China to emerge “relatively unscathed”?

It’s painful here. Worse than I ever thought it would be. Everyone, down to the taxi drivers and the lady who washes the cups at my language school, is talking about the crisis. I got a near-tearful call today from someone I know who works for a not-unprominent company here, asking if I had any suggestions for his keeping his sanity. “There are rumors everywhere. Everyone says a big reorganization is coming, that even the chairman of the company is leaving. The worse thing is that they won’t say anything formally but they’re all whispering about it. We all know the layoffs are coming, maybe up to 20 percent. But we are all in suspense. We can’t sleep, we can’t think about anything else.”

I told my friend to relax because a.) he is only 30 years old and he should thank God he is witnessing this kind of misery while he’s young and not when he’s getting ready to retire, and b.) there’s not a damned thing he can do, except keep as cool as possible and try his best to hang on to what he’s got.

But the call was deeply troubling. The anxiety level has reached the clicheed “fever pitch.” From many expats you’re hearing a lot of, “This is definitely a good time to be living in China and not America,” but also a lot of, “My company just laid XX people off, freezed hiring, cut expat packages, canceled all bonuses and stopped all travel.” Yeah, it’s a good time to be in China, but it’s not a fun time to be in China. Or at least not as fun, by a long shot, as the heady pre-crisis, pre-Olympic days, when money poured like wastewater into the Pearl River Delta.

China is scared. Everyone’s scared. Some businesses have been hit way harder than others, but everyone’s feeling the pressure. What still seems to separate China from the West, however, is the sense that even in the face of an unthinkable catastrophe, China still has more going for it than the West and this is still the better place to be. And for now, I tend to agree, cautiously. I’m not nearly as confident as I was a few months ago, when I was convinced China’s own domestic economy woud keep the engine roaring. It may keep the engine humming, softly, at least keeping the flame alive. And that is still more than you can say for the US, where it appears the lights are being extinguished one by one, leaving entire states and cities in the black. (Case in point from yesterday’s paper; this is not an exaggeration.)

Which brings us to the link of the day, an article from Foreign Affairs that begins with an agonizing description of just how deep the precipice is for the West, throwing into question the very foundations of free-market capitalism and wrenching us from what was a market-driven system to one driven by the government. After scaring us as much as he can, the author then turns to the “bright side” of the equation, i.e., the powers that may emerge stronger as US influence wanes. Need I state which of these powers comes out ahead?

No country will benefit economically from the financial crisis over the coming year, but a few states — most notably China — will achieve a stronger relative global position. China is experiencing its own real estate slowdown, its export markets are weak, and its overall growth rate is set to slow. But the country is still relatively insulated from the global crisis. Its foreign exchange reserves are approaching $2 trillion, making it the world’s strongest country in terms of liquidity. China’s financial system is not exposed, and the country’s growth, which is now driven by domestic activity, will continue at solid, if diminished, rates.

This relatively unscathed position gives China the opportunity to solidify its strategic advantages as the United States and Europe struggle to recover. Beijing will be in a position to assist other nations financially and make key investments in, for example, natural resources at a time when the West cannot. At the same time, this crisis may lead to a closer relationship between the United States and China. Trade-related flashpoints are diminishing, which may soften protectionist stances in the U.S. Congress. And it is likely that, with Washington less distracted by the war in Iraq, the new administration of President Obama will see more clearly than its predecessor that the U.S.-Chinese relationship is becoming the United States’ most important bilateral relationship. The Obama administration could lead efforts to bring China into the G-8 (the group of highly industrialized states) and expand China’s shareholding position in the International Monetary Fund. China, in turn, could lead an effort to enlarge the capital base of the IMF.

Kind of ironic, suggesting we turn to one of the world’s poorest countries to shore up the IMF. But that’s one of the peculiarities of China, verging (perhaps) on superpower status “while ranking just above the world’s poorest nations.” And yet there we are.

This is an immense article, like a book. Allow me to paste a final snip

[China] will suffer a lesser blow from the global crisis. It is experiencing some economic pain. Its export markets, led by the United States and Europe, are slowing dramatically. China is also suffering from price declines in certain urban real estate markets. Its growth slowed to nine percent during the third quarter of 2008 — a rate that other nations would envy but was China’s slowest in five years. These factors explain why the Chinese leadership is implementing a multiyear economic stimulus plan worth over $500 billion, or approximately 15 percent of GDP. Still, the IMF is projecting that the country’s economy will grow by 8.5 percent in 2009.

In financial terms, China is little affected by the crisis in the West. Its entire financial system plays a relatively small role in its economy, and it apparently has no exposure to the toxic assets that have brought the U.S. and European banking systems to their knees. China also runs a budget surplus and a very large current account surplus, and it carries little government debt. Chinese households save an astonishing 40 percent of their incomes. And China’s $2 trillion portfolio of foreign exchange reserves grew by $700 billion last year, thanks to the country’s current account surplus and foreign direct investment.

This means that although China, too, has been hurt by the crisis, its economic and financial power have been strengthened relative to those of the West. China’s global influence will thus increase, and Beijing will be able to undertake political and economic initiatives to increase it further. China and the Association of Southeast Asian Nations are just concluding an agreement that would create the world’s largest free-trade area, and Beijing could take additional steps toward Asian interdependence and play a stronger leadership role within the region.

China could also expand its diplomatic presence in the developing world, in order to further its model of capitalism and, in places such as Angola, Kazakhstan, and Sudan, satisfy its thirst for natural resources. In the midst of this crisis, it might also help finance emergency loans, either directly, through bilateral financing arrangements, or indirectly, by creating an additional facility at the IMF that could expand the organization’s available credit beyond what current quotas allow. China should also be expected to make strategic investments through its sovereign wealth funds. Given China’s appetite for natural resources, this is one likely area of interest; its relatively underdeveloped financial-services infrastructure is another.

Well, it sure sounds optimistic. I’ve written before about how well Hu has built relations with strategic partners in a Machiavellian way with only one thought in mind: how will this benefit China, morality be damned? Does China have the finesse and diplomatic skills to pull it all off? Looking at how clumsily they handle their own media relations, I would say no. But then, looking at how smoothly they ran the Games and how, when they set their minds to it, they can make things happen (again, morality – and the environment and safety, etc. – be damned), I’d say it’s not at all inconceivable.

In PR pitches, we often tell clients they are at “an inflection point,” a pivotal moment when they can achieve greatness or be lost in the crowd (which is why they need our services). The term has lost a lot of its meaning, but if ever there was a genuine, burning, 100-percent certified and documented inflection point for China, this is it. More than the Games, More than getting into the WTO. Yes, China is reeling from the shock waves and is getting hit by a sledge hammer. But the West is in a different boat, one with no life preservers. It won’t drown, but it won’t emerge from the water anytime soon, and when it comes up for air it won’t be the America we used to know. China will still be China, I believe. Its ruthless government, with money in the bank and massive support of its population, despite the fear and protests and angry anecdotes, is in a much better position to hold onto its power while keeping systems largely intact.

Sorry for all the metaphors. Read through the article if you haven’t yet reached saturation levels with grim news outlooks on our “crisis-opportunity,” as they say here. And please don’t misunderstand: I am not convinced China will achieve all that the authors claim it’s capable of. I think there’ll be misery aplenty along the way. But everything is relative. And China is in a better position than the US, relatively. For whatever that’s worth.

