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Credit Not Money Rules Today’s Global Markets

Money may not rule the world, but today’s news headlines would have us all believe that credit does. After a glum day for global markets on Monday, China stocks tumbled an additional seven percent Tuesday morning.

Chinese markets are in bear territory. The Chinese stock market has been on a roller coaster ride for the past two months which has experts asking “what is going on in Shanghai?” Stalled Beijing construction projects, depressed auto sales, global economic problems since 2007, all have played a small part in the Chinese market adjustment. Should other world economies be concerned?

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Imbalances can’t go on forever, right? If you are Greece, you might answer “yes.” The Greek Economy Minister Giorgos Saatsakis announced a few months ago that Greece would default on its payment to the IMF. The IMF International Monetary Fund loaned Greece over $264 billion at today’s exchange rates after the 2008 market crisis. Greece, Europe’s epicenter of debt, continues to operate their economy using an astounding sleight-of-hand. While the bailout money was intended to pay down Greece’s international debt, the Syriza party did not use it in this manner. Instead, they promised their citizens that they would renegotiate new bailout terms. Why pay a creditor when you don’t want to? An excuse was needed of course. Greece opened up their hands and asked fellow Euro countries to give them more money for what they now refer to as a charity for their “humanitarian crisis.”

The Western half of the globe also runs on credit instead of money. While the United States has been preaching that China’s undervalued currency was in need of an adjustment, China’s response was to gobble up U.S. Treasury bills to strengthen their dollar. While the rest of the world singles out the huge American fiscal and trade deficits and blames this situation on global economic instability, other countries have been procuring American debt.

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According to the CIA Fact Book, Luxembourg owns $144.7 billion in U.S. debt. Luxembourg offers tax-free banking to all. Of course, it has become a banking ally of many global companies including Apple. It is well known that Apple’s proceeds from Itunes downloads are funneled through Luxemburg banks to avoid U.S. taxes. Now Luxembourg is beginning to battle its market problems.
Let’s not overlook Belgium, who also has purchased a large share of American Treasury Bonds and other U.S. debt. A nation of bankers, Belgium’s government, has been shrewd in offering superior tax breaks for foreign companies, kept under a veiled secrecy.

There are other ways to own U.S. debt. Russia has been successful in converting oil exports into U.S. Treasury bonds, and Brazil has followed suit.Here is where our story comes full circle. While most countries have not invested in China, Brazil has invested heavily in Chinese markets. China imports massive amounts of raw materials like iron ore and crude oil from Brazil. While Brazil’s political problems are making headlines this week, Brazil’s economy has been struggling the past twelve months. The Bovespa stock index has dropped 21 percent and the Brazilian commodity index has declined. The devaluation of China’s currency will make matters worse for Brazil.

With weak growth in emerging markets, and decent growth in America and Europe the Fed is destined to raise rates. This is bad news for struggling countries with growth numbers. China is creating the drag and plunging their trading partners with them. It used to be that money made the world go round, but today it is credit that keeps the global market turning.

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