Prevailing financial sector “wisdom” holds that while the bond and stock markets of the US and EU are dangerously inflated following huge COVID borrowings and unprecedented central bank measures, that China is the one example of a market suitable for investment as it has managed to get beyond COVID and restart its economy. A closer look at recent official measures by Chinese financial regulators and the Bank of China suggest it is anything but safe, and that its domestic real estate sector could be a bubble whose collapse can trigger a global financial catastrophe beyond any seen in modern history.
In 1931 the world financial architecture of Versailles was bankrupt, but not yet in financial collapse. The key trigger to pull the world into the Great Depression was not the 1929 Wall Street stock crash, but rather the collapse of a relatively small Austrian bank.
In ways remarkably analogous to the unfolding global financial crisis of today, world credit had been built after 1919 on a pyramid of increasingly dubious debts, with the House of Morgan and Wall Street financial firms sitting at the peak of the pyramid. Most of Europe and a large number of developing countries from Bolivia to Poland were linked into the Wall Street credit pyramid. In 1929-1931, the domino-style failure of those Morgan-initiated credit links to Europe and beyond turned a manageable American stock market crash into the worst deflation crisis in American history, precipitating a global depression.
The amount of foreign bonds issued by Wall Street in the decade until the 1929 market crash was about $7,000,000,000, a huge amount equal to nearly 10% of total US Gross Domestic Product. The war-damaged European economies used more than 90% of these American loans to buy American goods, a boon to major US corporations listed on the New York Stock Exchange. When the buying collapsed after 1929, however, Wall Street’s foreign lending boom became a vehicle that severely worsened the US industrial depression. The whole edifice of dollar credits that supported Europe’s debt pyramid during the 1920’s rested on the loans of New York banks, above all from J.P. Morgan & Co., to Europe to refinance short-term credits. The US Government had insisted at Versailles in 1919 that Britain, France and Italy repay its US war loans in dollars.