The Discussion: 103 Comments

Well, I’ve just posted a comment in the open thread that would apply here.

Personally, I just don’t believe in this Mantra. I wish I could, but I can’t. Some blogs with renowned economists have been plagued in the last months with out of this world positive comments stating how China would not be affected so much, trying to force down our throat the decoupled economy theory. And most recently: Chinese consumerism still strong! Export on the rise in September!

I mean, Jesus Christ, who’s stupid enough to believe that?

Every time (try it, it’s funny), just wait a couple of weeks (sometimes days) and see the cycle repeat itself: Well, after all, it might be worse than what we thought. It’s almost becoming satirical, like a badly rehearsed play (the same rule applies for any scandals linked to China btw, Milk, SARS, you name it).

I’m not sure if these people are influenced by the “Panda Licking Factor” (personal and career future strongly link to China, sometimes in other contexts we also call this brownie points) of if they truly believe in what they say.

Again, China’s development is and has been fueled for many years by something (a magic wand?, God’s will?, UFO’s?), and no it’s not coming from inside China.

Simple experiment: Remove any foreign investment today and the export factor, and let’s see how well China copes and develops.

Simple, effective, and logical analysis. No need to try to find astrological reasons or read the future in Chicken Bones.

Sadly, the naysayers and doomsters are in the spotlight right now, and everybody else are just making clowns out of themselves. This is NOT a normal and temporary situation. We’ve NEVER witnessed this before. And whoever says the contrary, at least in my eyes, is a clown.

I said a while ago, China might end up spending his trillions trying to prevent the ship from sinking. And it showed up in the news.

It’s just obvious, I have no idea why, but it’s obvious. The big white elephant in the room.

December 24, 2008 @ 12:15 am | Comment

I sadly disagree with you, Richard. The article in Foreign Affairs reads like a complete fantasy: “…the country is still relatively insulated from the global crisis. …China’s financial system is not exposed…the country’s growth, which is now driven by domestic activity, will continue at solid, if diminished, rates.”

China is experiencing its own crisis, the one that we all knew had to come one day. Events around the world are simply making it more acute and help decide the timing. It was clear that China’s GDP could not grow at 10% p/a for ever, and that the export and FDI festival will one day come to a halt. China had to spend the good years preparing for this moment and building and healthy and balanced nation, with a moderately strong consumer basis and an educated workforce that can drive growth through innovation.

Instead of this, China’s leaders chose a growth model that relies heavily on exports and foreign investment in fixed assets. So, China became an empire of low-quality manufacturing and big buildings that fall apart quickly. It had an opportunity to wean itself from this by letting it’s currency flactuate freely. This would have hurt exports slowly and allow local consumption to grow incrementally. Now, China is paying the full price in one installment.

Talking about local consumption is nice, but it is not something that can be achieved in 2 months, not even in 2 years. In order to spend money, Trust (in the sociological sense) needs to be at a certain level. People need to know and/or feel that what they have today will still be there tomorrow. Do the Chinese people feel this way? I think not. China could spend the good years by investing in education and a universal healthcare platform. This would give people the security that things will always be ok, and prevent them from saving 70-30% of their income.

These are just a few examples. I could go on and on. Unfortunately, China did not use the good years to build a nation. Now it’s too late, and all the cash in China’s coffers can do little to help. And more importantly, the US is a liberal democracy held together by common values and beliefs. The current crisis poses no threat to the country’s political system, geographical borders, or existence. America has the capacity to change course quickly, and we see it today at one of its finest hours. It is times like this that show the strength of the American political system and its way of doing things. China, on the other hand, is held together by force. Even if it only suffers a tenth of what America is currently going through, nobody knows what would be the end result. And with such uncertainty hovering above, you expect Chinese people to spend more money and save the world?

It is clear that China is in for a bumpy ride, and the CCP will need to make some dramatic decisions in order to maintain stability. Let’s hope it will not be too painful.

December 24, 2008 @ 6:59 am | Comment

Bao and Dror, I don’t disagree with most of what either of you say. As I said, China will be hit hard. I think they’ll come out in a stronger global position and relatively unrattled, but the word “relatively” is key. What 10 years ago might have looked like a total catastrophe could, in 2009, just look like a serious problem. The Madoff scandal illustrated that beautifully. He stole as much as $50 billion. But in a world of trillion-dollar bailouts and $11 trillion in debts, that number actually doesn’t seem that huge anymore.

“Now it’s too late, and all the cash in China’s coffers can do little to help.” The only solution everywhere right now is cash. Money talks here like nothing else. It’s also going to be the solution in the US. Unfortunately, the US doesn’t have any and will be forced to print it. China has it. Will that alone save China? No, but it gives them a huge advantage coming out of the gate.

About the Chinese people not changing quickly – I really disagree. They have completely readjusted their thinking,more than Americans, and are prepared for an utterly awful few years ahead. I think Americans are actually more prone to inflexibility in the face of truly life-changing circumstances, losing a house, losing one’s savings, losing one’s dreams. If the money is turned off and the Chinese are jobless might they riot and protest? Absolutely. But this is why having cash is so important. China may be able to buy its way out. Maybe. If not, and if China is as doomed as you seem to think, then we had better all prepare to leave, because revolution and/or civil war could become distinct possibilities.

And with such uncertainty hovering above, you expect Chinese people to spend more money and save the world?

No, I honestly don’t. The author does. I think this is a bit fantastical. In fact, China has already said it is not that interested in helping to bail out the world. It has other things on its mind right now.

Of course, we can argue this back and forth for a long time. There’s plenty of supporting evidence for both scenarios.

December 24, 2008 @ 8:56 am | Comment

Richard, I think you are (severely) underestimating the social issues at play. This is not only a game of numbers and perception (50billion vs trillion, 105 growth vs. 7% growth). There are people involved, and the absolute numbers ammount to tens and potentially hundreds of millions of very angry people (real people, not numbers on paper). These people are mostly uneducated, have a history of social violence, and have a very narrow understanding of the way in which their country and the world in general works. If you think that China can just go down and come back up again without undergoing a serious political and social change (forced or otherwise)… I hope you are right, but I cannot agree.

And again – the fact that they have all this cash cannot help them much now. America is printing cash which makes the Chinese bonds worth much less + if China starts spending all its dollars, they would become even weaker. On top of that – pouring money into infrastructure and RE project now might help to delay the decline in GDP growth, but it will not solve China’s systemic problems: low social trust due to poor education and healthcare. All the emergency cash rescues in China can – at best – delay the pain to a later date.

And when I talk about change I am not talking about people “readjusting their thinking”. This is not enough, and it is not a matter of expectations management (not everythign can be solved with PR). I am talking about real change. Look at how much America has changed in the past four months: whole industries ceased to exist, many more have changed dramatically and will never be the same, the government changed (lucky timing), etc, and America is still standing. Capitalism never promised that everyone will be rich and that life will be perfect, but it still offers the best system for long-term growth of prosperity, and of course – the system keeps changing and adapting.

On top of that, a recession in the US or Japan looks and feels very different from a recession in Japan. I was in Japan during the hardest years of the recession there. People were buying less, not getting any increases in their incomes, and going abroad much less. But most of the population still lived comfortably and had all their basic necessities and much more. In China, the pain would be of a completely different scale and flavor.

There’s no doubt that China is in for a difficult time and is more volatile and fragile than most other countries in the world.

