The Australian Dollar is going to fall a lot further

Happy New Year!

As you know, I have been short the AUD (and the CNY) for more than one year. I have written about this here and here.  The story? Australia is a China derivative and I think China is the biggest credit bubble in the history of mankind.

Now that commodity prices have fallen, the streetwise professor (a commodity expert) is likewise musing about Chinese demand – without making any predictions of course.

I will briefly repeat my opinion on this: In order to keep demand constant, credit growth has to increase exponentially, i.e. to serve existing debt including interest payments as well as to finance new demand. This is because overall demand increases have been taking place against the backdrop of rapidly increasing leverage, i.e. they were not equity financed. With increasing debt/GDP debt growth increasingly is used to serve existing debt (assumption many of these projects are not economically viable). Also credit growth gets technically more difficult to handle (environmental problems, bank liquidity…). This is why I think Chinese demand for all sorts of commodities will fall substantially over the coming years.

John Hempton of Brontecapital, one of my favorite bloggers, has come up with the best analysis of this matter so far. It is the best because it is simple, intuitive and very original. It fits on a very small sheet of paper – just as it should be.

What did he do?

He has been reading Winston Churchill’s memories and what got his attention was Churchill’s gauge of the German Reich’s iron ore demand in 1940, i.e. a phase when it was preparing for war and undertaking huge infrastructure investments (Autobahns, housing…). He estimated annual iron-ore demand at around 20mln tonnes a year.

China uses about 1.1. trillion tonnes of iron ore per year.

In other words: an economy preparing for war and undertaking massive infrastructure investments such as was Nazi-Germany needed less than 2 percent of current Chinese iron ore demand!


“Yes, but population size…” I hear you say.

The facts:

According to Wikipedia, Germany had 79.3 mln inhabitants in 1939 compared to China’s 1.367 billion today.

That’s a factor of 17x. vs a factor of 50 x in absolute iron ore demand – no, population size cannot explain this huge difference alone.


Per capita iron ore demand in China last year was 3x that of what Nazi-Germany achieved in 1940 through brutal repression, plunder (Austrian CB Reserves) and confiscation. That’s insanity x 3, so to speak.

Iron ore is Australia’s main export product and more than 30 percent of its exports are going to China. I wonder whether John Hempton is short his own currency – he should be.

The AUD is doomed, I think it is going to depreciate further from here over the next 24 months.

(Disclosure: short AUD and CNY)



  1. It really is that simple! Another way to illustrate the utter unsustainability of the Chinese growth trajectory is consumption share – iron ore is one of the most extreme, if I recall, at around 45% of world consumption, or 3x GDP share. Coal, copper, cement, and other commodities aren’t far behind…

  2. China imports 2/3 of seaborne iron ore, if I am not mistaken. 80% of Australia’s production and 50% of Brazil’s are going there.
    And don’t forget all the scrap supply that will be made available in the next decade (empty skyscrapers…)

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