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The next financial crash is imminent, and China’s resource crisis could be the trigger

Business

China’s economic slowdown could be a key trigger of the coming global financial crisis, but one of its core drivers — China’s dwindling supplies of cheap domestic energy — is little understood by mainstream economists.


All eyes are on China as the world braces itself for what a growing number of financial analysts warn could be another global economic recession.

In a BBC interview to mark the 10th anniversary of the global financial crisis, Bank of England Governor Mark Carney described China as “one of the bigger risks” to global financial stability.

The Chinese “financial sector has developed very rapidly, and it has many of the same assumptions that were made in the run-up to the last financial crisis,” he warned:

“Could something like this happen again?… Could there be a trigger for a crisis — if we’re complacent, of course it could.”

Since 2007, China’s debts have quadrupled. According to the IMF, its total debt is now about 234 percent of gross GDP, which could rise to 300 percent by 2022. British financial journalist Harvey Jones catalogues a range of observations from several economists essentially warning that official data might not reflect how bad China’s economy is actually decelerating.

The great hope is that all this is merely a temporary blip as China transitions from a focus on manufacturing and exports toward domestic consumption and services.

Meanwhile, China’s annual rate of growth continues to decline. The British Foreign Office (FCO) has been monitoring China’s economic woes closely, and in a recent spate of monthly briefings this year has charted what appears to be its inevitable decline.

Last month, the FCO’s China Economics Network based out of the British Embassy in Beijing documented that China’s economy had “further softened… with indicators weakening across the board”.

The report found that: “Investment, industrial production, and retail sales all weakened, despite easing measures”; and noted that high-level Chinese measures to sustain economic growth were running out of steam.

China’s economic slowdown, moreover, coincides with brewing expectations that Wall Street’s longest running stock market bull run could be about to end soon.

One analysis of this sort came from Wall Street veteran Mark Newton, former Chief Technical Analyst at multi-billion dollar hedge fund Greywolf Capital, and prior to that a Morgan Stanley technical strategist.

Newton predicts that US stocks are close to peaking out, leading to a massive 40–50 percent plunge starting in the spring of 2019 or by 2020 at the latest. He explained that:

“Technically there have started to be warning signs with regards to negative momentum divergence (an indicator that can signal a pending trend reversal), which have appeared prior to most major market tops, including 2000 and 2007.”

Newton’s forecast is similar to a prediction made by US economist Professor Robert Aliber of the University of Chicago Booth School of Business. Earlier this year, INSURGE reported exclusively on Aliber’s forecast of a 40-50 percent stock market crash (in or shortly after 2018), based on examining the dynamic of previous banking crises.

The vulnerability of both the US and Chinese economies — not to mention the string of other vulnerabilities in numerous other countries from Brexit to Turkey to Italy — demonstrates that whatever the actual trigger might be, the resulting impact is likely to have a domino effect across multiple interconnected vulnerabilities.

This could well lead to a global financial crash scenario far worse than what began in 2008.

But financial analysts have completely missed a deeper biophysical driver of China’s economic descent: energy.

Last October, INSURGE drew attention to new scientific study led by the China University of Petroleum in Beijing, which found that China is about to experience a peak in its total oil production as early as 2018.

Without finding an alternative source of “new abundant energy resources”, the study warned, the 2018 peak in China’s combined conventional and unconventional oil will undermine continuing economic growth and “challenge the sustainable development of Chinese society.”

These conclusions have been corroborated by a new paper published this February in the journal Energy, once again led by a team at the China University of Petroleum.

The study applies the measure of Energy Return On Investment (EROI), a simple but powerful ratio to calculate how much energy is being invested to extract a particular quantity of energy.

The team attempted a more refined EROI calculation, noting that standard calculations look at energy obtained at the wellhead compared to what is used to extract it; whereas a more precise measure would look at energy available at ‘point of use’ (so, after extraction from the wellhead, processing and transportation until it is actually used for something tangible in society).

Using this approach to EROI, the study finds that over a period of around three decades (between 1987 and 2012), the value of the energy extracted from China’s domestic fossil fuel base declined by more than half from 11:1 to 5:1.

This means that more and more energy is being expended to extract a decreasing amount of energy: a process that is gradually undermining the rate of economic growth.

A similar finding extends to China’s coal consumption:

“In 1987, the energy production sectors consumed 1 ton standard coal equivalent (TCE) energy inputs for every 10.01 TCE of produce net energy. However, in 2012, this number declined to 4.25.”