December 24, 2008 @ 9:23 am | Comment

Pretty grim analysis, Dror. We may have to agree to disagree – I understand the depths of the problem, but I disagree that China is so fragile it will be broken. Only if it is bankrupt and has no means of helping to support the millions, or hundreds of millions, of disenfranchised. I’ve always said a financial crisis would be the true test of the CCP resiliency. Two years ago I would have agreed with you hands down. Now I am less sure. I also believe America hasn’t seen anything yet, and no industries have disappeared yet. They have been downsized and consolidated and altered, but the only industry I see on the verge of disappearing is newspapers. In 2009, I think it will be a lot worse.

This is the test. We’re there. We shouldn’t have long to wait before we see how deep the fissure in China’s financial-political system really are. You may be completely right. I don’t think so, but then I was a lot more optimistic a few months ago. A few months from now I may be even less so.

December 24, 2008 @ 9:37 am | Comment

Anyway, we’re all in for an adventure. And as for the US – investment banking no longer exists, the car industry is dead unless it reinvents itself, the Bush gang is gone, etc. etc. This is what I call change.

I’m not saying America will have a great time and China will fall apart. America is in for a lot of pain, but it does not threaten it’s political system, geographical borders, and basic values. China is in for much more pain, and nobody knows how it would emerge from this crisis.

Anyway, if all hell breaks loose, you are all invited to come to Israel. We have great weather, enough fruits and vegetables to feed everyone, and lots of weapons to make sure no one tries anything funny while the world falls apart.

December 24, 2008 @ 9:47 am | Comment

Dror hits the nail on the head- one of China’s major stumbling blocks was that it didn’t take advantage of the boom to build a more sustainable economic structure- it glorified, lived off and ultimately became dependent on the froth. You could even argue that with the amount of investment pouring into the country no matter what they did or the level of waste and corruption, there was really no incentive to change. People stop bothering to distinguish between quantity and quality of investment, build out, etc.

But now all of the sudden quality is going to matter a lot more, as the easy money tide goes back out to sea.

The US economy might be a complete mess right now, but I agree that deep down the socio-economic underpinnings are more firm. They’ve just been overshadowed by crazy finance in the past few years and hard to see.

December 24, 2008 @ 10:27 am | Comment

Right… and who exactly built a “sustainable economy”? Nobody in the world built a “sustainable economy”. But in absence of sustainability, China as a large pile of cash to solve problems, because most Asian realize something like this would come one day.

December 24, 2008 @ 10:49 am | Comment

The Marxist rule is that political change inevitably follows economic change. We are now in the midst of a tremendous economic change. It is foreseeable that there will be another great WAR like WWII (which followed the Great Depression).

A Bible in one hand (the 1st Amendment to the US Constitution) and a gun in the other hand (the 2nd Amendment). “If you survive recruit training. If you leave MY ISLAND, you will be a MINISTER OF DEATH PRAYING FOR WAR. But until that day….”

December 24, 2008 @ 11:00 am | Comment

@ Falen: Who built a sustainable economy? I’m not even going to start comparing the social strengths of the US compared to China (it wouldn’t be fair). But, you can have a quick look around and see Japan, South Korea, Taiwan, Hong Kong, and Singapore and the social transformation they underwent during the last 60 years. All these countries now have an educated workforce, innovative companies, and a relatively free economy and social system that enables them to absorb shocks more easily. And don’t give me the line about China being so big and beyond comparrison: if it’s too big to be prosperous, they should think of a new federal system to make things more efficient (I also have some other ideas… but we don’t want to make people too angry…). Cash does not solve all the problems, and it’s funny (and tragic) that the world’s last remaining “communist” country would resort to such an arguement.

By the way, I think that the problem is deeper and goes beyond China’s current leadership. Something went wrong 150 and 500 years ago, and China never recovered from it. Mostly because it was too proud to change and accept it’s real place in the world. Japan and Korea modernized long before the Americans occupied them and forced them to change. China didn’t, and the communisit took away what little it did during its most open and creative years(1920-1949). But that’s a different story…

@PB: Thanks for summing it up so clearly. It is indeed tragic and inveitable to become addicted to this type of growth. This is exactly the reason why a free market is always better than a centrally-controlled one. Money ultimately (and largely! not absolutely) goes to the places where it is most needed in a free market. In a centrally-controlled economy, it can keep pouring into the wrong places for 30 years before anyone realises it’s wrong.

December 24, 2008 @ 11:06 am | Comment

In This Global Economic Crisis, I Strongly Recommend The Chinese Communist Party

If you like money, you will know that there are many investment funds in the world. For example, there are stock funds, mutual funds, etc etc etc. This post wants to say that from an investment perspective, I strongly recommend the Chinese Communist Party.

If you are not good in finance, let me teach you some things. First, to judge if an investment is good, there are three ways

1) comparing it to a standard, average index
2) look at its ranking among other similar investments
3) look at its short term, medium term, and long term performance.

Number 1 is very important. Usually for a stock fund, it is usually compared with the index of SP500. If it is stronger than Sp500, then it is considered a good investment.

Second, it is important to compare the stock only to other similar investments. If you compare a money market fund to a stock fund, it is stupid. Even in the best years, the best money market fund is worse than the worst stock funds.

Lastly, only a fund that performs well in short, medium, and long terms alltogether is consiered a good fund. Usually long and medium term performance is more important than short term performance.

Using these standards, it is not hard to discover that:

1) Under the leadership of CCP, China avoided civil wars or internal splitting. In the past 57 years, there was no civil war in China. This is not something every government can do. Just look at the number of internal splitting or civil wars in the past 57 years in the world.

2)The economic performance of the “Communist Party Fund” in the past 10, 5, and 1 years all exceed world average performance. So it is a fund that performs well in short, medium, and long terms.

3) The speed of reduction of China’s poor population and illiterate population (both absolute numbers and proportion to population) far exceeds world averages.

4) The speed of increase in quality of life and life expectancy of Chinese population far exceeds world averages.

5) The speed of increase in Chinese people’s degree of freedom (both nominal and effective) far exceeds world averages. Many of you may not know this, but 35 years ago, any tea house in Beijing would have a bulletin board written by the government that said “Do Not Discuss Politics”. Today, no such bulletin board is there, and people can discuss politics much more freely. And today’s ratio of political prisoners to population is only a fraction of the number in 1949.

6) The increase of China’s status and image in the world exceeds world averages. In the ten biggest world news agencies (does not include China’s xinhua news), there is a 30% increase in articles about China from 2005 to 2006. In those articles, 75% of them are overall positive about China. In fact, China is the second most frequently mentioned country in world news, only after the US. In world news agencies, positive articles about China far exceeds positive articles about America, Europe or Japan. If you look at the situation in 1949, China was very rarely mentioned in world news articles, and the mentions were 75% negative.

7) The understanding of China by world’s people. In 1949, a typical image of Chinese in world’s people’s minds was someone with a long pigtail and slant eyes and looks very weak and clownish and can be pushed around easily. In 2006, 2/3 of all Chinese depicted in movies, tv, and books were in a positive light. Very ironically, the influence of FLG in America is due to the CCP. CCP created China’s strength, and China’s strength made American people be intersted in China, FLG is only one of the thousands of points of interest about China.

Overall, the Communist Party fund exceeds the market average, and and the CCP is a legendary manager of China’s development. I believe in this manager, and I believe its future performance can be sustained and increased. So my recommendation for this fund is: BUY.

