How the US Federal Reserve created a financial opioid crisis in the West By targeting asset prices to bolster the economy, the Federal Reserve is again creating an asset bubble. The US central bank’s loose monetary policy, more than China, is really to blame for the US’ troubles now by Andy Xie

US Federal Reserve Chair Jerome Powell

After Covid-19 lockdowns in March and April, many countries reopened, and people partied to celebrate the end of the pandemic. Now they are being swept by a 

second wave

 of infections, with deadly consequences as far as the eyes can see.

Until an effective vaccine is found, which could be years away, social distancing is likely the new normal. Parts of the global economy, like tourism, will remain shut and others like catering and entertainment must severely reduce their operating capacity. A rebound is unlikely, and the global economy’s capacity might be reduced by 10 to 20 per cent.

The new normal should result in sharply lower profits for surviving companies, as well as widespread bankruptcies (which are probably just being postponed by “helicopter money” from governments). Yet, looking at the financial markets – especially the 

tech stock frenzy

 – it is hard to tell that the global economy is collapsing, instead of booming.

The multi-year mania continues unchecked by Covid-19; 

Elon Musk

, it seems, can make himself richer just by tweeting titillating stuff. These days, so many are talking like 

Steve Jobs

 while dressing in minimalist garb; yet, none of them have put out a product as successful as the iPhone, not even close.

With high investment and low productivity, the current tech darlings are looking more like tech Kardashians. Tech mania is now fuelled by star power; knowing how to tease is half the battle.

However, the other half of the equation would be the supportive monetary environment. After all, the tech Kardashians need money to keep the lights on. This is where the Federal Reserve comes in; it has explicitly targeted asset prices to hold up the economy.

When the stock market stumbled over the prospect of a global economic slowdown in September last year, the Fed began buying Treasuries to bail out the market. When the market crashed in March this year on fears of the pandemic, the Fed poured 

trillions

 into the market to add liquidity, and started buying corporate bonds.

As US companies have been buying back stocks by 

issuing bonds

, the Fed is effectively buying stocks directly. When a central bank that can print as much money as it wants is willing to buy assets, asset prices then depend entirely on what the central bank does – rather than the underlying fundamentals.

All these tech billionaires are really the children of Fed chair Jerome Powell. Alan Greenspan’s dotcom babies were worth merely billions briefly; Powell’s children are worth tens of billions and hanging on and on. Earnings reporting season is coming. The numbers are probably going to be very bad. If the market crashes again, the Fed might buy stocks directly this time.

Expectations that the Fed will do whatever it takes to keep the market up are drawing back speculators time and again. When earnings don’t matter any more, more and more CEOs will do a Musk to keep stock prices up. The tech Kardashians are taking over Wall Street.

Is there such a thing as a free lunch, though? Karma will eventually catch up with the Fed. When China joined the global economy, its size and low wages added to deflationary pressure. The resulting low inflation in the world was really due to this shock, not overly tight monetary policy. Greenspan interpreted low inflation as a call for loose monetary policy, which led to asset bubbles. His successors have maintained the policy.

In the meantime, as global companies arbitraged between China and the West, wages in the West stagnated or declined. Loose monetary policy offered cheap debt to income-strapped workers there. With debt shoring up the living standard, the backlash against globalisation took many years to boil over.

Nowadays it is popular on both the left and right to blame China for the US’ woes. The Fed is even more at fault. It gave the West a painkiller. The Fed’s monetary policy is a financial opioid crisis.

China has been developing for four decades. It should no longer have a deflationary impact. When 

Japan hit the four-decade mark

, its per capita income was comparable to the US’. However, China’s is only one sixth of the US’. The reason for this is China’s investment-driven model, which tends to lead to overcapacity and increasing pressure to sell more at lower prices.

There is a now global backlash against China’s low prices. While negative stories abound about China and hence, the need to 

decouple

 from it, the low prices are the real reason. It is the gravity that sucks production into China. Even if China doesn’t change this time, a decoupling might finally unleash inflation in the global economy.

What goes around comes around. The Fed has led the world on this crazy bubble ride. When the ride finally screeches to a halt, the consequences will be far-reaching. A decade or more of stagflation awaits the world. Political turmoil and revolution might accompany it.

How to weaponise Hong Kong against China The opposition have got more than they bargained for, now that US President Donald Trump has stripped the city of its special trade status to treat it the same as the mainland by Alex Lo

It would have been amusing if it weren’t so tragic. 