The study uses this data to simulate the impact on China’s GDP, and concludes that China’s declining GDP is directly related to the declining EROI or energy value of its domestic hydrocarbon resource base.

But it isn’t just China experiencing an EROI decline. This is a global phenomenon, one that was recently noted by a scientific report to the United Nations that I covered for VICE, which warned that the global economy as a whole is shifting to a new era of declining resource quality.

This doesn’t mean we are ‘running out’ of fossil fuels — but it means that as the resource quality of those fuels decline, we increase the costs on our environment and systems of production, all of which increasingly impact on the health of the global economy.

As long as mainstream economic institutions remain blind to the fundamental biophysical basis of economics, as masterfully articulated by Charles Hall and Kent Klitgaard in their seminal book, Energy and the Wealth of Nations: An Introduction to BioPhysical Economics, they will remain in the dark about the core structural reasons why the current configuration of global capitalism is so prone to recurrent crisis and collapse.

medium.com/insurge-intelligence



75 Comments on "The next financial crash is imminent, and China’s resource crisis could be the trigger"

  1. joe on Fri, 14th Sep 2018 9:52 am 

    “The Conservative AND Labour Party could split over the issue:”

    Baha hahaha

    OMG, what a tool you are.

    Labour will split, you are right about that, but thats because the real labour party is trying to kick out the last of the (clinton inspired) third way liberals who sucked Blairs cocktail as they lied their way to 1,000,000 Iraqi dead. Fuck them. The Tories can’t lose an election now, that’s why they ca fight in the open. You really understood nothing you fool.

  2. Darrell Cloud on Fri, 14th Sep 2018 11:09 am 

    I was in China this summer. The tour guide told us that Shanghai puts 20,000 new cars on the road every month. The traffic was thick. The smog was thicker. And the high rises were everywhere. China is the new Japan.

  3. Cloggie on Fri, 14th Sep 2018 1:50 pm 

    joe is clearly mad, I understand that. So would I be if I lost 100k GBP in one day:

    https://www.dailymail.co.uk/news/article-6165689/No-deal-Brexit-bad-2008-financial-crash-BoE-governor-warns-cabinet.html

    Rest assured of my warmest sympathy, um, mate.

  4. Cloggie on Fri, 14th Sep 2018 2:25 pm 

    No deal Brexit far worse for British industry than UK gov says it will be.

    http://www.spiegel.de/wirtschaft/soziales/brexit-scheitern-der-verhandlungen-waere-dramatischer-als-viele-glauben-a-1228135.html

    Says not me but “Carolyn Fairbairn, Generaldirektorin des Verbandes der britischen Industrie”

    I think it would be in the interest of the UK if the EU would simply terminate negotiations and simply state the Brexit terms, like this:

    Dear British, we give you 4 options from which you may choose:

    1. WTO (default, we make that choice for you)
    2. “Canada”
    3. “Norway”
    4. Remain.

    Take your pick.

    If you don’t we pick 1. for you
    Once you have forked over 39 billion everything is settled. If you don’t, a total blockade will follow until you come to your senses.

    Choose wisely. We have all the cards. Eurasia is waiting for us.

  5. Cloggie on Fri, 14th Sep 2018 3:35 pm 

    No-deal Brexit latest: the death of retirement (Pexit)

    https://www.dailymail.co.uk/news/article-6165689/No-deal-Brexit-bad-2008-financial-crash-BoE-governor-warns-cabinet.html

    “The death of retirement: Mark Carney predicts older workers will NEVER get to leave their jobs and will need re-training instead after he is lashed by Brexiteers for gloomy no deal warning”

  6. Cloggie on Fri, 14th Sep 2018 3:54 pm 

    My favorite American white nationalist Richard Spencer making the case in favour of the EU, nota bene in Britain:

    https://youtu.be/FXGOWJbt2BU

    Totally agree with him.

    https://youtu.be/45uy-TtkD1k

  7. Boat on Fri, 14th Sep 2018 8:34 pm 

    Clog

    If he is your fav, odds are he will be kicked off social media.

  8. Boat on Fri, 14th Sep 2018 8:38 pm 

    Clog

    Parkinson’s retirees joining a drum boy band?

  9. Cloggie on Fri, 14th Sep 2018 10:31 pm 

    “If he is your fav, odds are he will be kicked off social media.”