December 24, 2008 @ 11:06 am | Comment

@ Buck: I agree that with China and Russia being unstable and in need of an external enemy, the Iranians pushing ahead with their nuclear and regional ambitions, the US having lots of empty factories, and Oil prices being at such a low – it definitely looks like we’re heading for a terrible war. I hope not.

December 24, 2008 @ 11:08 am | Comment

Ok, I’m confused- isn’t China’s “big pile of cash” in foreign currency? Who controls the value of that currency? I’m not been provocative here, I just want people to elaborate a bit more on how they see China’s huge accumulation of dollar reserves as an advantage since they don’t even have control over its value courtesy of Helicopter Ben and his printing presses.

So China’s great strategy was to accumulate massive amounts of paper wealth and debt obligations by pillaging its own environment?

Alright, sorry, that was overly provocative (as most if not all other countries are in quite similar positions). But people seem to be forgetting that cash has no intrinsic value- it’s not a resource, it’s a representation of value. And in crazy economic times, representations of value can get pretty, uhh, volatile.

December 24, 2008 @ 11:09 am | Comment

@ Math: the history you described is more or less correct. This is why now is a good time to SELL. The good times are over for now. BUY in again after the fallout.

Ans again: look at what China’s neighbors have done with their time during the last 60 years. Korea started from a much worse position, Japan started from complete ruin, etc. China has come a long way, but its not something to be too proud of and definitely much less than any human being deserves.

December 24, 2008 @ 11:12 am | Comment

Only 7% of China’s land is suitable for agriculture.

Kissinger: “If you control the oil, then you control nations. If you control the food, then you control the people.”

December 24, 2008 @ 11:27 am | Comment

Obama’s mantra was/is CHANGE.

Change is a euphemism for DESTRUCTION.

Obama is SHIVA, the Destroyer of the World.

December 24, 2008 @ 11:43 am | Comment

“My name is Buck, and I came here to… Quack”

December 24, 2008 @ 11:48 am | Comment

Funny, Dror. What better place to quack than the duck house?

Bottom line: the world is FUBAR. I think the US is more FUBAR than China, others disagree and time will tell. I’ve seen and heard so many arguments over the past few months, some arguing things will be stable and on the road to to recovery by 2010, others who believe the army will be mobilized to prevent civic unrest in American cities after the FDIC runs out of cash for the defaulting banks, others who say the dollar will soar in 2009, others who say the dollar will plunge, etc. Brilliant arguments can be made for each of these arguments. China will fail. America will fail. Etc.

The main reason I see it as being easier for China than the US is this: People in the big cities have known what’s coming for the past half year or longer. They are planning their lives based on the fact that they may soon be out of work. They are hoarding cash. They have contingency plans. Most have been saving money for years. They realize there’s not much the government can do for them and are prepared for the worst. In the countryside, the daily necessities are what’s required to keep the people from turning to violence. If they have the food and necessities to survive, I don’t see violence in the cards, or at least not the vast social upheavals that lead to revolution. China has always been government-drives as opposed to private sector-driven, so implementing a huge government-driven aid program is not too impossible to imagine.

I agree with Dror that it’s time to SELL, but that’s true everywhere right now. When it comes time to BUY again, China may be at a better vantage point. But who really knows? Nobody.

December 24, 2008 @ 1:29 pm | Comment

Lets not pretend to be fortune tellers that can foresee the future, nobodys knows the fallout when all said and done, I’ll be the first one to admit I have no clue whatsoever. But one thing that I know, however this thing is gonna pan out, has nothing to do with things like “the US is a liberal democracy”, dude put down your pipe, had not been for their liberal democracy we wouldnt be in this mess. And whoever thinks that South Korea, Taiwan can have a easier way out than China because China is ruled by a communist party…..for the love of god you seirously need to have your head examined.

December 24, 2008 @ 2:15 pm | Comment

Richard, I think that your predictions are more pessimistic than you realise. If we will get to a point when Chinese people need to spend their savings in order to buy basic necessities… it wouldn’t take long until things get nasty. Also – if people need to use their savings in order to buy necessities, how do you expect them to generate growth through local consumption?

I don’t think that China’s urban dwellers will give up the good life they got used to and go back home to spend their savings while waiting for the sun to shine. Some of the middle management people losing their jobs these days used to earn 10-25k rmb per month. Many of them will have to go back to a 3-4k job. That’s a dramatic change, and I don’t expect it to go down smoothly, especially when most of them have mortgages for one or two apartments and kids to educate.

“China has always been government-driven as opposed to private sector-driven” = right, and China has always had violent erruptions every 30-50 years once it was time for the government’s (and the people’s) time to pay for their mistakes.

December 24, 2008 @ 2:21 pm | Comment

Coldblooded, I think everyone admits that no one knows. (See my last comment: “But who really knows? Nobody.”) Otherwise, I mainly agree with your point – greed knows no political boundaries, and can be found as readily among communist nations as among democracies

December 24, 2008 @ 2:25 pm | Comment

@Coldblooded3: “had not been for their liberal democracy we wouldnt be in this mess” – last time I checked residents of the US had considerably higher standards of living, eduction levels, personal freedoms, and life expectancy levels than most countries on earth, let alone China. What part of the story did you miss out?

“whoever thinks that South Korea, Taiwan can have a easier way out than China because China is ruled by a communist party…..for the love of god you seirously need to have your head examined.” – I get my head examined regularly. Talk to me in 10 years. Actually make it one.

December 24, 2008 @ 2:28 pm | Comment

Great piece and great debates. My hat off, gentlemen!

Just my two cents, from a Chinese perspective:

* Whether China is in a relatively better position than US: Hard to say. US and China are like a pair of Siamese twins and should the US growth model not be sustainable, neither would be China’s, and changing course to get out of the current mess will be equally challenging and painful for both countries. A huge cash reserve is definitely a great strength of China’s, but by the same token you can argue that the liberal democracy is a great American asset that we Chinese have a good reason to envy. It is still too early to predict, with reasonable level of certainty, which country will bounce back sooner. I am 100% neutral on that.

* Whether China will fall apart: No way, in the longer term. In the past 5000 years China has always been among the beacons of human civilization, surviving numerous rounds of trials by fire, such as civil wars, revolutions, social unrests, conquests by Moguls, Manchus and other barbarians, humiliations at the hands of colonial powers, popular fanaticism during Mao’s era, etc. But we as a nation have always managed to emerge more glorious, with its core values even enhanced and geographical borders even enlarged. Vis-a-vis other great civilizations and great empires, China has a good reason to be confident about its resilience, which I should say “hardwired” in our cultural gene.

* The real danger facing China: Complacency, which may lead to wrong, at least premature, conclusion that the Anglo-Saxon style laissez-faire capitalism is bankrupt and the Chinese model is the answer. First off, the so-called Chinese model is nothing new. It is merely a combination of Occidental corporatism and Oriental paternalism. In the aftermath of Great Depression, many people, both on the right and on the left, believed that capitalism was doomed and either Nazi Germany or Communist Soviet Union would be the answer. They were terribly wrong. It is worrisome to see that nowadays many Chinese, including those on the high, are making the same mistake. This is the real danger. I keep my fingers crossed that the current leadership shall not be swayed by such unwarranted complacency. This apart, nothing is really challenging — given its huge war chest, China can build a relatively strong social safety net within relatively brief span of time, and it is actually much easier to teach people how to consume than to teach them how to save for rainy days. Just look at the stark contrast between the Americans who were the inspiration of Max Weber’s canonical “The Protestant Ethic and Spirit of Capitalism” and today’s Americans!

