered narrative is compelling. I find it very hard to make it justice here, but would say, to summarize the highlights:

  • Thanks to its reserve currency status, the USD enables the US to maintain a twin deficit: a fiscal deficit that boosts its growth, and a trade deficit that allows it to consume more than it produces.
  • The US has geopolitical clout because of its military supremacy on the oceans and the bases it maintains in countries buying its debt: Germany, Japan, and Saudi Arabia. These countries are clients buying US treasuries with their surplus. Most of the trade deficit, however, is now with China.
  • China had tremendous growth that led to a major economic role in the world economy, but unlike Germany and Japan, China needs to fend for its own defense and is not a client state in that respect.
  • China was buying US treasuries but stopped doing this after QE2, for fear of inflation.
  • China is trying to establish the RMB as an alternative reserve currency for Asia trade.
  • The US policy of weaponizing its currency by extending US jurisdiction to any transaction involving the dollar is pushing Iran and Russia into the arms of China. Even allies such as France had one of its bank fined $10bn over dealings with a US-sanctioned country that were authorized by the EU.
  • The Chinese leadership wants to deliver prosperity to its population as a way to entrench its legitimacy.
  • Chinese bonds and interest rates have been delivering above inflation returns and the leadership takes inflation control very seriously (after all, inflation was 20% during the Tienanmen uprisings).
  • Europe and Japan are very much stuck with low rates, the US is going to lower its rate.
  • China Government Bonds will probably yield less than US Treasuries, and China and Asia currencies are going to appreciate compared to the USD.