Grant Williams: China Is a Major Problem; Central Banks Up Against the Wall

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Grant Williams, author of the widely read Things That Make You Go Hmmm..., shares his views with Financial Sense Newshour on China, the disconnect between stock markets and global economies, and the September taper. Here we present a few key excerpts of his interview airing Friday for subscribers.

On the problem posed by China and other economies:

"China has been without question the engine or at least the promised engine of growth ever since the beginning of the last decade, and it’s done a pretty good job at carrying the load but now we’re beginning to see an almost inevitable slowing in China…even the official GDP figure, which I think everyone takes with a pinch of salt…is currently at 7.7%. I think people in this part of the world believe the real number is closer to maybe 5-5.5%. And look, that’s in a world of 0-1% growth. That’s still a pretty good number, but it’s not enough for China domestically and it’s not enough for China to carry the load for the rest of the world again. Everywhere you look, the signs are starting to get pretty drastic—Australia is the perfect case-in-point…The estimated deficit in Australia was just increased from $18 billion to $30 billion—that’s a big big re-estimation of what the number is going to be. So, this slowdown in China, which clearly isn’t really reflective of 7.7% growth is starting to catch the people who are dependent upon it unawares. And, as I said before, with China being the economy that has been forced almost to carry the load, that’s a big problem. And it’s not just a big problem for China: it’s a big problem for satellites like Australia; Korea is seeing their export numbers to China drop; Japan and China have political tensions; and also the trade between those two countries is starting to fracture. So, yeah, China is really a major problem."

On the disconnect between stock markets and the global economy:

"[T]here’s this connection in the human mind that a good stock market means a good economy but that’s not necessarily the case—certainly not at the moment. And everywhere you look markets are dependent on central banks, and that’s a very dangerous thing. A perfect example was Mark Carney’s comments at the BOE I think last night. He’s come out and said that interest rates are going to remain at zero until essentially 2016. Now this forward guidance has never been tried in the UK before. So, he’s said that you’re going to have zero rates for another three years, and they’ve also now linked the interest rate cycle to unemployment. He says that they need to get the unemployment rate down from 7.8% to 7%. And in the same breath he’s talking about how in the UK economy there’s been a strong uptick in the data from estimated growth of 1.4% to 1.7%, and then from 1.7% to 2.5% next year [estimated]. Now, you can clearly see from those statements that something is wrong here: A) 1.7% is not strong growth, and B) If you do have strong growth, why are you making a three year forward promise that you’re going to keep rates at zero. They’re really trying to squeeze every last juice from this lemon now and they’ve backed themselves into a corner where even promising zero percent rates for three years doesn’t generate any juice in the economy. So the law of diminishing returns is absolutely at play here and if you look at the effects that QE1 had, and then QE2, and then QE3, they’ve certainly been weakening every single time. So, now, we have this problem where central banks are up against the wall."

The remainder of this audio interview will be available for subscribers Friday, August 16th on the Newshour page. To gain full access to all our premium interviews and content, please CLICK HERE to subscribe.

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