Vladimir Putin threatens to tip over the global house of cards

Posted on 06 August 2014 with 6 comments from readers

What if the crisis in Ukraine becomes a ‘humanitarian rescue’ by the Russian military and energy prices hit the roof?

Oil above $150-a-barrel would crash the teetering Chinese real estate bubble as it did in July 2008 for US subprime loans, and bring Wall Street tumbling down.

An implosion of the Chinese economy is probably the biggest threat to the global economy out there today. The outflow of Chinese money in recent years has helped the world recover from the global financial crisis, albeit this has also been the smart money leaving a sinking ship.

Bubble trouble

Chinese capital is propping up bubbles all over the place. The two richest men in London are recent Chinese property investors in the city. Australia saw a A$5.9 billion inflow of property investment from China last year.

That said it is very hard to imagine exactly how this sort of crisis would roll out. Nobody really got the subprime crisis and 2008-9 global financial crisis right either. It almost bankrupted Goldman Sachs.

The Chinese themselves have been diversifying with increasing intensity. They bought a lot of gold last year while the Western ETFs were selling 800 tonnes at bargain prices.

If you do not do that then all that you are doing is risking money blindly. Look what I found.

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They’ve even become heavily involved in Dubai property with 300,000 residents said to come from China against almost nobody five years ago.

But of course the biggest bubble is in Chinese real estate itself. Bad loans could quickly multiply and bring down the banking sector, or at least parts of it, just like in the US subprime crisis.

How would Western financial markets respond? Badly. The Chinese have become hugely important buyers as well as sellers and Western multinationals are directly exposed to the domestic market.

Tourism threat

Even global tourism would take a massive hit as the Chinese are the new travelers of our age and come in large numbers.

But the financial sector would be hit hardest, most directly in China but also in ripples from this source as the bubbles created by a long period of low interest rates leave it particularly vulnerable to a black swan event like this.

Western leaders seem to have sleepwalked into a crisis this summer, rather as they did 100 years ago in the Great War. That was supposed to last until the end of the year. How long will this summer’s events reverberate? Will the world ever be the same again?