Is a big change underway in global capitalism? An interview with prominent short-seller, Jim Chanos. Part 3.

Interviewer: To turn to Europe, you’re a Greek-American, and you have been critical of the Eurozone’s attitude toward Greece. What do you make of the situation there now?

JC: The key issues for Greece now revolve around two entities that are not Greek. First you have the EU as a whole. We continue to have these bombshells, like the Italian referendum and Brexit — and you’ve also got elections coming up elsewhere in 2017.

I think Greece was sort of the Spanish Civil War to what’s about to be the EU’s WWII in that it was the opening preview of all of the problems that are going to come to the fore if Catalonia wants to become independent, if Italy wants to leave, if France wants to leave. The EU is being held together by chewing gum and string right now.

With this rise of nationalism — if that’s what it is and it continues — the EU is going to find itself increasingly a victim of people wanting self-determination in northern Europe. That’s the first thing. Second is something I’m much more concerned about which nobody’s paying attention to, and that’s the continued rise of Erdogan in Turkey. He has not only consolidated his power through a series of purges —thousands and thousands of journalists and academics have been thrown in prison since the aborted coup — but increasingly he is becoming more militant and Turkey is becoming a pro-Islamic state that is part of NATO. He’s throwing wild monkey wrenches into the whole Middle Eastern situation by making claims on land that was owned by the Ottomans, pre-WWI, like modern-day Iraq, modern-day Syria, and modern-day Greece and Bulgaria. He’s warned the EU that he will open Turkey’s borders to undocumented immigrants if EU membership talks are frozen. Like Xi Jinping, he’s putting out these old maps and saying: this is our real land. Erdoğan is yet another nationalist.

Poor Greece is at the crossroads of all these seismic events and Ottoman Empire II. You have got the possible weakening or dissolution of the EU, and Greek debt problems are about tenth on the list of issues in that region. They are going to struggle, no doubt about it. Every time the Greek economy starts to show some green shoots, it seems to stall and fall right back down again.

Interviewer: What do you hope might happen in this emerging world?

JC: This is the tough thing about being in the financial markets. You can have opinions on all this stuff and either get it wrong or have it not matter.

First, I hope our system of free trade holds up. That’s one thing I believe in fervently. The evidence seems to be that a rise of tariffs and trade walls and barriers will be bad for global growth. Given the debt overhang that’s out there, which is relentless, the ability of economies to service debts in a global trade war will be greatly curtailed, so I’m clearly watching that.

I also continue to be concerned, on a stand-alone basis, with the giant debt bubble occurring in China. It has done nothing but just gotten bigger since you and I last sat down. Despite all the talk of reform, there really hasn’t been any. The Chinese are more reliant on the state than ever — on state lending and state banks. The debt continues to grow at twice the rate of growth, and now the currency is depreciating.

We’re getting a situation where the Chinese economy is still a very important driver of global growth, but increasingly it is using the old methods that the Chinese themselves said only a few years ago that they would have to change. But they can’t, because every time they try, the economy slows too fast.

China continues to be half of the demand for global commodities. It basically supports Africa and countries like Australia and Brazil. Almost 40 percent of global GDP is either China or commodity-exporting countries whose prime market is China. That’s considerable. So we have to look not only at China’s role with us, but China’s role on its own because it is such a driver for global growth, Chinese growth represents 1 point of the 3 percent GDP growth, so if China were not growing at all, we’d be at 2 percent. Doesn’t sound like a lot but it is. We have to keep our eye on what’s going on there. A global trade war would probably send China into a really steep recession.

How would an average worker navigate a rising trade barrier globally? It’s scary. If we look back at the ’30s template, one major outlet was, of course, a giant arms race. By the late ’30s, you had the whole world realizing the threats of fascism and rearming rapidly. Keynesian government spending was what pulled up the economies; it just had some really bad repercussions from 1939-45. But if we get into any kind of global arms race with China, either conventionally or otherwise, that would be Reagan-like. I don’t know what the numbers would mean in terms of employment, but you would take a lot of manufacturing people and turn them to making other things.

Interviewer: How do you rate the current moment with big periods of change you’ve seen in your lifetime?

JC: I had this odd personal journey from being a union pipefitter and boilermaker as a college student — I made more money in two-and-a-half months making steel than I did my first year on Wall Street. I went from being a product of the industrial Midwest and putting myself through college by working in a steel mill, to being the beneficiary of the Reagan-Thatcher era. I saw the world change, but I didn’t really understand until years later what an important period the late ’70s/early ’80s was (and a great period for music, by the way!).

If we are in one of those periods now, if 2016 is like 1932 or 1979 — then you not only have to change your portfolio, you have to change your lifestyle. That’s one of the things we have been telling clients. If this is a major shift to populism, nationalism, greater state involvement, and less globalism, then you really have to rethink almost everything in your life.

Certainly, if you were a capitalist in 1932, you might be best served to change your outlook. And if you were a union leader in 1979, it would have been good to change your outlook. The question will be, in 2016, would it be best for the Davos man and woman, the globalists, to change their outlook?

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– Nwaodu Lawrence Chukwuemeka (Ideas Exchange Consulting).

nwaodu.lawrence@hotmail.co.uk (07066375847).