Merry Christmas!

P.S.: Richard, are you taking Chinese classes at Earth Village (Di Qiu Cun)? If yes, please do ring me when next time you are here. It is just 5-minute’s walk from my office.

December 24, 2008 @ 4:10 pm | Comment

Thanks for the interesting perspective Song. From where im standing, the fact that China’s civilization is 5,000 years old does little to help. No one expects that Chinese identity will disapear or that all Chinese people will choose a different name for themselves. We (I?) are talking about the collapse of the current regine and/or disintegration of different parts of the country. To remind you, as recently as 10 years ago, there was serious debate in various publications about whether or not Guangdong will remain a part of China by the year 2,000. Guangdong!. And that’s before even mentioning the fact that there are already parts of “Chinese civilization” who are not currently part of the People’s Republic. On top of that, you know better than I do that while Chinese civilization has been around for a long time, China’s current geographical structure is quite modern. Russian civilization has been around for a good while. It didn’t help the USSR. Still, the main power behind the disintegration of the USSR was ethnic nationalism, and on that front China is not under (a serious) threat. The Party, on the other hand, is at risk. China can remain a “civilization” and even maintain its current borders while its government system changes.

On the other hand – I see China’s “5,000 years of history” as one of its main handicaps. It’s exactly this perception of history and superiority that prevented China from reacting pragmatically to world events (unlike Japan in the 1850s and Korea around 1900). The Chinese rulers thought they knew best, stuck to their old ways, and what followed was a century of humiliation and pain.

December 24, 2008 @ 4:21 pm | Comment

Obama is Shiva, if one looks at it from a higher plane.

Shiva is a psychic expression of the principle of change/destruction.

Obama stands for the principle of change/destruction.

Therefore, Obama is Shiva, whether he realizes it or not.

All of the signs are there for people to see; however, the power of denial is very strong. Denial is also a type of faith. Faith is a strong desire that something is true. Denial is a strong desire that something is not true.

December 24, 2008 @ 4:36 pm | Comment

Thanks, Buck. I see everything clearly now.

December 24, 2008 @ 4:42 pm | Comment

“Thanks, Buck. I see everything clearly now.”

Religious concepts are typically just another way of looking at the same phenomenon. In the Bible, ideas are often expressed in parables. For example, the idea of Jonah in the belly of the whale does not literally mean that Jonah was in the belly of the whale. It’s a metaphor which means that Jonah was lost/damned for turning away from God. Thus, as an agent of Change/Destruction, one could honestly say that Obama is a manifestation of Shiva.

Our systems/institutions have collapsed (Richard: “Bottom line: the world is FUBAR. I think the US is more FUBAR than China, others disagree and time will tell.”)

All the signs are there to see, if one overcomes denial.

December 24, 2008 @ 6:02 pm | Comment

Song, thanks for the wonderful contribution. Unlike Dror, I don’t believe this crisis will culminate in the collapse of the CCP, an organization for which I hold no great love. I also wonder if you might not be overly concerned about China’s “complacency.” If there indeed was an attitude of complacency this past August, when it looked like China was still soaring and could do just about anything, it’s all evaporated. Honestly, I now see mainly anxiety, not complacency, but also determination – maybe even a maturation of the gung-ho jia you spirit, as everyday citizens realize China’s eternal climb heavenward is not guaranteed and that thier country may be in for some very hard times.

I’ve spotted small but (to me) significant changes throughout Beijing. I walked into 3.3 two days ago to use the ATM in the basement and at least four young ladies besieged me, asking if I wanted a massage. Business clearly isn’t good. I called Annie’s for home delivery last night, and for the first time since 2002, the guy who’s taken my orders for ages tried to sell me a bottle of wine, insisting it would make my dinner “more enjoyable.” When I declined, he tried to sell me on dessert. Unprecedented. I spent a few hours today at the Village and watched as the workers put the finishing touches on a bunch of new stores that’ll be opening soon, right next to a number of other stores on the third floor. Only all the open stores were totally empty aside from the forlorn salesladies. Not to say no one’s spending money or enjoying life; they are doing both. But the underlying feeling is one of angst. At a cocktail party with numerous expats we all know a few nights ago, there was only one topic of discussion. Everywhere, only one topic. Everyone’s wondering what the situation means for them.

Didn’t mean to ramble into an stream-of-consciousness essay. My entire point was that i see more fear and stress than complacency.

My language school is near the Dongzhimen subway station – they have good teachers and it’s a stone’s throw from where I live. I don’t think it’s near your office, but that doesn’t have to stop us from getting together. Thanks again for visiting and for commenting.

A special word to Buck – please take a good look at your contribution to this thread and ask yourself whether you believe you’ve enriched the conversation or detracted from it. Thanks.

December 24, 2008 @ 6:08 pm | Comment

thanks Buck – send me an email to discuss

December 24, 2008 @ 6:46 pm | Comment

Thanks, Richard. I never predicted that the CCP will collapse. My only point is that China is much more fragile than most people realize. And on that we all agree. It’s been good fun…

December 24, 2008 @ 6:54 pm | Comment

moving my discussion with Buck to email….

December 24, 2008 @ 6:58 pm | Comment

Thanks Dror. And I didn’t mean to put words in your mouth. I think we’re not too far off one another’s wavelength.

December 24, 2008 @ 6:59 pm | Comment


I do tend to see everything based on their symbolism, and also tend to interpret things in a way that would seem to most people in a very obscure way.

People are just not really there, they see things in an almost uni-dimensional reality, with black and white glasses. Sleepers everywhere. Once you reach a certain level of complexity and abstraction in thoughts and speech while discussing with them, you end up being graced with confused empty eyes,labeled as a lunatic or dismissed while the mass praise itself in their common and easy view of the world and the events that shape it.

Tell somebody something old and he will praise you, tell someone something new and he will hate you.

“US and China are like a pair of Siamese twins…”

I’m sorry to say this Song, but this is a very naive view. There is not such thing as a Siamese twins relationship (another out of this world mantra currently) . The US are USING China and they’ve been doing it since day one of the opening, they are just repeating the same thing other countries did decades ago, pillaging the country and using all of its resources for their own benefits. The US don’t give a damn shit about China and its future, and they probably hope the country will crumble upon itself. As I said before, one theory is that this whole circus, the economic crisis, is a very elaborated scheme to slow down the development of China. Put into a different context and for the believers of wacko theories, it might pave the way to the upcoming worldwide government. The jury is still out on this one.

The world is not a nice place, China is a competitor, not an enemy (yet) but a very strong competitor.

“In the past 5000 years China has always been among the beacons of human civilization”

China has been stuck in an eternal cycle of rises and declines, since the beginning of times. And sadly, it seems it’s not about to end soon according to the latest signs.

December 25, 2008 @ 2:25 am | Comment

Counter article 😉

China growth myth

December 25, 2008 @ 3:50 am | Comment


The old… Bla bla rainbow picture… And then the boring: Woops… We were wrong approach.

I’m telling you, it’s becoming ridiculous. Sometimes I wish my first language was English, I think I could reach people more and be taken seriously.

Well, I guess I’m doomed to post comments in the quackers section and being dismissed while the world goes down the drain.

