The story of China is far from black and white.  It is a giant mix of a lot of good things and bad things.  China remains a communist country, at least in name.  In reality, it is some kind of mix of capitalism, mercantilism, and authoritarian.

It is not completely unlike the United States.  The U.S. is a mix of all of these things as well, but to a lesser degree. The U.S. government is more bureaucratic, which can be good or bad.  The Chinese economy is far more centrally planned, but they also don’t have as much red tape to go along with it.

The U.S. is obviously less authoritarian.  You can find horror stories and government abuses everywhere.  But the reality is that, in general, Americans still have freedom of speech, freedom of press, and gun ownership rights.  The same cannot be said for the average Chinese citizen/ resident.

It was recently reported that Jack Ma, the founder of Alibaba, has been a long-time member of the Communist Party. While the story is mildly interesting, it is not that big of a deal.  Again, he is a communist in name only.  He may have become a “communist” just for purely self-defense reasons.

Alibaba is a giant company that is comparable to Amazon.  In fact, many sellers on Amazon source their products from suppliers they find on Alibaba.  Alibaba is really a symbol of capitalism.  It is a demonstration of how millions of people voluntarily trade with each other to become better off.

China was once a truly communist country.  That is to say, it was a brutal totalitarian society.  Tens of millions of people were killed at the hands of the communists.  In 1979, Deng Xiaoping allowed markets to somewhat open up, particularly in agriculture.  China has since become a huge economic powerhouse with relatively freer markets.  It is centrally planned to a high degree, but this is a dramatic improvement from the socialist system it once was.  The relatively freer market has helped hundreds of millions of people escape extreme poverty.

With that said, economic growth in China seems to be struggling as compared to what it was in the previous couple of decades.  I am surprised the Chinese boom has been able to go on as long as it has. Some of the boom is artificial, and some of it is real.

The Chinese have never experienced a hardcore recession.  Prior to 1980, the entire country was in one big permanent recession.  It was an economic basket case with extreme poverty.  But since it began to experience exceptional economic growth, there has never been a large-scale economic decline, at least according to the statistics (which granted, aren’t probably that accurate).

The stock market has struggled in recent years in China.  You could say that the stock bubble has burst.  The Chinese government has continually tried to prop up that bubble, or at least prevent it from a further fall.

There is obviously a massive real estate bubble in China that is propped up by the Chinese central bank and the central planners.  It is incredible that prices have not fallen over a cliff at this point, but again, there is massive manipulation.  They are trying hard to prevent real estate prices from crashing.

As much as the U.S. economy is controlled by government, there is still far more room for corrections in the U.S. than what we see in China.

Some Malinvestments are Worse than Others

I have read or heard some people’s stories about visiting China.  They say that some of the infrastructure is incredible.  The main airports are modern, the highways are impressive, and the bullet trains are incredible to ride.

This isn’t a compliment to the central planners of China.  It is still malinvestment to a large degree.  But some misallocations are worse than others. At least when the Chinese bubble collapses, they will still have high-speed trains and some great infrastructure.

In the U.S., the government spends trillions of dollars, and for what?  The worst are the wars and the money spent to maintain an empire overseas.  It is completely wasteful, if not destructive.  There are massive entitlement programs (and other welfare) that serve to make people more dependent on government.  There is also other domestic spending that lines the pockets of the lobbyists and their industries.

Even in terms of debt, it is the Chinese buying U.S. government debt.  This is a malinvestment in itself, but from the Chinese point of view, at least they are collecting interest, while the U.S. government (the taxpayer) is paying out interest.  It is a short-term subsidy for American consumers to some degree, but it is a long-term liability, unless the government is actually going to default on the debt.

To be clear, I am much happier being in the United States than I would be China, at least by judging from what I know.  And I ultimately think the U.S. will be more resilient, especially when a hard recession comes.  Americans have been through hard recessions before.  In China, there are going to be violent revolts.

I think the general trajectory for China is up.  The people there have had a taste of a middle class lifestyle, and they aren’t going to easily give that up.  This should be beneficial for everyone.

Still, the U.S. has its advantages.  I already mentioned the liberties that Americans have that the Chinese do not. Most of the rest of the world does not have the same degree of liberty when it comes to speech, press, and gun ownership.  In addition, Americans are still very entrepreneurial.  This is good for economic growth.

The problem with the U.S. is the administrative state and all of the red tape.  It’s possible this may be a bigger problem than the unfunded liabilities.

I have said that we actually need a recession in a certain sense. We need the correction, which is the reallocation of resources.  It will help to make things more affordable for middle class America.