    In present day America, that is facing bolshevation, even the president runs the risk of being banned from twitter. His most important supporter in the social media Alex Jones has already been banned.

    It is not “the lunatic fringe” like me, we are talking half America here.

    Now how do you think this is going to end, boat?

    I hope (for you) that you have a refuge abroad, like several here.

    Or do you plan to sit out the coming “troubles” with your Comedy Kaepernick Nikes on, while kneeling in front of your 200 inch blackball screen in the hope they will forgive you your skin color and skip your house?

    https://documents1940.wordpress.com/2018/06/11/cw2-brewing/

  10. Cloggie on Sat, 15th Sep 2018 2:27 am 

    It is the central political theme of our time: are we going to commit sociocide (boat, millimind, tard, sissy, davy) or are we going to protect are civilization and European identity (moi, Antius, Theedrich).

    Here a clash between Salvini and the political correct dwarf from Luxemburg Asselborn. Salvini wants Italy for the Italians and restore the Italian family, Asselborn wants unlimited immigration from the third world and copy the US (video):

    http://www.spiegel.de/politik/ausland/matteo-salvini-und-jean-asselborn-geraten-bei-ministertreffen-aneinander-a-1228265.html

    Note that politicians from the Protestant NW are the worst (Germany, Holland, Britain, Sweden). Protestants, unlike Catholics are historically the champions of “freedom of religion”).

    This theme and not peak oil or climate change will lead to real destabilization of our societies and political systems in the short term. Civil war will likely result from this, in Europe but most of all in the US.

  11. makati1 on Sat, 15th Sep 2018 4:49 am 

    “Yet Another Trillion-Dollar Unfunded Liability: Too Many People In Hurricane Alley”

    “Twenty-nine years ago this month, Hurricane Hugo barreled ashore just north of Charleston, S.C., a category 4 storm with maximum winds estimated at 140 miles an hour and the highest storm tide ever recorded on the East Coast….

    Over the next three decades, an estimated 610,000 homes were added within 50 miles of the coastline, according to my research….

    Most will be affected by Hurricane Florence, the monster storm that is advancing on the coast, with landfall expected Friday morning….

    There seems to be something of a “disaster amnesia” going on with respect to our land development practices after a calamity…

    And since we haven’t had a direct hit in quite a while, no one seems to understand just how much all those extra buildings will cost to replace. In this sense, Cat-2 Hurricane Florence is a taste of things to come, but just a taste. The main course is the inevitable “big one” that hits Miami, after which we’ll finally be able to calculate this latest unfunded liability. ”

    https://www.dollarcollapse.com/unfunded-liability-crowded-hurricane-alley/

    “it’s not “disaster amnesia” its pure stupidity/insanity. The taxpayers need to stop funding rebuilding these mansions of the wealthy, THEN the stupidity would end.

    “The definition of insanity is doing the same thing over and over again, but expecting different results.”

    BTW: The typhoon is past the Philippines and is headed for China. Just a rainy day where I live. Electric was of for most of the day but, obviously, has been restored. I doubt that the Carolinians can say the same.

  12. Davy on Sat, 15th Sep 2018 6:22 am 

    “Super typhoon Mangkhut: The world’s biggest storm of 2018 has claimed its first victims”
    https://tinyurl.com/yb8knlae

    “The massive storm cut a swathe of destruction when it struck the northern tip of Luzon island, threatening the lives and homes of roughly four million people.”

    “Mangkhut was packing sustained winds of 170 km/h and gusts of up to 260 km/h as it left the Philippines. An average of 20 typhoons and storms lash the Philippines each year, killing hundreds of people and leaving millions in near-perpetual poverty. Thousands of people fled their homes in high-risk areas ahead of the storm’s arrival because of major flooding and landslide risks.”

  13. Davy on Sat, 15th Sep 2018 6:28 am 

    “GOES-East – Latest CONUS Images”
    https://tinyurl.com/ybzkod5g

    5000 x 3000 px, (JPG, 9.96 MB)

    If you click on this image you will see much of the Carolinas still have plenty of power. I was expecting a blacked out region.

  14. Davy on Sat, 15th Sep 2018 7:01 am 

    “Overall Red alert Tropical Cyclone for MANGKHUT-18”
    in Philippines, China, Guam, Northern Mariana Islands”
    https://tinyurl.com/y7twxb2q

    There could be significant damage in one of China’s industrial heartlands. The storm was downgraded by its interaction with the P’s but there is plenty of warm ocean to intensify over ahead on its path to China.

