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An Interesting China Analysis By Jim Chanos (and a little more by me…)

Here’s a recent interview with Jim Chanos on the critical state of the Chinese economic picture. Chanos typically makes his money short-selling overpriced markets and he’s “all over” China like stink on a pig; has been for well over a year.

Chanos believes 2011 will be his big year to begin cashing in on his China shorts. Here’s his reasoning:

Should Chanos’ vision play out, global implications would include a massive spreading of deflation throughout commodities markets – since most are currently being supported mainly by Chinese demand and China-centric global speculation.

Therefore, major commodities-based economies such as Canada, Australia, New Zealand, most South American countries, and many others, would take a direct economic hit as well.

Obviously, a contracting/declining global economy hits energy demand, so OPEC would soon find itself to be awash in oil (again) and prices would quickly begin to adjust.

Wildcard! A new “global cooling” trend – should it continue – would add significant support to energy markets while dramatically increasing food prices due to hoarding and shortages.

As indicated by Chanos, many European countries – already in dire financial straits – would also be hit hard as they are heavy “net” exporters to China. In light of deepening “austerity”, local implications would be severe and Europe would become a social tinderbox. It seems unlikely to me that the Euro, and even the “EU” itself, would survive such a scenario.

U.S. financial interests would be hit indirectly (we’re not major exporters to China) by significant exposure to private and sovereign debt defaults emanating primarily from Europe. It’s hard to guess if there would be any willing “deep-pockets” buyers for new U.S. Treasury debt (other than the Fed itself) in such a “SHTF” marketplace. Could this imply QE3…QE27…QE243?

With many nations becoming unwilling or fiscally incapable of cooperating in global “bailout” schemes, a powerful new wave of protectionist/separatist/isolationist pressures would likely be unleashed – presenting increasing resistance to further globalization efforts as nations and entire regions begin to suffer acute internal stresses and national leaders fight viciously for political control and survival.

In the extreme, capital flows would be restricted if not entirely stopped in some (or many) countries and new international hostilities would likely appear, reversing decades of globalization efforts.

Consider this plausible scenario an “equal and opposite reaction” to many decades of intense globalist pressure and prima facie international cooperation that, on-the-whole, does not appear to have benefited local economies or permanently raised the living standards of large groups of people.

Question whether or not “globalization” is a natural evolutionary development and, if not, is it sustainable without devastating cost to both man and nature. Will “thinking global” finally lead us to buying local?

Overall, this grand scenario – kicked-off by a major slow-down in China – plays well with the long-wave deflationary theories I continue to support – as a massive overhang of globally-digitized “bubble-credit” continues to forcefully unwind in a somewhat unpredictable and virtually uncontrollable manner.

As I read it, we’re still relatively “early” in this grand deflationary cycle. The entire “game” has been delayed by the deceptive and massively harmful “inflationary meddling” of a global band of politicos and central banks acting in concert in pitifully vain attempts to circumvent laws of nature and physics; what goes up must come down.

In my book, Rule #1 is “In the end, gravity wins.” All other rules follow.

As most readers know, the vested financial interests have carried this “ploy” off by exponentially increasing sovereign (national) debts that have served PRIMARILY to bail themselves and their cronies (private interests) out of losing speculative gambles (which created the whole mess in the first place) with real “cash money” taken directly from “taxpayers” via the creation of massive new PERMANENT sovereign debts.

Perhaps not surprisingly, much of the money surreptitiously taken by these shadowy financial interests has found its way into precious metals and other tangible assets – which they now own free-and-clear. These sophisticated “interests” are well aware that tangible assets survive the abandonment and ultimate collapse of paper “intangibles” (i.e. stocks, bonds, fiat currencies). Employing strategies such as this at the proper time allow for the compounding and transfer of wealth across multiple generations.

Taxpayers, on the other hand, get nothing in return for this explosion in debt but the temporary “illusion” that their banking system and economy have been saved – plus a future darkened by having been saddled with the mountain of new debt. Diminished individual opportunity accompanied by far higher future costs. At some point, increased sovereign debt ultimately leads to severe social cutbacks, known to global banking elites as fiscal “austerity” programs.

Bear in mind that fiscal “austerity” serves ONLY to make more national revenue available to pay interest to international bankers on phantom debts created for countries already reeling under unsustainable debt loads. The undisclosed intent is to eventually bankrupt a country and to foreclose, with the bankers acquiring its “pledged” national assets for pennies on the dollar.

These reckless and grossly irresponsible acts carried out by national leaders – and the resulting fiscal austerity programs – will serve to multiply the eventual damage to “real” people by the future – albeit delayed – collapse of large sectors of both global and local economies.

Social safety nets will be systematically shredded and torn by the echoing political austerity mantra “We can simply no longer afford it”. Despite the intense suffering by people, perks for special interests and corporations are seldom affected since it is presumed, without question, that they hold the key to jobs, job creation, and a return to economic stability and growth.

The predictable result will be social unrest in any country adopting such an aggressive, punitive stance against its hungriest citizens. If you reside in an afflicted country, be watchful of early signs of social-pain-induced unrest near you and prepare yourself to deal with it however you must. Panics and shortages come to mind as hungry mobs take what they need wherever they can find it.

In this continuation of an age-old story; a few play, while most just pay. We’ll continue to pay…and pay…until we put a stop to it.

Meanwhile, NO job is safe, NO pension is safe, NO investment is safe. Assuming a deflationary environment exists, CASH continues to be KING until the storm passes.

Remember, depressions happen one household at a time. Why? Because, for an endless variety of reasons, depressions FORCE OTHER PEOPLE to hold tight to their money and this quickly travels through economies as the “multiplier effect” works to rapidly undermine households and vital small businesses through chain-reaction.

That’s why it’s called a “deflationary cycle” and, in order to be stopped, a cycle must generally be allowed to fully play itself out.

The sooner we learn to stand back and allow this to happen (See: Iceland Exits Recession), the less damage we’ll all sustain in our lives and the better off we’ll all be in the end.

The unfortunate fact is, there is simply no way to avoid the pain. Scary as it seems, we MUST all step up and face the lashings. Just be sure to remember who brought us here.

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