The Thucydides Hyperinflation Trap - Mine Digital
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The Thucydides Hyperinflation Trap

May 24, 2020 • 
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Between China and the United States, we are about to see the effects of the greatest expansion of debt, money, liquidity and asset purchases of all time.

The Numbers

Energy enjoyed a massive turnaround this week, which we may take to mean that the enormous industrial expansion we suggest lower down may have already begun.

Stocks and silver also did well this week.

The Events

The Incumbent and the Challenger

The big event this week was the start of the geo-political showdown between China and the United States. Because we love to use phrases that give authority to ideas, we will hear plenty about the apparent ‘Thucydides trap’ between China and the United States moving forward – A cheap and easy way to signal that we understand the deep and abiding implications.

Ever since Bill Clinton ushered China into the World Trade Organisation on March 20, 2000 an arrogant and delusional Western world thought that their paradigm would be the higher reality, that communist China would choose Western Liberalism only 12 years after the Tiananmen square massacre. This was an incredible assumption that was recognised as having failed when George Soros fronted Davos with a speech in January 2019 that defined China as a bad actor for the Western Davos set.

China has had incredibly bad luck since that speech.

Although Donald Trump had already been responding to China in more direct terms, it had already been 4 years since Barack Obama had spoken to President Xi about IP theft – theft estimated to be worth 225 to 600 billion USD a year. These efforts of IP theft were reportedly ratcheted up when Trump began to make protectionist noises early in his presidency – potentially because time was running out.

But nothing had ever been done, because in many ways President Xi’s China had always paid lip service to playing the role of ‘good’ global citizen according to Western standards – but at the same time has never hidden the CCP’s motivations and plans.

Rather than simply be another tiger economy, a rapidly growing manufacturing powerhouse as the blessing intended by the embrace of global institutions and give itself time to develop a middle-class and improve living standards for the billion plus people, the nation who viciously destroyed their traditional culture in a ‘Cultural Revolution’ (up to 2 million deaths) pivoted into referring to its ‘5000 year history’ as a rallying call to a right of regional (and indeed global) dominance in zero-sum games and transactions ( a turn of events criticised by Deng Xiaoping in a speech to the UN in 1974).

Instead, China had decided to ride the tiger.

In a comical parody of the bigger picture given the theft of intellectual property, President Xi Jinping had also introduced the idea of the ‘Chinese Dream’ in 2013 – directly lifted from the ‘American Dream’. The American Dream with Chinese characteristics?

Other historical events that should have been left behind in a cultural revolution such as the ‘Century of Humiliation’ (century, or 1000 years are a figure of speech) are also used in a dangerous narrative of racial and cultural supremacy (previously criticised by Mao Zedong as Han chauvinism) that it is their turn. It carries implicit threats because of the perception that there are only zero-sum games and no partnerships but transactions.

And it’s not just the Chinese powerhouse that believes that it is the turn of the Chinese Communist Party. Ray Dalio is right out in front as a Westerner in finance, who supposedly understands the global Economy, who sees China as replacing the United States as the global superpower.

As mentioned last week, it is hard to imagine how the global supply chain can attack global demand and win. How you batter your customers, use wolf-warrior diplomacy (a name literally lifted from a movie where Chinese special forces defeat US ex-Navy Seal mercenaries) and make every deal as a zero-sum game and survive in one piece has not seemed to occur to Ray. Cheers for your principles, mate.

It just doesn’t make sense, but is not for the Western Mind. There is a deep belief in a Chinese manifest destiny as well as a willingness to engage in, and win a war of attrition. Chinese generals have commented on their ability to sacrifice a city being nuked and risk a second, but that the Americans would never risk the second. They are convinced that they have an appetite for destruction and attrition unmatched anywhere else. It is not the plan, and never was, and never will be that we are all going to make it.

The tokens of partnership that the Western mind counts on as good faith – that it was Western capital, Western technology and Western markets that made the Chinese economy possible is not accepted. It is more along the lines of it being Chinese smarts to attract the capital, a Western failure to protect technology, perhaps stupidity to provide open access to markets. These disparate views – not even dichotomous but on different planes of reality – were figured out a long, long time ago on the side of the Communist party.

And it wasn’t in good faith in the Western world. The Chinese crackdown on Uigher Muslims began in 2011, but was all of a sudden a big deal in 2019. Everybody was happy with Chinese money and manufacturing, until they weren’t. It should be obvious that it is not China, or even Xi’s Communist Party that is the blame for this. It is the Western idolisation of money in neo-liberalism that created the imbalance. China was going to get rich and magically act as a partner, without her own ambitions.

And because of this enormous misunderstanding it looks like a terminal result is inevitable between China and the United States in what is now a full-blown Economic War.

