Twenty Million Man March

China's Great Wall is visible from space. So, too, may be the stream of China's newly unemployed, all 20 million of them, returning to their homes in outlying provinces. With shrinking worldwide demand for Chinese manufactured goods, factories along the industrialized seaboard are cutting back. China's white-hot economic growth is cooling.

Government officials plan to do something about it. They know darn well that social stability depends on keeping young workers busy. Borrowing from the Western playbook, they are devising massive stimulus programs to keep and create jobs. Unlike their counterparts in the U.S. and Eurozone, they can actually afford those programs, having amassed a sizable trade surplus over the past two decades.

National stimulus spending in China will mean a redeployment of capital normally used to purchase U.S. Treasury bonds. This is bad news for the U.S., which needs to borrow to finance its own stimulus initiative. As bidders for American debt walk away, yields will inevitably rise. And rising interest rates will abort any economic recovery that might be forthcoming.

Also threatening to drive up interest rates are the borrowing needs of American and European banks. As the chart below illustrates, over $2 trillion in bank debt will mature by the end of 2010. That debt will have to be refinanced with new issuance, and in today's market that appears impossible. The risk of government takeovers of troubled banks is just too great. Private investors who last fall bought bank-issued hybrid bonds and preferred stock have gotten crushed. They will not make the same mistake twice.

Widespread defaults, both by corporations and by sovereign nations, are in our future. The collapsing debt will create a vortex too powerful for meaningful government intervention.

Maturing Bank Securities in 2009/10 (USD)

Source: UBS