  15. Cloggie on Sat, 15th Sep 2018 12:40 pm 

    Vostok-2018 ze pictures:

    https://www.geenstijl.nl/5143853/vostok-2018-foto-s-rusland-showt-legerballen/

  16. makati1 on Sat, 15th Sep 2018 7:46 pm 

    “Tropical Storm Florence batters North and South Carolina; 12 deaths reported – live updates” CBS

    “Typhoon Mangkhut kills at least 12 in the Philippines; China next on alert” Accuweather

    “Nearly 1 million customers have lost power across North and South Carolina since Florence first began impacting the region on Thursday.” Accuweather

    “More than 15,000 people were evacuated from the Cagayan province prior to the typhoon’s arrival, the Associated Press reported. About 8,700 evacuated from high-risk portions of the Philippines in total.” Accuweather

    “Swansboro, NC has now received more than 30 inches of rain; several other have received more than 20 inches. Forecasters warned that rains totaling up to 3.5 feet could trigger epic flooding through early next week.” CBS

    “It made landfall at Baggao, in the north-east of the main Philippine island of Luzon, at about 01:40 local time on Saturday (17:40 GMT on Friday) and left some 20 hours later.” BBC

    “At 2 p.m. Saturday, Florence was inching west at 3 mph, with its center located about 50 miles west of Myrtle Beach, South Carolina. Forecasters say prolonged rainfall from Florence could produce catastrophic flash flooding and significant river flooding.” CBS

    Mangkhut came and went. Florence is staying around for a long visit. Which is worse? It is all over here except for the cleanup. Not so on the US East Coast.

  17. Cloggie on Sun, 16th Sep 2018 2:32 am 

    Crash or no crash, by 2025 robot working hours will supersede human working hours, globally:

    http://www.spiegel.de/wirtschaft/soziales/studie-weltwirtschaftsforum-maschinen-verrichten-bald-mehr-arbeit-als-menschen-a-1228108.html

    Now it is still 29-71%

    75 million jobs will disappear, but 133 million new ones created.

  18. makati1 on Sun, 16th Sep 2018 3:03 am 

    Techie Cloggie, your dreams are getting more and more extreme. The crash will end ALL robotic bullshit. It will end a lot of things that we take for granted today. Wait and see.

  19. makati1 on Sun, 16th Sep 2018 3:20 am 

    “2 storms, Florence and Mangkhut, different as water and wind”

    ” Nature expresses its fury in sundry ways. Two deadly storms — Hurricane Florence and Typhoon Mangkhut — roared ashore on the same day, half a world apart, but the way they spread devastation was as different as water and wind….

    Mangkhut made landfall Friday on the northeastern tip of Luzon island in the Philippines with top-of-the-scale Category 5 winds of 165 mph. Florence had weakened to a Category 1 storm with 90 mph winds by the time it arrived at North Carolina’s coast….

    Yet a day after landfall the faster-moving Mangkhut was back out over open water — weakened,…Florence, meanwhile, was still plodding across South Carolina at a pace slower than a normal person walks. By Saturday morning, it had already dumped more than 30 inches (76 centimeters) of rain, a record for North Carolina.”

    https://ph.yahoo.com/news/2-storms-florence-mangkhut-different-water-wind-195928205.html

    “As the world warms from the burning of fossil fuels, the globe will see both more extremely intense storms like Mangkhut and wetter storms like Florence.”

  20. Davy on Sun, 16th Sep 2018 3:48 am 

    “Mangkhut came and went. Florence is staying around for a long visit. Which is worse? It is all over here except for the cleanup. Not so on the US East Coast.”

    I find it strange someone would turn natural disasters into a competition.

  21. Davy on Sun, 16th Sep 2018 4:00 am 

    “Now it is still 29-71% 75 million jobs will disappear, but 133 million new ones created.”

    More reality testing needed.

  22. Davy on Sun, 16th Sep 2018 4:16 am 

    “These Four Predicted The Global Financial Crisis; Here’s What They Think Causes The Next One”
    https://tinyurl.com/y73y3ayz

    “The ultimate thing that brings down financial markets is excess leverage … So, you look where’s the big leverage, and right now I think it’s in emerging markets.” Shilling is particularly worried about the $8 trillion in dollar-denominated emerging-market corporate and sovereign debt, especially as the U.S. dollar rises along with interest rates. “The problem is as the dollar increases,” he said, “it gets tougher and tougher for them to service [that debt] because it takes more and more of their local currency to do so.” Of that, $249 billion must be repaid or refinanced through next year, Bloomberg reported.”

