Introduction

In recent months, many have speculated about the Federal Reserve’s decisions regarding interest rates, particularly in SeptemberThe fluctuations in the capital markets, including stocks, housing, and bonds, have caused a significant recalibration of pricesAnalysis indicates that as unemployment rates have consistently fallen below average, and core inflation has lagged behind market expectations, the likelihood of a 25 basis point rate cut by the Fed now stands at over 50%.

Observing trends in assets valued in Japanese yen, particularly through metrics such as the Nikkei index and bond yields, it becomes glaringly evident that the global economy has been ensnared in a liquidity trap for an extended periodThis condition poses critical risks not only to emerging economies but also to developed financial systems worldwide.

If this trend continues unaddressed, it could trigger a debt repayment crisis not only within Japan but also across the Eurozone, reverberating through the international financial systemThis would catalyze a domino effect that could jeopardize major asset classes, including those tied to the dollar, leading to financial fragility across primary economies.

While a decrease in U.S. interest rates may alleviate certain adverse effects associated with stringent liquidity, it concurrently increases the risk of asset bubbles bursting within domestic markets.

During the previous tightening cycle of the dollar, liquidity tethered to the dollar surged back to the U.S. for tangible investments and financial productsShould this rate-cutting phase elicit uncontrollable risks, the consequent steep decline in productivity ratios and investment returns may severely contract these funds, tightening liquidity further and plunging investors into an even more severe liquidity trap

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This represents a catastrophic scenario reminiscent of historical financial crises.

An examination of historical financial catastrophes reveals that they are often linked to similar liquidity trapsHowever, the underlying causes of the current economic turmoil differ fundamentally from past crises, particularly in contrast to the 2008 financial meltdown. The current crisis bears more resemblance to the 1929 Great Depression and the stagflation experienced in the 1970s than to the cyclical downturns of previous crises.

Firstly, according to the theories of business cycle innovator Joseph Schumpeter and economist Ludwig von Mises, our modern economic reality resembles a transitional epoch wherein old engines of growth are being replaced by newer, more sustainable sources of productivity.

Secondly, as delineated by the Merrill Lynch Investment Clock and the Kondratiev wave theory, the current economic crisis resembles a hybrid of stagflation and depression rather than the cyclical downturns exemplified by the Asian financial crisis of 1997 or the global financial crisis of 2008.

Furthermore, the geopolitical dynamics that have reshaped globalization and intensified conflicts are new variables absent from prior economic studies.

Addressing these intricacies, a full-blown global financial crisis will likely exhibit three characteristics: complexity, protracted duration, and confrontation.

While China remains deeply embedded in the global order and international supply chains, the impending global financial crisis may impose adverse external influences

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Nevertheless, due to capital controls and foreign exchange systems in place, even severe external perturbations are unlikely to entirely derail the functioning of the Chinese economy and society.

More concerning, however, are the structural issues originating within China's own operational frameworks, as these pose genuine risks that could destabilize the national economy.

Since the 1980s, China has strategically harnessed its advantages through reform and opening-up policies, resulting in an influx of technical know-how driven by foreign investment, combined with geographic and demographic advantages to build a robust economic foundation.

Initially, under the guidance of an economy-focused philosophy, local government entities rallied for growth, using GDP and other metrics as performance benchmarks that favored mid-to-low-end manufacturing, establishing an export-driven development modelThis model facilitated the training of engineers and professionals while utilizing capital from regions like Hong Kong, Macao, and Taiwan, forming operational frameworks that produced significant economic advantages.

Following this, increasing the supply of land, labor, and taxes amounted to shifts in power dynamics, creating an enabling environment for institutional innovation that set the stage for economic modernization in China.

In 2001, China's entry into the WTO further integrated its economy into global trade systems, enhancing its manufacturing capabilities and enabling it to emerge as the world’s second-largest player in manufacturing.

The 2008 financial crisis marked a turning point, halting China's rapid integration into the globalized economy and ushering in an era of debt-driven investment models.

At that time, a massive 4 trillion yuan stimulus plan focused heavily on real estate and infrastructure, positioning the property market as a new engine for domestic growth alongside traditional manufacturing exports.

The decade from 2008 to 2020 saw China enter a period described by economists as that preceding the Lewis population turning point, characterized by significant growth.

During this phase, China not only solidified its status as the world's factory but also became a construction powerhouse, leading infrastructure development on a monumental scale.

Yet, as the dividends of early reforms diminished and the 2008 crisis exposed the vulnerabilities of the globalized 2.0 system, signs of diminishing returns in growth catalysts surfaced

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By 2014-2015, there was a steep decline in capital markets heavily reliant on real estate and equities, coinciding with a peak in local government financing debts.

In response to economic stagnation, beginning in 2016, China introduced numerous measures including supply-side structural reform.

