[TTPer Mike Ryan wrote a thoughtful commentary on the Forum regarding China Is Now the Epicenter of Global Risk by Ambrose Evans-Pritchard.  Several TTPers suggested we publish it as a full article.  We are happy to comply.  Thanks, Mike.]

This is in response to a question asked on the Forum, “Can anyone explain the repercussions of the global risk of China to our economy?”  Here are my thoughts.

It is risky to predict the reactions of complex systems that are actively influenced by government, especially when the primary goal of government is power for insiders and the fleecing of outsiders. 

Example: The Clinton Global Initiative and its DOJ support.  Governments spend more on power and control every time there is a financial crisis. 

Some thoughts:

In July, the New Zealand government announced its intention to eradicate all rats, stoats and possums from the entire country by 2050 to save native birds such as the kiwi.

It’s an ambitious plan, perhaps impossible to pull off with the methods available today, but it’s a stark reminder that invasive alien species today constitute perhaps the greatest extinction threat to animal populations world-wide.

The dodo on Mauritius, emblematic of extinction, was wiped out less by hungry sailors than by the rats, pigs, dogs and cats they brought with them. Hawaii once had 55 species of honeycreeper; today just 17 remain, thanks largely to rats and avian malaria, transmitted by alien mosquitoes brought by people. Guam has lost nine species of bird to an introduced snake.

In the Mississippi River, it is Asian carp; in the Everglades, Burmese pythons; in the Great Lakes, Russian zebra mussels; in the South, Indochinese kudzu vine.

In Australia, cane toads from South America; in Lake Victoria in Africa, water hyacinth from the Amazon; in Germany, Chinese mitten crabs; in the Caribbean, lionfish from the Pacific. A fungus spread by African clawed toads (used in laboratories) has wiped out frogs in Central America.

But it turns out there’s a flip side.  None of this is to say that invasive species are always a threat. They can bring positive effects, too, by increasing biodiversity within a region.

The growth rate of nominal GDP in the US has fallen to 2.4%, the lowest level outside recession since the Second World War.

It has been sliding relentlessly for almost two years, a warning signal that underlying deflationary forces may be tightening their grip on the US economy.

Given this extraordinary backdrop, the violent spike in US and global bonds yields since last week is extremely odd. It is rare for AAA-rated safe-haven debt to fall out of favor at the same time as stock markets, and few explanations on offer make sense.

We can all agree that oxygen is thinning as we enter the final phase of the economic cycle after 86 months of expansion. The MSCI world index of global equities has risen to a forward price-to-earnings ratio of 17, significantly higher than on the cusp of the Lehman crisis.

Nonetheless, the Fed cannot plausibly be responsible for the global bond rout. What is true is that markets fear the Bank of Japan and the European Central Bank are reaching their political limits, and may not be allowed to press ahead with their experiments even if they want to.

The US dollar is tightening its grip on the global financial system at the expense of the euro, entrenching American hegemony and rendering the US Federal Reserve more powerful than at any time in history.

Newly-released data from the Bank for International Settlements (BIS) show that the dollar’s share of the $5.1 trillion in foreign exchange trades each day has continued rising to 87.6% of all transactions.

It is the latest evidence confirming the extraordinary resilience of the dollar-based international order, confounding expectations of US financial decline a decade ago.

Roughly 60% of the global economy is either in the dollar zone or closely tied to it through currency pegs or ‘dirty floats’, and the level of debt issued in dollars outside US jurisdiction has soared to $9 trillion.

This has profound implications for monetary policy. The Fed has become the world’s central bank whether it likes it or not, setting borrowing costs for much of the global system.