Contagion is kicking in. Argentina, Turkey, South Africa. Currencies are being defending, reserves are falling, interest rates are rising to defend a currency in a war that will be hard to win. Increased interest rates choke of any recovery which could set back the global recovery.
Things are looking bleak but gold and productive land might appear to be safe havens but that is for another day. Deflation is not a gold bug positive. #
Next stage - currency wars (that have already been running pretty hot for the last couple of years). Once China pile in they things will really heat up.
Half the world economy is one accident away from a deflation trap. The International Monetary Fund says the probability may now be as high as 20pc.It is a remarkable state of affairs that the G2 monetary superpowers - the US and China - should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.
Moreover, China is struggling to keep its industries humming at the current exchange rate. Patrick Artus, from Natixis, says surging wages - and falling productivity - mean that it now costs 10pc more to produce the Airbus A320 in Tianjing than it does in Toulouse.The implications are obvious. China may at some stage try to steer down the yuan to hold on to market share, whatever they say in the US Congress, partly to stop Japan stealing a march with its 30pc devaluation under Abenomics. Albert Edwards from Societe Generale say this may prove the ultimate deflationary shock, dwarfing the 1998 Asia crisis.