US President Donald Trump has signed into law the Hong Kong Autonomy Act

 as well as an executive order ending the city’s preferential trade and special customs status. This is, apparently, to preserve and fight for Hong Kong’s freedoms!

The act will require sanctions against foreign individuals and banks for supposedly 

helping to erode Hong Kong’s autonomy

. HSBC, Standard Chartered and Bank of China, note-issuing banks one and all, watch out! I hope you don’t have Carrie Lam as your customer.

“Hong Kong will now be treated the same as mainland China,” Trump said. “No special privileges, no special economic treatment, and no export of sensitive technologies.”

It’s hard to see how any of that will help Hong Kong, its people and their “autonomy” by treating it as part of China. Surely this couldn’t have been what the opposition and protest movement had in mind when they openly urged Washington to sanction Hong Kong and Beijing. They had wanted the threat, not the execution, in the belief that Beijing would back off.

But Beijing wasn’t about to compromise when it considered Hong Kong’s stability and governability a core national security concern, especially after the 

prolonged violent unrest of last year

.

Some opposition leaders thought they could change the behaviour of one superpower by inviting the intervention of another one. They rather neglect the fact that Hongkongers are small fry caught in a titanic power struggle between the two. If someone is going to be trampled on, any sensible person could have guessed which one.

The new American laws – there are more in the pipeline – will harm Hong Kong a lot more than Beijing. Washington is on a warpath to take on China in every domain it can think of – 

South China Sea

, 

5G

, trade, international disease control, 

Chinese students

 and researchers in America, US-listed Chinese companies …

Hong Kong is just another “linkage” to be weaponised by Washington, and our opposition and anti-government activists have handed over their city on a silver platter.

Either they are too naive or stupid to realise what has happened. Or they hate China more than they love their own city. Maybe giving Beijing a bloody nose is worth it even if it means breaking Hong Kong in the process. And many of our noble freedom fighters can move to the Five Eyes English-speaking nations to avoid facing the consequences of their actions.

‘Heightened risk’ of military conflict over South China Sea, observers warn. Washington has hardened its position on the strategic waterway, rejecting most of Beijing’s claims China’s foreign ministry hit back, calling the US challenge ‘groundless’ and an effort to sow discord By Laura Zhou

A Chinese navy patrol on Woody Island in the South China Sea.

The risk of military conflict between China and the United States is rising, observers warn, after Washington hardened its position on 

the South China Sea

 and rejected most of Beijing’s claims to the resource-rich waterway.

US Secretary of State Mike Pompeo said in a statement on Monday that 

the US formally opposed a swathe of Chinese claims

 to waters within the so-called nine-dash line that encompasses almost all of the South China Sea.

While Washington has no sovereignty claims in the disputed waters, Pompeo said the US also rejected Beijing’s territorial or maritime claims to Mischief Reef and Second Thomas Shoal, in line with 

a Hague tribunal ruling in 2016

.

The US rejected all Chinese claims beyond the 12-nautical mile territorial area around the Spratly Islands, citing in particular the waters surrounding Vanguard Bank off Vietnam, Luconia Shoals of Malaysia, the area within Brunei’s exclusive economic zone, and Natuna Besar of Indonesia. The statement also said China’s claims over the submerged feature James Shoal near Malaysia were unlawful.

“We are making clear: Beijing’s claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them,” Pompeo said in the statement.

“The world will not allow Beijing to treat the South China Sea as its maritime empire.”

US Secretary of State Mike Pompeo said Beijing would not be allowed “to treat the South China Sea as its maritime empire”. Photo: AFP

Chinese foreign ministry spokesman Zhao Lijian called the US challenge “groundless” and an effort by Washington to sow discord between Beijing and Southeast Asian nations, which he said would fail.

The risk of military conflict between China and the United States is rising, observers warn, after Washington hardened its position on 

the South China Sea

 and rejected most of Beijing’s claims to the resource-rich waterway.

US Secretary of State Mike Pompeo said in a statement on Monday that 

the US formally opposed a swathe of Chinese claims

 to waters within the so-called nine-dash line that encompasses almost all of the South China Sea.

While Washington has no sovereignty claims in the disputed waters, Pompeo said the US also rejected Beijing’s territorial or maritime claims to Mischief Reef and Second Thomas Shoal, in line with 

a Hague tribunal ruling in 2016

.

The US rejected all Chinese claims beyond the 12-nautical mile territorial area around the Spratly Islands, citing in particular the waters surrounding Vanguard Bank off Vietnam, Luconia Shoals of Malaysia, the area within Brunei’s exclusive economic zone, and Natuna Besar of Indonesia. The statement also said China’s claims over the submerged feature James Shoal near Malaysia were unlawful.

