As we all watch, the US economy teeters toward potential collapse. Jerome a Paris and Bonddad have multiple diaries on this issue over the last several weeks(Humbly, I hope my diaries have added to the discussion). But no one has discussed the 800 pound gorilla - what are the potential end games here?
First, the frequent comment has been where else can the money go? Well, Jerome's diary today talks about the shift out of the US. So, where can it go - try China. But what does that mean?
It means that we are now looking at the US capital as a major player in China (already is). But, as we have seen, the Japan took US Constitutional Law after WWII and achieved a rule of law that has huge variations from the US. My expectation is that China will diverge even further. So, what is the relationship with the US?
China is looking for hegemony. And the major restraint on hegemony is likely to be the US - at least as far as China looking eastward. As the US economy declines, there is going to be a huge dichotomy between the capital classes - which require a highly funded military to defend their investments in China - and the income based classes who need investment by the government in the US plus a greater need for safety net services.
If the investment class wins, let's face it, we become Brazil.If the income class wins, there is great danger that the investments in China seem to vaporize through cultural impacts such as "family wealth trumps law" that happens in some cultures.
The reality is that the investment flight has assumed that China and India will be the havens of law protecting capital that the US has been. The decline of the US dollar and the US economy bring that into question.
I don't see a rosy, soft landing in these scenarios.