I’ve written many articles about the economy in recent years. I’m not going to recapitulate everything I’ve said there, but I do want to repeat my warning that a ‘trigger event’ anywhere in the world might rebound on the US economy too, precipitating a major local recession.
The Hill warned yesterday that US exposure to Chinese debt, indirect as well as direct, might be more dangerous than it looks on the surface – a classic ‘trigger event’. Here’s an excerpt.
Banks in the U.S. have limited credit exposure in Hong Kong at only $67 billion. What should give us pause is that when you add up the exposures of the very interconnected China and Hong Kong financial systems, U.S. banks’ exposure is almost $151 billion, or a few billion dollars higher than U.S. banks’ total exposure to Switzerland.
American banks are exposed to China and Hong Kong directly because they buy Chinese and Hong Kong debt and have financial transactions with Chinese and Hong Kong financial institutions and corporations.
It is also incredibly important to remember that not only are U.S. banks directly exposed to China, but so are myriads of other types of U.S. financial institutions and corporations. In turn, U.S. banks are exposed to those financial institutions and corporations because the banks lend to them, invest in their bonds and equities and, in some cases, invest in them directly. If Chinese economic conditions continue to worsen, U.S. companies and banks would also get hurt from stock and bond market turmoil in Asian financial markets.
Moreover, the largest U.S. financial institutions, especially large banks, often transact credit derivatives linked to Chinese and Hong Kong sovereign, corporate and financial institution debt, as well as the debt of other global companies impacted by Chinese developments. The extent of those contingent liabilities is difficult to measure since parties transacting credit derivatives do not have to report publicly on what type of debt they are paying protection.
What is usually not discussed at all is that the U.S. banks’ two largest exposures are to the U.K. and Japan, for which China represents very large foreign exposures. Hence, any negative repercussions that would impact U.K. and Japanese financial institutions and corporations from a Chinese slowdown would end up trickling down to U.S. banks, even if with a lag.
Moreover, in the U.S. banks’ top-20 foreign exposures, they also have Australia, South Korea, Singapore and Taiwan, all of which hold China as an incredibly significant counterparty.
There’s more at the link.
Nassim Taleb would refer to such a possibility as a ‘black swan’ event – but there’s no guarantee it won’t occur. (Indeed, there’s an increasingly strong likelihood that it may, in due course.) If it does, things are going to get very, very interesting – and very, very difficult. Keep that in mind when you make plans for the future.
Peter
My Dad used to start preparations for our chicken dinner by wringing the bird's head off. It's an amazing thing, because the bird doesn't immediately realize it is dead. One even stood and crowed afterwards.
I often wonder if our economy is comparable to that bird…
It hasn't yet realized it's dead.
After the collapse, when the fires have burned themselves out and the ashes cooled, when the food riots have abated, when enough of the rubble has been cleared to make a few streets passable, when the Mel Gibson Road Warrior characters have finally been killed off, when we're able to progress beyond Life As A Cormac McCarthy Novel, we really need to revisit this "too big to fail" business with financial institutions.