April 25, 2022

China And The Price Of Oil.

I have to admit that I'm an avid shopper at Amazon. I very much enjoy the convenience that comes from shopping at home. Combined with their range of products and prices, make Amazon a sure-fire winner for me.

But sometimes Amazon is unable to deliver an item I've ordered. So I ask you what's the price of that item?

The answer is zero.

When that happens, Amazon simply cancels the transaction. If any funds were taken out of my account, they are returned to me. My purchase is canceled. And I'm left with my money, but no goods have changed hands.

Incidentally, if you're looking at the economy as a whole, and if this were to happen a lot, then the “velocity of money” would approach zero.

And this seems to be the point that most on Wall Street seem to be missing.

If transactions don't occur, because of the Chinese lockdown in Shanghai, that doesn't cause inflation, and if it persists it will cause deflation.

As you're no doubt aware, the Chinese authorities have instituted an incredibly strict lock-down of the city of Shanghai. This lock-down includes closing the world's largest container complex. And halting all shipping at the Port of Shanghai.

It is estimated that about 20% of worldwide shipping is currently on stand down. As not only the thousands of ships anchored offshore at Shanghai are affected. But also all those ships that were scheduled to sail to Shanghai, must now wait where they are. Standing in line, if you will, until the port once again opens.

And therein lies the real crux of the matter. When the Chinese authorities decide to reopen Shanghai is anyone's guess. It could be tomorrow, or it could be next year.

And understanding the point is critical to understanding just what is likely to happen next.

Shanghai is one of only four regions in China that is governed directly by the central authority. Ultimately it is the Chinese Communist Party that is in charge here. And I believe that their agenda goes far beyond their public pronouncement of Zero Tolerance for the spread of Covid-19.

Thus, the CCP has control not only of Shanghai but by extension of all of China's trading partners. This includes, most especially, the United States.

And that's where this whole thing leads. This is a less than overt, but exceedingly effective economic attack on America. And the sooner this country realizes this fact the better.

Still don't believe that we're facing a deflationary wave, brought about by China? Let me give an example:

Over the weekend, Fortune Magazine published an article, entitled in part:

"Experts say China’s lockdowns will make inflation and the supply chain nightmare even worse..."

In the article, several experts are cited, all believe that the lockdown in Shanghai will cause inflation. That's the premise of the article. They all assume that the authorities will reopen the port shortly.

But what if that doesn't happen? What if, as some China experts now believe, the lockdowns continue for months. Then no one will buy or sell. And like my Amazon delivery, money will not change hands.

That's deflationary. Not inflationary.

Fortune makes this very point when they reference a Bloomberg article: (quote)

"Fuel demand in China is on track to drop 20% this month in the biggest decline since the first wave of COVID-19 lockdowns more than two years ago..."

And that's my point. We're going to get to a stage, if we're not already there, where very little activity is taking place. Few transactions are made. Just like that terrible second quarter of 2020, when our economy dropped by one-third. The greatest drop in history.

And depending upon the Chinese authorities, we're liable to find ourselves there again.