Australia, Subs, and Money Laundering

Good morning on this bright, sunny Thursday.

I can’t wait until this week is over.  It’s been a doozy.

Trav WhatsApped me last night with news the Australian Parliament was recalled over big news.  He was correct.

I’m going to unpack it this mo

Pax Britannicamerica?

Just about two hours ago, President Joe Biden announced that he was giving Australia nuclear submarine technology.

In nearly six decades, the United States has not given away nuclear submarine technology and has only done it once before. They gifted it to the United Kingdom to help contain the Russians in the Cold War.

There was an excellent strategic reason for it.

This time, though they never mentioned the name “China” in the joint press conference, the rise of China clearly troubles the governments of the United States, Australia, and the UK.

That’s fine. The Chinese Communist Party (CCP) troubles me, too.

The CCP does things that make me very uncomfortable, such as social credit systems, clamping down on gaming for children, and utterly decimating stocks that they’re not happy with. 

The Chinese ed-tech stocks come to mind.

China has been troubling much of East Asia because of its newfound military might.

Through its Belt and Road initiative, the CCP has the means to put a good portion of the world into debt slavery.

So it makes complete sense that the United States is trying to counter this, but there’s something interesting about Australia.

Australia is one of the favored homes of Chinese money laundering.

Chinatown, Australia

Now, I may sound like I have sour grapes concerning real estate prices around the globe.

Sydney, Melbourne, Vancouver, New York, and London, great cities though they are, have housing markets out of all proportion to the income generated in those cities.

A significant reason for this is ill-gotten, Chinese official corruption gains.

Now, of course, the Chinese are trying to blame money laundering on the triads in Hong Kong.

I have no doubt that’s at least partially true, but the vast majority of the laundering that is pushing up house prices comes from corrupt Chinese government officials.

One estimate has Vancouver’s house prices up by about 7.5%, thanks to Chinese money-laundering.

Of course, when I say Chinese, I don’t mean hard-working Chinese people who have lawfully emigrated, created great jobs and lives for themselves, and have bought expensive houses. 

Good for them. I’m only speaking about the money that corrupt officials route out of China.

Of course, if you talk to libertarian free marketeers about it, they’ll go, “Hey, listen, the price is the price because of the market, and that’s it.”

But here’s the problem.

The money that is used to buy real assets is printed out of thin air.

We could, of course, make the argument that that’s the same case with the Federal Reserve.  And that’s bad enough.

But the issue is that the money is printed in China, then converted into Aussie or Canadian, or US dollars. Then real assets are bought with those dollars that were bought with nothing other than the PBOC’s fiat.

(The PBOC is the People’s Bank of China, China’s equivalent of the Federal Reserve.)

Using printed money from one country to buy real assets in another country creates problems for the host population.

How Money Laundering Works

There are three levels of money laundering: placement, layering, and integration.

 

    1. Placement is the depositing of ill-gotten gains into the financial system.
    2. Layering is moving the ill-gotten gains through the financial system in multiple transactions to conceal its criminal origin.
    3. Integration is where you buy legitimate assets in the hopes that that money now looks like it came from legitimate sources.


This process is being used to buy tangible assets in Western countries with no extradition treaties with China.

Very smart.

The only time that Chinese government officials get caught doing this is when their families travel back to China.  The Chinese government becomes aware of this and then holds the family hostage in return for the corrupt official giving himself up.

In the meantime, the consequences of this are enormous.

First, young families can’t afford housing near any major city anymore, so they’ll move out.

This is especially true with COVID and the advent of Zoom working.  People must adjust to the market and do so by deserting cities.

Second, more luxury housing is built instead of new starter homes, so you have skylines full of empty apartment buildings.

Again, the problem is that you have part of a city with apartments with three bedrooms and four roommates. 

Then the rest of the buildings lay empty.  All of the establishments under those buildings – coffee shops, delis, clothing stores – don’t have any footfall because no one’s living in the building.

So these businesses go bankrupt.

And of course, the other consequence is that you are directly allowing this illegal activity to happen on your soil, which threatens your credibility.

If you go to London and New York and you see these 500 square foot cubbyholes that cost $2,500 a month, you could see that the prices are all out of proportion of what you get.

Again, you’ll have people arguing with me, saying, “Well, you know what? Just go move somewhere else,” which is what people do, and I think this contributes to the fall of cities (and makes James Altucher look like a genius in the process).

I think we’re going to see over the next 20 years that this money laundering, these empty skylines, and these ill-gotten gains as significant reasons why people choose to live in rural areas.

People will get to the boondocks where you can afford a lovely house, have some room, your kid can run around, and you can still work from it.

Back to the Subs

I wonder how Australia reconciles its real estate market, growing ethnic Chinese population, and its new fleet of stealthy subs.

China has already boycotted Aussie coal, but India stepped in to snap up the supply at lower prices.

Yesterday, the OECD warned Australia:

Over the past two decades, the share of Australia’s merchandise exports destined for China has increased from 10 percent to around 40 percent and now surpasses Australia’s total merchandise exports to all OECD countries combined.

The increased concentration of export flows makes Australia more vulnerable to a future shock in the Chinese economy or import restrictions being imposed on additional commodities, such as iron ore.

This looks like a conscious uncoupling, as Gwyneth Paltrow might say.

But with its warlike overtones, the question is, “Will it go hot?”

If so, it’ll be China against the US, UK, Oz, Japan, India, and (yikes!) Taiwan.

It’s not a prospect to relish.

Until tomorrow.

All the best,

Sean

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