December 25, 2008 @ 3:55 am | Comment

Until it’s on the front pages…

December 25, 2008 @ 4:01 am | Comment

Ecodelta, I saw that article. Like I said, we can come up with so many articles by prominent experts arguing each side persuasively. Take a look at this piece I posted 5 years ago, by Harvard-educated China hand (who hates the CCP with a passion) – he was pretty much wrong on all counts. At least thus far. It will be very hard to say who was right or wrong in this debate, because it will depend on what you point to and when. As with America, what seemed inconceivable a year ago (the demolition of US investment banks, to name just one) is now not so surprising.

December 25, 2008 @ 11:29 am | Comment

Hi Richard!

Thank you for the sharing. Indeed I can feel the stress on the street, as attested by empty stores and salespeople who all of sudden turned over welcoming. I myself have cut my spending considerably, and most of my interns, graduating students from a couple of the nation’s top-notch colleges, haven’t secured a job offer yet. A former colleague called me yesterday asking whether he could go back to work here because his company just went under. Indeed, you are right that there’s not much complacency left. But still, Chinese leadership’s deriving the wrong lessons from the current crisis and changing the course of reform and opening, along with and as a manifestation of the escalating populist and nationalistic sentiments of the general public, is still a clear and present danger.

I am trying to find a copy of Capitalism with Chinese Characteristics: Entrepreneurship and the State, by Prof. Yasheng Huang of MIT, because based on what I have read on the The Economist book review, it seems that Prof. Huang makes a very intelligent argument on the inherent flaws of China’s economic growth model. Do you happen to have a copy? Sadly that every one is talking about such trash as Currency War, which is just a poorly-written copycat of those anti-Semitic pamphlets and other conspiracy theories.

I will let you know when next time I visit CBD 🙂

Dror, as to whether the situation is so dire that it could lead to a “regime change”, I really cannot fathom nor am in a position to comment. I do admit, however, that the popularity, even legitimacy of the current political system is by and large based on the leadership’s ability to deliver continuous economic growth and increasing living standard for the majority of the population. Once such ability is severely undermined and/or doubted, we have a good reason to speculate something nasty, given that we as a nation have yet to learn to deal with thorny issues in a civil manner. We will see how successfully the government’s stimulus plan could help the Class of 2009 find jobs next summer.

To use history as a reference for the future is always a dangerous thing, as you so correctly pointed out, and as we have seen what happened to those financial rocket scientists’ models during this crisis. History is not a hard science and its usefulness in predicting the future is more a myth than reality. But still, call it my wishful thinking, I do believe that China’s ability to survive and thrive numerous rounds of rise and fall in the past could tell something about its resilience.

Hi Bao, by Siamese twin I am not implying anything intimate between China and US, it is just a matter of fact: in the past decade or two, China and US have been like a pair of Energizer bunnies, with China producing, producing, producing, lending, lending, lending, and US buying, buying buying, borrowing, borrowing, borrowing. The imbalance of both countries are indeed two sides of one coin, and therefore, in order to solve that, some form of collaboration between the two countries is desirable.

We individuals can enter into something noble called friendship, but between nations there is always self interests. I grew up in a time when Soviet Union was China’s Nemesis No. 1 and US was an ally. I can still recall all those Soviet-bashing propaganda on the media. Same thing is happening now, just with Russia an ally and US an enemy. For me this change is as surreal as George Orwell’s 1984, but it is a legitimate human enterprise called politics (or should I say realpolitik).

Please do excuse me, Gentlemen! Have to get back to my work. Wishing you all a very merry holiday!

December 25, 2008 @ 12:18 pm | Comment

Song, I don’t have a copy but am asking around. Running to lunch, but want to thank you again for the excellent comments. And I do agree with you about the CCP’s staying power. Until someone can answer the most obvious question – what entity can fill the void if the CCP falls from power – I have no choice but to agree reluctantly that they’re not going anywhere anytime soon.

December 25, 2008 @ 12:38 pm | Comment

Richard – the fact that no apparent entity is available to fill the gap does not guarantee the survival of the CCP (or any other government, for that matter). Plenty of regimes collapsed over the past 20 years, and most of them had no viable alternatives until they ceased to exist. Also, rememebr that there are different factions within the CCP, and various other power groups that meddle around it (and behind it), and once the leading faction is weakened, various other forces are revealed and come to the forefront.

Still, I definitely agree that the chances of the CCP collapsing completely are very low – but they are definitely on the rise. A lot of it depends on the party itself and on its ability to change and react to world affairs.

Finally, I would like to note that while it was a great dicussion (thanks everyone), I think we forgot to mention the main point: A centrally-managed economy is not viable over the long term and cannot compete with more open economic models in bringing prosperity and peace to its people. And I am not talking only about deregulating the market, but about a wholistic model that includes personal freedoms, human rights, and a largely-private economy (with varying degrees of regulation). Whether or not China learns this lesson today or in 5,10,15 years (or never) is only a formality.

December 25, 2008 @ 3:10 pm | Comment

As I said Dror, we aren’t too far apart. Some slight differences.

Richard – the fact that no apparent entity is available to fill the gap does not guarantee the survival of the CCP

No, but it makes it less likely. At least in Russia there was a Boris Yeltsin standing by waiting. In China, it’s hard to impossible to imagine what the new government would look like. There’s no revolutionary army and its team of leaders as in the 1930s (at least not yet). If it’s one faction of the CCP replacing another, that’s not quite a replacement of the CCP. More like what Deng did to the Gang of Four. That, too, is hard to imagine – for now. The situation has to really hit rock bottom for any of these scenarios to occur. So yes, the odds for a downfall may be on the rise, but I see them now at about 3 out of 10 as opposed to a year ago, when they were zero out of 10.

The last point about a centrally managed government…. Any such system is inherently corrupt and awful. It runs on repression, brute force and propaganda. But China has emerged as a rather bizarre anomaly, getting away with this system while winning the encouragement of many if not most of its citizens, who actually believe the party;s economic system has brought them “peace and prosperity.” That was certainly true when the engine was roaring. Now may be the moment of truth, when finally everyone realizes it can’t go on forever this way. Yet some economists have actually said (up until this year, anyway) there was no reason why this system couldn’t continue on in perpetuity, continuing its oppression and corruption and abuse of human rights and freedom as long as the people had enough to eat and a feeling of hope for the future. The crisis pulls the rug out from under that theory. What happens in the coming year will determine whether the party will sink or swim. My personal bet: they’ll swim, a lot more slowly and choking now and then. Sometimes it may even look like the dead man’s float. But the party will survive, for better or worse. I may be singing a very different tune in just a few months, but that’s how it looks to me and to Foreign Affairs.

December 25, 2008 @ 4:22 pm | Comment

Thanks, Richard. 3 out of 10 is a lot 🙂
Even while the engine was roaring, I think it was quite clear to anyone who visits different parts of China regularly and talks to people that the model is simply not viable.

Most economists and commentators look at GDP growth, FDI, and housing sales. This type of superficial data is especially misleading when it comes to China. Averages mean nothing in a country in which a “middle-class” (not a billionaire) man can own 40 apartments while his neighbor cannot afford to buy half a kilo of washing powder.

