War Averted — For Now at Least

Will We Be So Lucky Next Time? [The Daily Reckoning] August 02, 2022 [WEBSITE]( | [UNSUBSCRIBE]( War Averted — For Now at Least - China doesn’t shoot down Pelosi’s plane after all… - War with China could be “just a shot away”… - Then Jim Rickards shows you why China may be more a “paper dragon” than an actual dragon… [URGENT: Drug Stock Could End Arthritis?]( [This Simple Chart]( Will This Company’s Breakthrough Give New Hope To Millions? If You Or Somebody You Know Suffers From Arthritis, Pay Close Attention [Click Here For The Urgent Details]( Portsmouth, New Hampshire August 2, 2022 Editor’s note: If you’re a long-suffering reader, you may have noticed that the masthead on today’s issue is slightly different than what you’re accustomed to seeing. Explanation tomorrow. In the meantime, Jim Rickards breaks down Nancy Pelosi’s provocative visit to Taiwan. [Jim Rickards] JIM RICKARDS Dear Reader , Well, House Speaker Nancy Pelosi has landed safely in Taiwan, despite severe Chinese protests. Members of Congress usually find some official business to do on the Riviera or the Greek islands or some such locale where you can work on your tan or try the discos. Pelosi has chosen to fly into one of the most politically and militarily volatile spots on Earth for no good reason. The U.S. claims that Pelosi represents the legislative branch, which is separate from the executive branch, which handles diplomacy with foreign powers. But that distinction means nothing to the Chinese. They don’t believe that such distinctions exist. Their view is that Pelosi’s visit must have White House support and that this visit is a deliberate and dangerous provocation. The Chinese are enraged that such a high-ranking U.S. official (Pelosi is second in line for the presidency, after Kamala Harris) would visit Taiwan, whose independence China doesn’t recognize. Some in China even wanted its air force to force down or even shoot down Pelosi’s plane, which would have obviously had serious geopolitical consequences. Whatever you think of Nancy Pelosi, she is a duly elected, prominent American official. Shooting her plane down would be an act of war. Thankfully, cooler heads prevailed in Beijing, as I expected they would. But China still pledges some sort of unspecified retaliation, and Pelosi’s Taiwan trip just ratchets up tensions with China even further. Of course, political and military tension in the Western Pacific and off the coast of China are nothing new. There’s no need to rehash the entire history here, but they trace to 1949, when Chinese nationalist forces under Chiang Kai-shek retreated to Taiwan. They established a government-in-exile, claiming to be the legitimate government of China, opposing Mao Zedong’s Communist government on mainland China. The U.S. has walked a fine diplomatic line over the years to avoid provoking a dispute that could simmer over into war. In more recent years, the confrontations have involved fishing and mineral rights in the South China Sea and Chinese efforts to build new islands by dredging around coral reefs. The U.S. routinely sends Navy vessels through the South China Sea near Taiwan on what it calls “freedom of navigation” missions (recognized by international maritime law but opposed by China). So far, the U.S.-Chinese confrontation has been about naval vessels passing in close quarters and surveillance aircraft being harassed by fighter jets. The risk of such tactics is an accidental collision, a rogue shot fired or a command misunderstood. Any such incident could lead to retaliation, and there’s no telling where it might stop. Both sides typically stop short of direct military action because of the obvious risk of triggering something that could turn into World War III. China does not want war at this time. But diverting the people’s attention away from domestic problems toward a foreign foe is an old trick leaders use to unite the people in times of uncertainty. Rallying the people around the flag is a tried-and-true method to garner support. If China’s leadership decides that the risk of losing legitimacy at home outweighs the risk of conflict with the United States, the likelihood of war rises dramatically. I’m not predicting it, but wars have started over less. As Mick Jagger sang, a U.S.-China war is “just a shot away.” Below, I show you why China’s social and economic situations are much more precarious than you may think. If you think China is a mighty superpower that will soon displace the U.S., please read on. Regards, Jim Rickards for The Daily Reckoning P.S. I just went live earlier today with an [urgent Zoom call]( where I talked about everything from the recent debacle with Pelosi and Taiwan to the Fed’s most recent rate hike. This is by FAR one of the most explosive and high demand Zoom calls I’ve ever done. Because of Zoom limitations and the fact that we had more than 10,000 people registered for the call, you may have been locked out If so, don’t worry. Here’s a replay link: [CLICK HERE TO ACCESS THE ZOOM REPLAY]( But because due to the time-sensitive nature of the content, this message will be removed from the internet by Thursday at midnight at the latest. So don’t delay. [Click here now for immediate access to today’s urgent Zoom call.]( [Hey, It’s Jim Rickards Here]( I need your attention immediately. My big announcement comes down on Tuesday at midnight. If you haven’t already, you need to see it. Trust me, you do not want to miss out on what’s coming. [Click Here ASAP]( The Daily Reckoning Presents: “China has serious structural economic problems and its internal contradictions that are finally catching up with it”… ****************************** China, Paper Dragon By Jim Rickards [Jim Rickards] JIM RICKARDS If you’re still working on the assumption that China is a financial and economic juggernaut destined to pass the U.S. in total output and eventually rule the world, it’s time to put those ideas aside. None of that is true. To begin, China is entering the greatest demographic collapse in the history of the world, worse than the Black Death of the 14th century and the Spanish flu of 1918. China’s current population is about 1.4 billion, but that number will decline to perhaps 800 million by the year 2090. That’s a loss of 600 million people. If an economy is nothing more than the number of people working in it and the average productivity of those workers, then that demographic collapse by itself is enough to bring China to its knees. Still, there’s more. The assertive communism of Xi Jinping is destroying whatever small traces of capitalism might have emerged in the decades since Deng Xiaoping’s reorientation of the Chinese economy in 1978. China’s stock bubble is