You don’t want to piss off China! In August 2015 the Chinese economy began to slow down unexpectedly just as the U.S. economy was picking up. The U.S. central bank was about to increase U.S. interest rates for the first time in many years, against the direct wishes of the Chinese authorities. A rate increase would have increased the value of the US dollar and the Chinese Yuan in the global marketplace (since the Yuan had been tied directly to the US Dollar). This simple rate increase was seen as an aggressive “Act of  War” by  the Chinese. On August 12 and 13, the Chinese retaliated. They dropped their Yuan by three percent in two days. This sent all financial markets around the world  (including their own) into a tailspin. They had sent an economic message to Janet Yellen. Don’t mess with China!

I recently had a chance to interview Mike Verge, author of the recently published book “Global Deflation and the next Great American Decade to Come”. In his book he describes this exact scenario in great detail. He likens this 2015 economic situation to the Cold War of the 1960’s where the Soviet Union and the United States both put nuclear warheads on intercontinental missiles. At first the whole world became frantic. But then in a strange twist of game theory, each side began to realize that if he pulled the trigger first, the other side would respond automatically and both sides would be destroyed. This scenario was called “Mutually Assured Destruction”, or MAD for short. This intense “MAD scenario” has effectively put a freeze on nuclear warfare for over fifty years.

Fast forward to August of 2015 and the Chinese sent a similar message to the US Central bank and the world. They would take whatever action was required to protect their financial sovereignty against all attackers, even if it meant destroying their own economy. Verge says that the Chinese had just implemented the first “Financial MAD Protocol”. The message was received by the U.S. Central Bank.

In his book Verge develops many other unique new concepts that simply explain complex financial situations. He likens them to “Financial Sunglasses”. Once you put them on, the confusing and hazy world of global economics becomes clear.  To explain all of this, he depends on three key principles:

1. 1. The forces of inflation and deflation are always in a “tug of war”. On the deflation side are:

ageing demographics, overcapacity, and extreme global debt levels. On the inflation side there is money printing, continual expansion of this debt, and government infrastructure spending.

1. 2. Deflation can only be fully understood from a global perspective in U.S. dollars as all countries are trying to ‘export deflation and import inflation’.
2. 3. The internet is the “Silent Killer”. It is the greatest deflationary force of all time.

I really recommend his book as he goes on to describe a counter-intuitive world where oil prices drop, retailers are reduced to “Showrooms and phones”, banks are formed where nobody pays, and asset taxes replaces income taxes. Although he does suggest some disturbing economic scenarios, none of them anticipates a total economic war with China.

In our discussion, Verge told me not to take our eye off China. Their economy is now slowing and they are doing “What ever it takes” to attain global economic dominance. Silently, they are now implementing a new plan to greatly devalue the yuan, and export a massive “Wave of Deflation” around the world. In the past year, they have devalued their yuan by over seven percent, (over three percent in just the past month!)  Verge is convinced that this “Deflation Tsunami” launched by the Chinese will slowly and silently engulf the world.  While we have been watching Trump take office in the United States, the Chinese have launched the most frightening economic war machine of all time. To ignore them any further would be ..well…..MADness!