    “That housing-related stocks “saw a parabolic run-up” in 2016-17, but in January his index “peaked and now it’s coming down hard.” And this spells “bad news on the housing market looking 12 months down the road.” But the biggest danger, Stack told me, is from low-quality corporate debt. Issuance of corporate bonds has “gone from around $700 billion in 2008 to about two and a half times that [today].” And, he added, more and more of that debt is subprime. Uh-oh. In 2005, he pointed out, companies issued five times as much high-quality as subprime debt, but last year “we had as much subprime debt, poor quality-debt issued, as quality debt on the corporate level,” he said, warning “this is the kind of debt that does get defaulted on dramatically in an economic downturn.”

    “There has been a shift of risk from the formal banking system to the shadow financial system.” He also told me the post-crisis reforms did not address central banks’ role in creating asset bubbles through accommodative monetary policy, which he sees as the financial markets’ biggest long-term challenge. “You get hooked on leverage. It’s cheap, it’s easy to refinance, so why not take more of it? You get lulled into taking more leverage than perhaps you can handle.”

    “I think the choice of Europe is… going to have to put [all the debt] on the balance sheet of the European Central Bank. If they don’t, then the euro zone breaks apart and we’re going to get a 50% valuation collapse.” “Greece…is a rounding error. Italy is not…. And Brussels and Germany are going to have to allow Italy to overshoot their persistent debt, and the ECB is going to have to buy that debt.” “If it doesn’t happen, the debt triggers a crisis in Europe, [and] that triggers the beginning of a global recession” but… “there are so many little dominoes, if they all start falling, one leads to the next.”

  23. Cloggie on Sun, 16th Sep 2018 4:19 am 

    “Techie Cloggie, your dreams are getting more and more extreme. The crash will end ALL robotic bullshit. It will end a lot of things that we take for granted today. Wait and see.”

    Crashes are so overrated. Crashes only hurt pensioners and unemployed, societies as a whole simply soldier on. Throughout the entire thirties the US was one giant crash/depression, yet by 1945 the US arrived at planetary pole position, all by design.

    It is a very American attitude, makati shares with Davy, to overestimate the importance of finances in the grand scheme of things.

    It is very well possible we are going to witness a second Lehman sort of crash, dominating the headlines, just like the Greek crash did in Europe. But somehow they will find a way out of the messes of the future.

    Technology will continue to develop, the only unknown is the salary of the engineers who are supposed to do the developing.lol

    The biggest bang I’m expecting is political instability in the US after Trump and Iran as a good second and Brexit a third.

    Peak oil and climate change impact: not immanent.

  24. Davy on Sun, 16th Sep 2018 4:46 am 

    “It is a very American attitude, makati shares with Davy, to overestimate the importance of finances in the grand scheme of things.”

    AH, “American attitude”…please it is a global shared attitude that economics pays the bills for technology not the other way around. There may have been an overestimation of finance in my comments 3-5 years ago when this whole experiment with Central bank interest rate repression and quantitative easing was in full swing. Currently I accept we may be in some kind of “new normal” that involves an altered global financial system of overt and shadow central bank intervention that could manage more years of a status quo. Yet, these policies and behaviors have limits and the tools to deal with the resulting distortions and systematic disruptions diminishing. The trend is in the wrong direction. Risks have multiplied and dispersed infecting what once was healthy segments of society. Dominos are everywhere with trends of poor economic decisions at all levels in the wrong direction. To ignore this situation to protect a techno optimistic agenda is denial. I would much rather overestimate in acceptance than dismiss in denial.

  25. Davy on Sun, 16th Sep 2018 4:56 am 

    Tropical Cyclone MANGKHUT-18
    https://tinyurl.com/y9lv9xdo

    Red Alert for Tropical Cyclone MANGKHUT-18
    Date Sun, 16 Sep 2018 06:00:00 GMT
    Location 21.60,113.60 (lat,lon)
    Severity Hurricane/Typhoon > 74 mph (maximum wind speed of 287 km/h)
    Population Population affected by Category 1 (120 km/h) wind speeds or higher is 3.772 million

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