December 25, 2008 @ 5:00 pm | Comment

Yes. China is a total anomaly. It never ceases to amaze me, the Jaguars and Porsches alongside the old lady on the bicycle lugging a mountain of cardboard waste and empty plastic water bottles. The divide between them has been China’s hugest challenge since the Deng days, and now it threatens to explode. Do we pray for the CCP to find a solution and hold things together, or for a revolution to throw them out? Tough choice. Ultimately the Chinese people will be the ones to decide. Right now they still seem to think the government will keep them safe enough. It’ill be fascinating to see how this unfolds. With Obama about to come into power and the fate of the world seeming to dangle in the balance, I have to say there’s never been a more fascinating, or terrifying, time in modern history. (No, I’m not saying Obama is terrifying – just the state of the world he’s about to inherit.)

December 25, 2008 @ 5:27 pm | Comment

Yes. These are interesting times, and we’re in the right place.

December 25, 2008 @ 6:14 pm | Comment

Some thoughts

“Plenty of regimes collapsed over the past 20 years, and most of them had no viable alternatives until they ceased to exist.”
It is usually a good strategy to have a competent/capable opposition, both in democratic or authoritarian regimes. In case of a power alternation/collapse better to have competent people running the show. On the contrary, things can get much worst.
But the lack of an alternative does no necessarily prevent a (catastrophic?) change/collapse of power

“in which a “middle-class” (not a billionaire) man can own 40 apartments while his neighbor cannot afford to buy half a kilo of washing powder.”
Is maintaining that situation in the best interest of the CCP? To have a mass of impoverished easily manipulable people. They can be used to held hostage a thin layer of a really middle upper class, while at the same time providing this lower class with slow incremental improvements to keep them hopeful. Just enough improvements to perpetuate the political system.
A Machiavelic strategy!

Going in the opposite, less dark direction. Is the recent approach between TW and CH an indication of a plan to have eventually a bipartisan political system in CH? CCP and KMT?

“China is a total anomaly.”
And anomalies are sooner or later deal with in the real world. Just look to what happened with the financial sector! 😉

About China Crisis. It is so easy to predict a collapse of CH like a collapse in Wall Street. Collapses do eventually happen, but always at the most unexpected time. If they were not so unexpected, not so many people would be caught unaware by them! And that applies to investors, CH experts and… even the CCP 😉

December 25, 2008 @ 6:21 pm | Comment

Is maintaining that situation in the best interest of the CCP? To have a mass of impoverished easily manipulable people. They can be used to held hostage a thin layer of a really middle upper class, while at the same time providing this lower class with slow incremental improvements to keep them hopeful.

I don’t see it that way. It’s the dirt-poor who might be most inclined to rebel. The middle class has had plenty of warning, and things are still okay here – they are saving like mad, prepared for the worst. It’s the poor villagers who depend on money sent from their relatives working at factories in the industrial centers who are in danger of truly being driven to desperation. Yes, the middle classes will be disappointed, but not to the point of taking up arms. I think the big worry is HOW the government will provide the ” slow incremental improvements” that will pacify those hundreds of millions. That’s an awful lot of welfare.

December 25, 2008 @ 10:15 pm | Comment

…Richard, throughout Chinese history, rebellions rose and fell based on the will of the rich merchants, landowners, and industrialists. Even Mao was a rich farmer. He was not hungry and his family had more than enough.

Still, I don’t think the party would like to keep most of the country poor, it only wants to keep them ignorant. In my book, these two go hand in hand. They CCP still think they can have one (economic development) without the other (education, basic freedoms). We’ll see how it goes.

December 26, 2008 @ 8:00 am | Comment

Mao was relatively rich, but I wouldn’t say his revolution was driven by the middle classes.

They definitely want the people to be ignorant. Keeping them poor is important, too – after all, China’s growth was built on the back of dirt-cheap labor. Also important is keeping them fed and allowing enough hope to keep them going.

December 26, 2008 @ 9:20 am | Comment

Mao was relatively rich, but in any case he was not the one to bring down the Qing dynasty or any other government for that matter. He was a crafty politician who took advantage of the chaos in China and manipulated the various powers to his advantage. The Qing were brought down by rich merchants and landowners, and so were most other dynasties. So… who will play Yuan Shikai to Hu Jintao’s Dowger Cixi?


December 26, 2008 @ 10:28 am | Comment

Yes. My only point was that it’s the poor who are most likely to call for revolution, not the landed gentry or the middle classes.

December 26, 2008 @ 11:28 am | Comment

the US is a liberal democracy held together by common values and beliefs.

The only thing that holds the U.S together is money. Much of which, it turns out, didn’t really exist.

Other than that, nothing keeps the American people from tearing each other apart (as if they don’t already) except the fact that 70% of them are in such poor health they’d probably get a heart attack in the process.

December 26, 2008 @ 2:58 pm | Comment

The sky is falling down! The sky is falling down!

December 26, 2008 @ 7:30 pm | Comment

A Bian, that is correct. To start, Citigroup, AIG, Lehmann Bros, Bear Stearn, Merrill Lynch – all either badly hurt or even wiped out. Trillions of dollars in debt. Massive unemployment on the horizon, worst US retail holiday season in generations meaning more and more factories in China will have to close, and now we see the chain reaction spiralling out of control – well, how do you define at what point the sky is falling? Nearly everyone, including Paulson and Bush and Obama and, well, everybody, will tell you the sky is falling right now and no one who isnt sitting on a pile of cash is safe. Most of my friends have lost between 30 and 50 percent of their retirement savings. The philanthropies that counted on the wealthy, the maids of the bankers on Wall Street who send money to their grandparents in the Dominican Republic, everyone up and down the food chain, all are at risk, and those who haven’t saved cash may face either welfare or starvation – not long from now, but very, very soon. Are you aware we are witnessing the worst financial crisis, by a long shot, since the Great Depression? Or maybe you were joking? That must be it, you were just kidding.

December 26, 2008 @ 7:53 pm | Comment

Is the sky falling that hard? Bloated investment banks needed to get hit hard- they had taken over too much of the economy. Sure the pain is bad now, but it is for the better long term. Finance comes back down to earth, and a semblance of sanity returns to economic activity and expectations in the States (ie maybe I shouldn’t borrow against my hugely inflated home value that could never possibly go down because nothing ever goes down ever). I think these are good things.

December 26, 2008 @ 11:01 pm | Comment

PB, Detroit was right on the brink of extinction, a large percentage of the Chinese factories are shut, retail prices plummeted, the Euro is a basket case, etc., etc. – again, I guess it depends on what constitutes a falling sky. When I see a huge industry like investment banking torn apart and all the losses that come in its week, including guaranteed debt for generations, along with the rest of the world’s current calamities – unemployment, malaise, bankruptcies and the entire global balance of power threatened – well, if that’s not a falling sky, what is? Sure it could be worse, I guess, but this is pretty serious stuff.

December 27, 2008 @ 1:27 am | Comment

“The only solution everywhere right now is cash. Money talks here like nothing else.”

I think what we are witnessing is actually the exact opposite, this crisis is currently exposing in crude terms the absurdity of Cash and it’s virtual value.

Right now the world is being given a lesson about how volatile the cash concept is, thanks to Wall Street.

This is nothing new in an economic crisis, explaining why people usually rush to buy gold and other basic commodities.

Because in the context of a major crisis, what matters is resources
, tangible and real commodities. Money is rendered worthless.

Resource based economy. Think about this concept. It’s today’s homework (it was introduced in the overview previously, but now is the time to think about it more seriously, a key concept for what will emerge from all this later on).