As a result, Hong Kong will likely lose its special designation as a financial centre (a seemingly long-planned result), protectionism will emerge in many economies. A new Western trading bloc will likely emerge, that includes India as a new manufacturing hub and China will essentially be forced to take Hong Kong and Taiwan to appease domestic politics – they are already antagonising anybody they can to create the propaganda necessary to shore up domestic politics, beating the war-drums loud and clear.

So if we can understand the reality and size of this geo-political struggle, we can see what is ahead here.

With the writing on the wall in massive debt and weird things going on in each currency, China and the United States would enter a spending binge, to grow their economies as large as possible in as short as possible a time as a necessary geo-political strategy. Is it a Thucydides hyperinflation trap?

China appears to be going for broke by spending as much as possible to build as much as possible to have as much momentum as possible going into this apocalyptic scenario. Last quarters increase in debt (17%) is the largest ever (now at 317% of GDP).

Although, who knows about their numbers. We can see in China’s official GDP growth figure where the complexity is taken out of the chart in 2013, that there is no way the very smooth numbers are accurate from that point forward.

Across the pond, the United States has injected liquidity, quantitative easing, asset purchases, rescue packages, other funding worth 10! trillion dollars and may be backing this up with a fiscal expenditure in the works of 1-3 trillion dollars.

Between American Senators and the US Federal Reserve, somebody thinks they are Santa Clause.

Although it’s not just them – almost every economy in the world is expanding credit, providing liquidity, fiscal stimulus and/or expanding the money supply at an astonishing rate.

The US Dollar is unlikely to survive as the global reserve currency – it is no longer money with a flat (and especially negative) interest rate.

So if this enormous infrastructure spend occurs in the US, in tandem with a similar spend in China, as these two behemoths go at it, we are likely to see a wild appreciation of commodities, of the Aussie Dollar, Bitcoin and Gold should appreciate significantly and it all looks like we are in for one hell of a ride.

In its mind, China has already laid the groundwork in Australia, by showing how serious it is in banning barley and beef, and creating new laws to provide flexibility on iron ore shipments. China will be desperate to obtain Iron Ore and Coal in an environment of a weakening Yuan, and potentially other countries also expanding steel manufacturing.

In this environment, it is possible that the Australian dollar keeps appreciating until there is a direct intervention – perhaps that intervention should include our own monetary expansion to fund the nationalised purchase of all Australian gold, to lay the groundwork for our own digital currency, similarly to how China has led the world on the post-USD global financial system.

All the developments feel dangerous, and like new territory.


Bitcoin has been trading in and breaking out of wedge patterns after trading lower, failing to break the $10k level 3 or 4 times this week.

The latest story Friday was that Bitcoin and perhaps USD Tethers were being influenced by a Chinese attempt to shutter all cryptocurrency trade with the idea that capital would spew out of Hong Kong. How long this might affect the market is anybodies guess, but cryptocurrency markets and the network of connections involved in them have been notoriously difficult to halt in previous crackdowns.

Bitcoin / USD on a 15 min Chart

Bitcoin / USD on a 4hr Chart

The 4hr chart shows a market that has not successfully challenged longs in a meaningful way since making its low in March.

Whether this indicates that a squeeze exists as potential is the big question.


Volumes in Bitcoin show a lot more trade in price weakness than the slight recovery Thursday and Friday.


Bitcoin sentiment has plateaued since the start of May.

BTC Dominance

Interestingly, BTC Dominance has been dropping off the last 5 days. Where this is Bitcoins moment of truth – attracting praise from legends of fund management Paul Tudor Jones, gaining acceptance by its early critic and luminary of the financial universe, Jamie Dimon (looking to rehabilite himself for history) and the worlds greatest investment bank, Goldman Sachs looking to induct customers on Bitcoin this coming week – it is losing momentum at the $10k mark.



We think that after breaking out of its consolidation flag, that perhaps an upwards trend-channel is the correct way to think about how gold is going to move.
In our humble opinion, it is either this, or a quick squeeze before breaking highs convincingly.

The Gold/Silver ratio is still providing room for gold to appreciate, although it made a small retracement Thursday and Friday.


The Dollar Index is still trading sideways, with a lot of the world taking a keen interest in what it is going to do next. It looks technically weaker rather than stronger, but reports are of a structural strength because of USD shortfalls globally.


Treasury Inflation Protected Securities are still edging higher gently, but without major direction.

Written By: Thomas Kuhn, CFA

Thomas is a 12-year veteran of financial markets working to bring digital assets into the fold of traditional financial markets.  With an interest in fundamental analysis with a technical overlay, Thomas actively takes positions in the markets he covers. As well as producing education for traders, Thomas writes for Mine Digital, CFA Asia-Pacific Research Exchange and Hackernoon.

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