Externally, the government employed asymmetric competition tactics to maintain the integrity of the globalization order while gradually reclaiming market share in mid-to-low-end manufacturing and fostering foreign investment.

Internally, there were measures to depress the costs related to production factors to stabilize costs within the manufacturing export sector.

Specific initiatives targeted the property market through urban renewal projects in second- and third-tier cities, while infrastructure projects aimed at networked construction culminated in nationwide undertakings.

Debt monetization strategies resolved reduced taxation burdens on exporting entities through local and special debt financing while expanding credit for household sectors, consequently raising personal and housing-related debt levels.

Meanwhile, the credit sector geared towards property developers further inflated debt levels.

Conversely, as local government bonds increased—general, special, and municipal—the banks enjoyed significant asset revenue hikes alongside rising revenues from land sales, burdening nearly every societal segment outside the central government with substantial debts.

As a result, assets derived from state land—spanning residential, commercial, and industrial infrastructure—experienced substantial price inflations, increasing costs for residents and businesses while complicating administrative governance and shedding light on transactional barriers.

By 2018, escalating geopolitical tensions began striking at the heart of China's manufacturing and exporting sectors, resulting in diminishing job opportunities for millions and ushering in an initial liquidity crisis.

Subsequently, technological frictions, particularly in semiconductor supply chains, introduced immense uncertainty for the manufacturing industry.

As domestic real estate and infrastructure markets succumbed to the repercussions of debt-driven practices, excessive financialization, and operational inefficiencies, many long-standing economic challenges began to surface in early 2019.

However, the global public health crisis in early 2020 masked these challenges temporarily and accelerated the deterioration of systemic issues across the economy.

This crisis propelled China's manufacturing export market share to unprecedented heights, yet inadvertently led to neglect of longer-term risks, prompting an urgent restructuring of housing supply dynamics alongside rigorous regulations on real estate financing.

Subsequently, the property market struggled to recover, leading to a series of complications across economic systems, including:

First, homeowners motivated by a desire to prepay mortgages prompted developers to default on housing projects, resulting in intensified pressure on authorities to ensure project completion

This translated into proximal effects on financial institutions, inducing a wave of bad debts as collateral for investment portfolios, further cascading down to capital markets.

Consequently, sources of income for households, corporate profits, and fiscal revenues at both local and central levels witnessed substantial declines, plunging the society into a spiral of asset depreciation and liquidity challenges it struggles to escape.

Thus far, all four main societal sectors—households grappling with salary reductions, enterprises facing insolvency challenges, financial institutions ensnared in a liquidity crisis, and administrative bodies experiencing a debt crisis—are on the trajectory toward significant upheavals.

In response to over-leveraging in sovereign debt financing, authorities face the specter of credit defaults, underscoring the overarching financial predicament.

Within the triad of growth engines, the manufacturing and exporting sectors confront realities of a crumbling trade order, traditional Western influences seeking a restructuring of this order, and systemic challenges affecting industrial advancement and economic transitions.

Conversely, infrastructure investments display signs of excessive development and rapid asset depreciation, showcasing a saturation in credit expansion and dwindling investment returns.

In commercial consumption, indicators reveal rampant stagnation, signaling a glaring inadequacy in domestic demand, declining purchasing power among residents, and overcapacity within the production sectors.

As for capital markets encompassing equities, bonds, currencies, futures, and insurance, a common theme persists: an acute shortage of sustainable investment

These issues stem not only from the aforementioned factors but also from unresolved systemic challenges regarding sovereign oversight.

Overall, the Chinese economy is facing extraordinary systemic challenges driven by factors such as liquidity conversion inefficiencies, household financial crises, corporate insolvencies, and expansive governmental overreach.

The juxtaposition of asymmetries within public and private sectors and geographical disparities complicates the distribution of resources across the economy, highlighting underlying social challenges.

Furthermore, deficiencies in legal frameworks for market economies and ineffectual governance structures heighten the vulnerability of economic management.

The three dominant structural challenges facing the sovereign system involve resource misallocation, imbalanced supply and demand, and a lack of long-term accountability mechanisms for balancing power dynamics.

Additionally, China is prepped for unprecedented trials, grappling with an external new Ginderberg trap and an internal Tacitus trapNavigating these potential pitfalls will be pivotal in determining China’s trajectory moving forward.

Responding to these systemic challenges mandates a counteractive approach, reacting in direct opposition to their origins.

Having previously elaborated on numerous solutions to address structural economic issues, I will refrain from reiterating them here.

Final Thoughts

In conclusion, one key principle remains: human welfare must remain the end goal, never merely a means.

Any socio-economic theory that disregards this principle risks plunging an entire society into nihilism and irreparable despair.

I earnestly hope that the elite will embrace transformation, genuinely embrace comprehensive reforms, and strive toward a liberally grounded society rooted in Mises and Hayek’s principles, consequently guiding the nation through tumultuous transitions toward a balanced and prosperous status.

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