But even in the longer term, we need a recession to drastically scale back the government. It is going to be difficult when the government cannot fulfill all of its promises, particularly to senior citizens.  There will be pain involved.  The good news is that it will be an opportunity to correct some of the past mistakes.  Best of all, it will be an opportunity to dramatically scale back the U.S. empire overseas.

The hardest part will be repealing some of the red tape from the administrative state.  That will not likely come crashing down. Luckily, entrepreneurs are creative and resilient.  And with technology, we will find ways to go around the red tape and hopefully make some of it irrelevant.

I am still optimistic for both China and the U.S. in the long run.  But the paths to prosperity will not look the same. There will be short-term pains for both though.

I have heard people refer to the current state of the economy as the “everything bubble”. In other words, they are saying that virtually everything is in a bubble.  This could include real estate, stocks, bonds, crypto currencies, and commodities.  I would also say that government is a massive bubble, and that is what needs to be popped the most.

Of course, not everything can be in a bubble, unless we are facing the complete collapse of society and the division of labor.  There is always something that goes up, or at least doesn’t go down.  That is why I advocate a permanent portfolio. It is rare that all four asset classes go down in tandem.  And when it does happen, it is short lived.

I don’t necessarily think the U.S. dollar is in a bubble as compared to the other major currencies (the yuan, yen, and euro).  That is only because the Federal Reserve has been less bad in terms of monetary policy, especially over the last 4 years.

As long as these major currencies exist, at least one of them has to go up as compared to the others.  And even in terms of purchasing power, if price inflation gets out of control, then gold and silver will likely go up.

My point is that there are always going to be exceptions, even in an “everything bubble”. There will always be certain asset classes or investments that perform well.

Still, I think the idea of an “everything bubble” has some merit.  Maybe we can call it the “most everything bubble”.  One area where I tend to disagree with the idea of a bubble is in the realm of government bonds.  I continue to say that U.S. government bonds will do well in a recession (yields will fall), as long as price inflation stays relatively low.  There probably is a bubble in U.S. government debt, but it is going to take a lot longer to pop.

Gold is a little less predictable, but we know that gold will tend to do well when significant inflation becomes a concern.

I do believe that the “most everything bubble” is beginning to pop.  It has already started, and I am not referring to the recent decline in stocks, although that could also be the beginning of something.

So what is the first asset class to pop?

The Bitcoin Bubble

The price of one bitcoin recently dropped below $4,000.  It peaked in December 2017 at about $18,000.  Other crypto currencies have also fallen dramatically, but I point to Bitcoin because it started the trend and is still the most popular of the crypto currencies.

I have no idea if Bitcoin will have another run up from here or just continue to go down.  I am not making day-to-day predictions. But I do know that it could easily keep going down to $1,000 or $500 or $10.  It probably won’t hit zero any time soon because you can almost always find someone to pay something.  This is especially true with Bitcoin, since there are libertarian-leaning tech nerds who spend every waking hour of their lives researching and thinking about Bitcoin.

Bitcoin is nothing to me.  As with everything, it has subjective value.  But it is completely useless for anything other than the fact that others are willing to accept bitcoins or buy them.  Bitcoin is not much different from a government currency.  But with a government currency, you are essentially compelled to use it, and you have to pay taxes in it.

I see parallels between the Bitcoin/ crypto currency bubble and the tech bubble of the late 1990s. Bitcoins will fall like many dot com companies did.  It may do the equivalent of going bankrupt.  But just as the crash in tech stocks did not spell the end for the Internet, neither will the crash in cryptos spell the end for the blockchain. The technology behind Bitcoin will be used in many ways in the future for other things.

A few years ago, I wouldn’t have cared much if Bitcoin and other cryptos crashed.  I would have said it was mostly irrelevant to the overall economy.  Today, I see things a little different, only because Bitcoin has become so popular and talked about.  There is at least one show on CNBC that seems to devote a lot of their time talking about Bitcoin.  If you go around and ask people, there is now a large percentage of the population who are at least familiar with Bitcoin.

It does not surprise me that this was the first major bubble to pop.  Real estate takes time for prices to adjust.  Stocks can obviously crash quickly, but there is more support there, at least for the time being.  With Bitcoin, it is still a somewhat thin market, and it is easy for the price to fall quickly.  It is also pure speculation as far as I’m concerned.

I really do believe that the bursting of the Bitcoin bubble is the beginning of the bursting of the “most everything bubble”.  I just don’t know how long everything else is going to take to follow suit.

I’m still looking for the inverted yield curve.  Bitcoin didn’t need an inverted yield curve to collapse. But I don’t think we will see an official recession until the yield curve goes flat or inverted.  We are getting close, but we’re not quite there yet.