These are the alt-A loans. The barefoot investor says
If sub-prime loans have been referred to as toxic, then the Alt-As are like passing wind in an elevator—not exactly toxic, but still not pleasant.
People with less-than-stellar credit histories got these loans (liars took out sub-prime).
Just like with sub-prime loans, the honeymoon is ending for many people who took out these Alt-A loans in the boom years. They’re just starting to see their loans reset to higher rates—and the default rates are soaring.
The professionals who watch these things closely predict that over the next 12 to 18 months these loans will be the cause of another wave of mortgage defaults.
Basically, the further down the tube the US financial system goes, the more people get laid off and the more people get freaked out, stop ALL discretionary spending and start eating rice for every meal.
Now the success in recent times of China has been fueled to a large extent by the fact that there were lots of Americans spending lots of money (cash and credit) on crap that was made in China. Basically lots and lots of discretionary spending. Now, obviously crap from China is generally cheap, so there will continue to be some demand, but it is an absolute certainty that consumer spending has taken a big hit and will continue to do so as long as people are worried that they won´t have a job next week (a very real fear for many in the US).
So what does this mean for China? They have a developing home market to sell to, will continue to have some demand in the US and they still sell to markets around the world, both in the developed and developing world (definitely Chinese crap for sale in Ecuador). However, realistically they are going to experience a severe drop in demand. There current free-for-all attitude to capitalism will see an accompanying massive rise in unemployment as factories close or shed staff.
So, we have an oppressive, nationalistic and brutal dictatorship, with a young, male dominated population (some estimates suggest there maybe 40 million more young men than young women in China) and great unrest and dissatisfaction caused by unemployment and hardship.
What do dictatorships sometimes do in situations like this? They find a diversion to take the people´s minds off the problem. How?
Traditionally they start a war.
I don´t think it´s at all unrealistic to expect that a newly empowered China, with billions of dollars cash, a gradually modernising military and a range of domestic problems might see this as a good way to get people supporting the Government and forgetting about domestic issues.
So where?
Probably not Taiwan, although it is definitely possible. Obama seems to prefer talking to doing anything realistic (like deploying a carrier battlegroup) and there might be an opportunity to make some noise and score some points, even if nothing else.
China is basically next door to Russia´s possessions in the East, possessions that are both immensely wealthy and also often underutilised due to Russia´s population crisis. Such a target would be attractive but Russia a) supports China in the Security Council on various matters to do with oppressing human rights and has b) lots of tanks (better than the Chinese) and c) nukes.
India is another neighbour of China and the two have clashed in the past, mostly at brutally high altitudes where nobody is around to hear you scream. This would be a likely scenario, as the conflict could be contained, however there´s nothing very exciting about capturing a mountain or two, it doesn´t really mean anything.
Mongolia is right next door, but China already has shit loads of semi desert, do they really want more? Probably not.
So where than?
The three most likely options as I see them are:
A brutal crackdown of the Uighurs and other ethnic minority groups, under the guise of putting down a rebellion or averting a civil war.
Annexing the Spratley Islands would be another possible move. They are claimed by China, the Philipines, Vietnam and (I believe)Thailand. Apparently some Chinese ships sailed through the area many hundreds of years ago, so that seems a good reason for the Chinese to claim them. This would be a small scale conflict, characterised by sinking a few enemy ships and loudly declaiming that what was rightfully Chinese has been reclaimed.
Similarly, Vietnam for many hundreds of years was a Chinese possession and the two countries even clashed in the late 70´s (the Chinese were embarrassed rather dreadfully). While China is unlikely to want all of Vietnam, they might consider ädjusting¨ the border somewhat, getting a conflict, some land and lots of patriotic fervour, all together in one big package.
Another out there option?
China apparently has 1 million ethnic Chinese in Africa in various positions. The Chinese are the reason that Sudan continues to kill black people with impunity and why Robert Mugabe is still the man in Zimbabwe. While it´s extremely unlikely the Chinese would actually try and conquer anything, they might send in the troops to help an ally out and get some fighting happening.
Of course there´s lots of other possibilities, but I think the idea of China using it´s military as a way to divert attention from domestic issues is a very realistic one.
You heard it here first!
Harry
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