Be grateful for what did not happen.
Two and a half years ago, governments around the world took the unprecedented step of “shutting down” their economies, which means the extreme control of people and their choices. This has proven to be devastating to prosperity, education, culture, health, and the prospects for liberty. Anyone could have anticipated this so it is not entirely clear why so many people in charge did not, at least that is what they now claim.
What did not happen—here is where the good fortune comes in—is a serious financial crisis along the lines of 2008. This occurs when a highly leveraged system is exposed by a dramatic rush by individuals and institutions to take back what they believe to be theirs, pulling their financial assets from the system and triggering all the mechanisms in place to save the banks and brokerage houses whose profits depend on retaining public confidence.
That never happened. The lockdowns affected mostly the “real economy” and not the world of leveraged finance and banking. That was bad enough. And now we are dealing with a huge problem of inflation that is a direct result of the government’s seemingly magic power to create the illusion of retained prosperity even though national and global economic systems went into a deep hibernation. Inflation is the expected result of a vast amount of liquidity working its way toward endemicity.
Now let us turn to events in Zhengzhou, China, a central financial hub with 12 million inhabitants. It is undergoing a deep financial crisis that has residents running on banks and authorities using every power accumulated during the COVID crisis to stop it from happening.
For some reason, Americans are inclined to dismiss events in China as something odd going on “over there” that surely cannot affect us here. That is the huge mistake that the United States and Europe made in 2020. We should not make that mistake again, and become aware that events in Zhengzhou could foreshadow real risks all over the world.
A financial scandal in central China has touched depositors across the country, some of whom placed their life savings in four rural banks offering high rates of return, then found their funds frozen as investigators examined allegations of widespread fraud.
When the bank customers began showing up to demand their money, the authorities in the city of Zhengzhou tried to use health code apps meant to prevent the spread of Covid-19 to prevent them from traveling.
The city retreated after a backlash, and several officials were punished. But the depositors kept coming, with as many as a thousand gathering on Sunday.
Perhaps such displays of force can temporarily stop a bank run but it certainly does not instill public confidence in a system that has lost it. At issue is the depositor guarantee that China has started to offer people with deposits in banks. It is set at $75,000 but many depositors have far more in the bank than that, just as in the United States today. Understandably, people worried about the future of the institutions want to be protected from whatever the government was planning.
In this case, there had been accusations that the banks were using fraudulent means of soliciting depositors. If true, this would mean that the deposit insurance would not apply, and therefore it becomes an issue of whether this was real fraud taking place or if this is merely a manufactured excuse to void the promises made to depositors.
In every financial crisis, the great concern is to stop the contagion. Once confidence is lost in one institution, it can spread quickly and dramatically to every other. Confidence is not really something that can be controlled by governments. What is in people’s heads is their own business. What government can do is control the movements of people. Here is where we get to Orwell territory, except that this is not fiction. It is happening right now.
The Times further reports that the Chinese Communist Party (CCP) used the health apps on people’s phones, along with location services, to stop people from going to the city and then detaining them if they did. These health apps were originally designed for lockdown enforcement during the COVID crisis but now they are being used for controlling the people’s movements more generally, even to stop a run on the banks.
Tom Zhang, the owner of a textile business in the eastern province of Zhejiang, said this happened to him when he was on a train headed to Zhengzhou on Sunday, despite coming from a town where there had been no Covid cases.
Upon arriving in the city, Mr. Zhang said, he was stopped by the police and told that his red code — usually suggesting an infection or close contact — indicated he posed public health risk. He said the Zhengzhou police had held him in a local library for around 12 hours.
The trajectory is terrifyingly ominous because such tools were certainly being pushed everywhere in the West, until the public revolted against both vaccine mandates and the applications designed to control population movements based on them. We saw their use in Canada, and to a more limited extent in New York City, which attempted to segregate an entire city based on compliance with vaccine mandates.
Thankfully, public pressure caused most states and cities in the United States to dial back the mandates and the passport system. The trouble is that the push is still alive and the technology is all in place to try another attempt in the future. A generalized financial crisis combined with another round of disease panic could be the perfect storm here just as it has been in China.
The U.S. economy right now stands at a precipice. The Fed believes it can manufacture a soft landing without triggering depression as it seeks to control inflation. What we do not know—and what we cannot know until they reveal themselves—are the pockets of vulnerability that may exist in the banking and financial sectors due to the profound disturbance of lockdowns and the resulting liquidity injections that allowed for cosmetic recovery.
We have so far avoided a full-blown financial crisis. Should that happen, the deployment of full-scale force against the population could quickly move from bad to worse to terrible. Sadly, the behavior of the CCP has been for nearly three years a fairly reliable foreshadowing of policies pushed by elites in the United States. For this reason, everyone should now pay careful attention to events in Zhengzhou.