“We are making clear: Beijing’s claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them,” Pompeo said in the statement.

“The world will not allow Beijing to treat the South China Sea as its maritime empire.”

US Secretary of State Mike Pompeo said Beijing would not be allowed “to treat the South China Sea as its maritime empire”. Photo: AFP

Chinese foreign ministry spokesman Zhao Lijian called the US challenge “groundless” and an effort by Washington to sow discord between Beijing and Southeast Asian nations, which he said would fail.

“China is not seeking to become a maritime empire. China treats its neighbouring nations on an equal basis and exercises the greatest restraint,” Zhao said on Tuesday.

He said the US was the destabilising factor in the South China Sea, as it constantly sent naval vessels to its waters, even though it was not a claimant state.

The administration of Barack Obama opposed Beijing’s claims after the 2016 ruling and pressed China to stop its land reclamation at Scarborough Shoal. But Pompeo’s statement was the first time the US has openly rejected Beijing’s claims in the strategic waterway, through which US$5 trillion in global shipping trade passes annually.

Chen Xiangmiao, an assistant research fellow with Hainan-based think tank the National Institute for South China Sea Studies, said Pompeo’s remarks signalled that the US had chosen a side.

“The US position is very clear,” Chen said. “If we used to say that the US didn’t take sides over sovereignty disputes, now this statement has denied China’s territorial claims, which means that the contest between China and the US over the South China Sea is close to a new Cold War.”

Washington’s latest stance on the South China Sea disputes could worsen an escalating confrontation between the two superpowers, which has spilled over from trade to 

the coronavirus pandemic

, human rights and 

the national security law in Hong Kong

. Early this month, the US sent two aircraft carriers, the USS Ronald Reagan and USS Nimitz, and four other warships to the South China Sea for an exercise while China was holding its own drill near the contested Paracel Islands.

The US Navy sent two aircraft carrier groups for an exercise in the South China Sea earlier this month. Photo: EPA-EFE

Zhang Mingliang, a South China Sea expert with Jinan University in Guangzhou, said acrimony between China and the US over the waterway and their increasing military activities in the region had taken tensions “to an unprecedentedly high level”.

“The confrontation and game-playing surrounding the South China Sea is worse than elsewhere,” Zhang said.

Collin Koh, a research fellow with the S. Rajaratnam School of International Studies at Nanyang Technological University in Singapore, said Beijing may step up measures to challenge US military activities in the contested waters.

“This could potentially result in a heightened risk of incidents – even if not premeditated, but inadvertent in nature – in the South China Sea that could raise tensions and inflame the situation,” he said.

In the statement, Pompeo said the US “stands with our Southeast Asian allies and partners in protecting their sovereign rights to offshore resources” – a remark Chen from the Hainan think tank said hit a raw nerve for China.

The South China Sea accounts for about 12 per cent of the global fish catch, feeding tens of millions of people in the region. It is also rich in energy resources, with an estimated 11 billion barrels of untapped oil and 190 trillion cubic feet of natural gas. China has territorial disputes over the waterway with Vietnam, the Philippines, Taiwan, Malaysia and Brunei.

Tensions over energy exploration have run high since last year, when the Chinese and Vietnamese coastguards were locked in a stand-off for months over oil activities near Vanguard Bank, a reef in the disputed Spratly Islands.

China also sent coastguard vessels to waters near Luconia Breakers, a reef cluster at the southern end of the Spratlys, in May last year, as Malaysian oil and gas exploration was under way, according to the Asia Maritime Transparency Initiative (AMTI) under the Centre for Strategic and International Studies.

In a more unusual situation earlier this year, Chinese, Vietnamese and Malaysian navy, coastguard and militia vessels were 

involved in a stand-off

 after Malaysian state energy firm Petronas sent a British drillship to operate in two oil and gas blocks that fall within the Malaysia-Vietnam joint defined area as well as China’s nine-dash line, according to the AMTI. That confrontation was not confirmed by any of the countries.

There have also been skirmishes over fishing rights between claimants and Indonesia, a non-claimant whose exclusive economic zone near the Natuna islands overlaps with China’s nine-dash line.

“While China is talking about dialogue and cooperation, disputes over resource exploration remain deep and continue to intensify,” Chen said. “If these disputes escalate into conflict, the US may have an opportunity to step in.”