also bursting. That comes on top of China’s failed zero-COVID policy that is destroying growth in pursuit of an impossible goal of fighting COVID by locking down large cities on a seemingly random basis for extended periods of time. International business is already moving quickly to move supply chains from China to Vietnam and elsewhere in South Asia. Once those supply chains move, they will not come back to China for at least 10 years if ever. These are permanent losses for the Chinese economy. In a nutshell, China has serious structural economic problems and its internal contradictions that are finally catching up with it. Will China be able to overcome these headwinds? Not easily, if at all. “Chinese markets” is one of the great oxymorons. There are no markets in China. Everything is tightly regulated and manipulated (at best) or a complete fraud (at worst). For example, China puts up strong GDP numbers with occasional blips such as the 2020 pandemic or the 2008 global financial crisis. But Chinese GDP is 45% investment (25% is more typical for other large economies) and 50% of that 45% is wasted. But the investment component is thinly disguised government spending — many of the companies conducting investment in large infrastructure projects are backed directly or indirectly by the government through the banks. This investment is debt-financed. China is so heavily indebted that it is now at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt. Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused. The Chinese landscape remains littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model. What’s worse is that these white elephants are being financed with debt that can never be repaid. And no allowance has been made for the maintenance that will be needed to keep these white elephants in usable form if demand does rise in the future, which is doubtful. If you subtracted the waste from the reported GDP, you’d find that actual GDP is more like 3% than the 6% China reports. Essentially, China is on the horns of a dilemma with no good way out. It has driven growth with excessive credit, wasted infrastructure investment and Ponzi schemes, none of which is productive in the long run. Meanwhile, China's per capita income is also under $12,000 per person, compared with per capita income of about $64,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis. [Stunning New Prediction for 2022]( You’re going to want to see this — America’s #1 futurist just came out with a stunning new prediction for what could happen in 2022. And surprise, it’s got nothing to do with Trump. Or trade wars. Or the ongoing gyrations on Wall Street. In fact, this could be your one chance to ignore all that upsetting “fake news”… and get back to the business of getting exceedingly rich instead. [Click Here Now]( Most importantly, at under $12,000 per capita GDP, China is stuck squarely in the "middle-income trap" as defined by development economists. The path from low income (about $5,000 per capita) to middle income (about $10,000 per capita) is fairly straightforward and mostly involves reduced corruption, direct foreign investment and migration from the countryside to cities to pursue assembly-style jobs. The path from middle income to high income (about $20,000 per capita) is much more difficult and involves creation and deployment of high technology and manufacture of high value added goods. Among developing economies (excluding oil producers), only Taiwan, Hong Kong, Singapore and South Korea have successfully made this transition since World War II. All other developing economies in Latin America, Africa, South Asia and the Middle East including giants such as Brazil and Turkey remain stuck in the middle-income ranks. China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks. To escape the middle-income trap requires more than cheap labor and infrastructure investment. It requires applied technology to produce high value added products. This explains why China has always been so focused on stealing U.S. intellectual property. China has not shown much capacity for developing high-technology on its own, but it has been quite effective at stealing such technology from trading partners and applying it through its own system of state-owned enterprises. But the U.S. and other countries have cracked down on China's technology theft and China cannot generate the needed technology through its own R&D. In short, and despite enormous annual growth in the past 20 years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved. And that has serious implications for China's leadership… China's economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver. It will remain in power only so long as it provides jobs and a rising living standard for the Chinese people. The overriding imperative of the Chinese leadership is to avoid societal unrest. If China's job machine seizes as parts of it did during the coronavirus outbreak, Beijing fears that popular unrest could emerge on a potentially much greater scale than the 1989 Tiananmen Square protests. This is an existential threat to Communist power. President Xi Jinping could quickly lose what the Chinese call "the Mandate of Heaven." That's a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years. If the Mandate of Heaven is lost, a ruler can fall quickly. The Chinese leadership knows this, but they’ve had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities. Essentially, China is on the horns of a dilemma with no good way out. The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase). Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential. There’s more to the story, but that should be enough to convince any investor that China is one market to keep away from. If you’re invested in China, it’s a good idea to get out before it’s too late. China’s essentially a paper dragon. Regards, Jim Rickards for The Daily Reckoning P.S. I just went live earlier today with an [urgent Zoom call]( where I talked about everything from the recent debacle with Pelosi and Taiwan to the Fed’s most recent rate hike. This is by FAR one of the most explosive and high-demand Zoom calls I’ve ever done. Because of Zoom limitations and the fact that we had more than 10,000 people registered for the call, you may have been locked out If so, don’t worry. Here’s a replay link: [CLICK HERE TO ACCESS THE ZOOM REPLAY]( But because of the time-sensitive nature of the content, this message will be removed from the internet by Thursday at midnight at the latest. So don’t delay. [Click here now for immediate access to today’s urgent Zoom call.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. 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