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King Dollar is Dead? Biggest Paradigm Shift in 100 Years: China and Electric Cars at Forefront

Steen Jakobsen, Saxo Bank Chief Economist and CIO, says the biggest change in 100 years is underway. He points to events in China and with electrification of cars.

This is a guest post by Jakobsen.

Macro Digest: The 19th Party Conference - The biggest Paradigm shift in 100 years?

I think next week’s 19th China Communist Party’s Conference is the single biggest event this year – a confirmation a true paradigm shift

China leads world in credit creation, growth and now in most technology fields… My take remains that President Xi will focus on quality over quantity, that pollution reducing is the number one social issue and that The Party is taking more and more control. The net output will be:

  • Lower than expected growth next 18 month (while China converts economy from export engine to one of productivity gains – President Xi wants 2010 GDP per Capita doubled (Rule of 72= 72/7% GDP per year = 10 years) which means objective of 7% growth per year, but most of this will be productivity driven which means investment first (hence lower growth) then higher
  • Reduction of pollution = Electrification of cars – BDY says by 2030 100 pc of cars will be EV – this catapult China to leadership in battery, E-engines, and pollution reduction (Don’t forget that from 1900 to 1910/13 the US went from 100% horse carriages to 100% cars!)
  • High ratio of R&D and innovation to gain leadership China is already, but will be even more dominant in E-commerce, payments and Fintech. (See Mckinsey report below)
  • Slow gradual openness in capital account, more access to market for foreigners and BIG FOCUS on converting global trade from US$ to CNY [Yuan vs Dollar]
  • Weaker CNY post conference
  • Big negative credit & growth impact on rest of the world

Changes comes much faster than we human beings like – our brain is simply not designed to accept quick changes, and one of the few short comings of the brain is that it likes (and uses) the recent past to extrapolate the future. We think linear but world evolves super log-normal. An excellent example is the pictures below from New York in 1900 and 1913. Notice the difference and that in the space of 13 years only.

I think the next 13 years will surpass those years in terms of change, dynamics and how we act, analyze and live.

China is changing and has changed more than market gives it credit for – the Anglo-saxon economist’ keeps focus on banking system and debt, but unlikely western world China can accelerate growth through release of productivity – The US with President Trump has chosen to “retire” from the global economy on a fundamentally flawed concept of America 1st while China is growing its importance, probably best illustrated by this chart:

Now China also wants a new world order in commodities . China will allow exporters to avoid US$ payments for Yuan or Gold!

China is enjoying US’ indecision on foreign policy, which seems to be driven by indecision, spur of the moment changes and randomness opposite this sits China, with its One Belt, One Road, Asian Development Bank and the Shanghai Cooperation Organisation – There is in excess of 3 billion people in this alliance – and with Pakistan and India joining in 2015 that number will be 4 billion by 2050.

The future belongs to the countries and companies which can command the consumers, no one is better placed than China (and India).

We are witnessing a geo-political reality show where one hegemonic power, the US, almost voluntarily is given up its dominance. The result is clear to me:

The King Dollar is dead, Long live the King CNY!

Steen Jakobsen

Mish View - Dollar Not Dead Yet

A paradigm change is indeed underway, but it will be led by cars (autonomous driving and electrification), demographics (aging boomers), the demise of pension plans, a revolt by millennials, and a squashing of the current political class.

A currency crisis is inevitable but it's too soon to say gold gold will be back in the picture. Some suggest SDRs, but I dismiss that idea.

King dollar is certainly not dead yet, and contrary to popular belief, having the reserve currency is more of a curse than a blessing.

Why Dollar is King

  • The dollar is king because the US has open capital markets, property rights, and the world's biggest bond markets.
  • The US also has a Bill of Rights granting freedom of speech and protections from unwarranted searches. China imprisons people for speaking their mind.
  • China is a long way from competing with the US on those important issues. In addition China repeatedly resorts to capital controls to stop monetary flight.

China will not supplant the US for at least two decades and may not ever.

Nonetheless, I agree with the general idea that a massive set of disruptions is underway.

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By the way, those who think electrification of cars and autonomous cars are a decade away, need consider the lead in image, then think again: California Allows Fully Autonomous (No Driver Present) Vehicle Tests .

Mike "Mish" Shedlock

China has a number of insurmountable problems, which cannot be solved with financial repression or any other kind. The US political situation is more lately conservative, although not fiscally. That could change. The BB generation is not a problem, in twenty years they will all be gone and the US population will be a lot smaller. At the same time a great deal of personal wealth has accumulated, so Millennials living in basements today will live in luxury tomorrow. The need to monetize growth, military and social welfare will diminish accordingly. In a shrinking national economy the stock market will coalesce. Americans will be more like the Swiss, with plains instead of Alps. The Chinese meanwhile have decades of growing pains ahead of them as they are likely to splinter into regional autonomies, including a large Muslim group.

How one can declare a "paradigm shift" w/o mentioning cryptocurrency is beyond me... If Mish thinks electric and/or autonomous cars will be more disruptive/meaningful than crypto, then I'd like some of what he's smoking...

He doesn't believe in crypto. He thinks they are all in a bubble, which will crash, and they will disappear. A shocking view for someone who embraces new technology in so many other areas.

I also saw the article on autonomous vehicles but autonomy doesn't guarantee electrification.

What I expect to happen is the shift towards vehicles being a rent-a-ride model and all ownership will be frowned upon as a greedy & wasteful gesture by those of the "Fat Cat" class. It won't be hard to sell to the politicians & media and the corporations backing autonomous vehicles will pay billions for the opportunity to remove private ownership and force you to pay for every ride.

And not to mention the argument that autonomous vehicles can never be driven by terrorists into crowds, making them ultimately safer (until someone hacks the vehicle control network).

Meh. People completely rejected renewable energy vehicles between 1900 and 1913

Going from horses to cars was a much bigger leap than going from internal combustion to electric engines. Plus horses and cars can't share the same road, so once a few cars were on the road, it was very dangerous to use horses.

  • The US was fortunate enough to have a number of factors that made it possible to expand "it's influence" in the past say 200 years.
  • There's indeed a "paradigm shift" going on that will reduce the influence of the US. But this does not automatically mean that China will become the new "superpower". I see a new world without a "superpower" like the US and the Sovier Union.
  • I see a future world with more and more regional influential countries and the US and China will only be two of them.- The increased prosperity here in the US in the last say 150 years allowed the US middle class to "push back" against authoritarian tendencies of the government. And therefore the Constitution didn't become a "dead letter". But now the US middle class is being hollowed out more and more since say the early 1980s. And as long as that hollowing out process continues the Constitution will be "ignored" more and more.

Will China strip mine the planet for lithium to make all those batteries? Reliance on batteries = electric cars remain toys for the rich or power golf carts. Batteries have to be heating (poor performance in the cold) & cooled (batteries have internal resistance which is why they catch on fire sometimes) to maintain performance and are energy intensive to make. Now if you could use a capacitor, you get around many of the problems of batteries: Very little internal resistance and be charged quickly. Problem is, even with ultra-capacitors, you don't get even the storage capacity of batteries.

If someone invents a capacitor that has a similar energy density as a tank of gasoline (that is affordable), gasoline cars will be gone as quickly as the horse drawn vehicles in the photos from the article.

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