The Dow plummeted today, following the mass selloff in the Shanghai markets. The Chinese markets, which have been growing at unsustainably high rates over the last few years are now beginning to see a restoration of economic equilibrium, which is sending shockwaves across the world financial markets.
I’ve argued before that the Chinese economy is not going to grow forever, and this may be an indication that the China bubble is bursting. The Chinese have some deep structural problems in their banking system that could make things even worse for them. The Chinese economy is in many ways similar to the Japanese economy before their major economic downturn.
In many ways, this is reminiscent of the October 27, 1999 “mini-crash” that also originated in selloffs in the Asian market and eventually spread to the rest of the world’s financial markets. Despite that crash, the US was largely unaffected and the US economy continued to do well. Hopefully this “mini-crash” will follow suit.
The fundamentals of the US economy are still solid, but this is another reason why policymakers can’t kill the goose that laid the golden egg. Things like tax hikes, protectionist measures, or increases to regulation all make the US economy more prone to international effects rather than less — and if that happens, it could mean that another downtown in the Chinese economy could have lasting harmful effects for the US economy.