December 27, 2008 @ 4:31 am | Comment

“The only solution everywhere right now is cash. Money talks here like nothing else.”

I forgot to add:

What we see right now is not a solution, at all. Where are the results? Any idea where the cash has been spent so far? Does the recent bailout seem to have any effect on stopping the major worldwide crash yet?

The cash injection right now is the equivalent of the action of pulling the plug on a terminally ill patient. Pull the plug mom, he’s gone, let’s collect the insurance now and move on.

December 27, 2008 @ 4:35 am | Comment

“if that’s not a falling sky, what is?” – Wait 6 months and you’ll see.

I don’t think the sky is falling, at least not in America. What is happening now shows how strong and efficient the capitalist system can be. Industries and methods that are not viable die a quick and painful death, but the economy regains it’s balance (after a long series of palpitations) and emerges stronger. Has China, in its current form, the ability to change so quickly and endure such pain? I think not.

December 27, 2008 @ 8:16 am | Comment

Bao makes a crucial point that I’ve tried to raise before on here- the value of cash is VIRTUAL, and all the more so in a fiat money system. It doesn’t emerge unscathed from economic troubles. At the heart of it, if no one will trade you actual physical goods for your cash, then it is worthless. Although I guess you could burn large amounts of it for heat if need be. 🙂

The flight to gold is also curious to me- how is gold anymore of a real store of value than cash? Can you eat it? Burn it? What does it do besides shine? Not much. It’s as virtual a store of value as cash, really.

I know this is delving into the philosophy of economics/finance rather deeply, as most people around the world still recognize/accept the stated value of currency as a method of exchange. But I think the point is that having a big pile of “cash” doesn’t guarantee anything- what if you don’t have any resources and no one will sell you any? Push comes to shove, it’s a bunch of paper or numbers on a computer.

But I think things will get a lot more interesting from here on, and not necessary for the worse: as Bao alludes to, the whole value construct of cash is going to get tethered back to physical, resource and environmental realities. The whole problem with a hyper-financialized economy is that the ‘value’ of cash/money becomes detached from real-world limitations. Money and cash are virtual and our inventions, so we can increase/decrease the supply to infinity if we choose.

Resources and environmental capacity are not infinite, however. So we’ve got a representation of value (money) that can be grown infinitely which allows us to claim from a pool of finite physical resources. Oops, something wrong there. Perhaps this financial mess will start the process where representations of value like cash will become more linked to physical realities again. That is why I think we’ll see an explosion in creativity in environmental economics to start joining the concepts of wealth creation and sustainability. Both the US and China can definitely benefit from that!

December 27, 2008 @ 8:50 am | Comment

PB/Bao – I’m with you on the Cash issue. It’s part of what I have been trying to say. America still has a hoard of educated people, patents, the world’s best universities, various resources, a variety of functional and crucial social institutions, and the “American way of doing things” which will put it back on its feet again shortly (its still on its feet even now).

China, on the other hand, has a pile of cash that can do very little to help it at this point in time.

December 27, 2008 @ 10:51 am | Comment

“I think what we are witnessing is actually the exact opposite, this crisis is currently exposing in crude terms the absurdity of Cash and it’s virtual value.”

If you haven’t seen it already, I thoroughly recommend Niall Ferguson’s six-part documentary ‘The Ascent of Money’, which looks at the world’s financial history and the rise of globalisation.

One of the lessons seems to be that we seem incapable of learning from past financial crises. And history has some whoppers.

December 27, 2008 @ 10:53 am | Comment

Over the last 10 years many of America’s best and brightest stopped going into the sciences and other once-respected professions and instead went into finance. That was the only way to get spectacularly rich almost overnight. It was also many of America’s best who helped get us into this nightmare. If we are so brilliant and so clever and have such great resources, how did we end up so completely fucked? Maybe these geniuses will now suddenly get smart and dig us out of our own hole – that’s why Obama won – but I’m not placing any bets yet.

The bailout money went to the banks to stop their immediate bleeding and is not being circulated by them. This is one of the biggest headaches for those managing the bailout – how to get the banks to open up and extend credit. None will do so right now in such a risky environment. This is no longer being called a housing crisis, but a credit crunch because no one is extending credit, the oil that lubricates the country’s financial engine. I don’t know the answer, but the first step is definitely to get the money into the banks, and the next step is to pump it into the system. We aren’t getting to step 2 fast enough, and that may be seen by historians as a key factor in the collapse. Loans are now almost impossible to come by. Those who don’t need them – those with cash – can do business and at least attempt to grow. Those without it, like most small business, which factor a certain degree of debt for expansion into their books, are in serious trouble. They are actually being called on their loans. So the concentric circles of despair widen and intensify.

All that matters in the days ahead is cash, not just for the resuscitation of the economy, but also in terms of personal survival. If you have it, you will not be too seriously affected by the crisis – there will be plenty of bargains and if you have so much cash you don’t need to work, or enough to flee the country if necessary, you’ll be fine. The flight to gold and other precious metals always occurs at a time like this, of insecurity. While you can’t usually walk into a store and buy things with it, you can always sell if for currency when needed. This is a new phenomenon in America, pawning gold and jewelry for cash. It’s especially attractive at the time of a falling dollar, and the dollar’s decline hasn’t started yet. I’m not recommending you buy it, as the metals market is still highly volatile and speculative, but this is the answer to PB’s question. Those who had the prescience to see this coming a couple of years ago and switched over to gold are rich today. Gold has been battered in the past 8 months like everything else, but is still way up over the past 5 years and is edging higher right now. If you want to see something fascinating, check out the price for physical gold on ebay, and then check the price of paper gold on the stock market (NYSE: GLD). This is a shocker, and here is an article that explains how market manipulators keep the price of paper gold depressed, and why this can’t last much longer.

Anyway, back to the central point: We all know the massive, impossible problems China has, and America’s historical ability to overcome crises and move ahead and lead the world. The only problem is, we are not the same country we were even 20 years ago. We have gone from a producer of goods to a provider of services (something that started 40 years ago), where many of our best minds were taught not to solve actual problems but to create wealth out of nothing. Encouraged by the incredibly aggressive credit card industry (also a product of our best and brightest and part of the whole system that brought us down) we became a nation of spenders, and worse, of indebted spenders. Deeply indebted. China won’t rise up now and replace America – it has far too many of its own crises to handle. But America has fallen downward, raising China’s profile on the world stage. They now can wield influence where once only America held all the cards. They can lend. They can invest. Their system is rotten, stuck together with glue and rubber bands, and logically it should have crumbled 10 years ago. But it lasted this long and it seems likely to me that they’ll hold out longer, with a lot misery and maybe even some blood along the way, but still with enough of an advantage to ultimately improve its status as a world influencer while America’s influence wanes. You can disagree all you want, as I’ve said, but China seems to defy logic, through its own ruthlessness and cash reserves. Don’t forget, we are right now engaged in an escalating war in Afghanistan and are still spending billions every day in Iraq. India and Pakistan appear ready for war, which could make the price of oil soar yet again. America is uniquely vulnerable because of its debtor status, absurd commitments to nation-building and overall lack of options. Let’s sit back and watch the show unfold.

December 27, 2008 @ 12:38 pm | Comment

To make a crude point Richard, if you had to go pure survivalist would you want a pile of gold anymore than you’d want a pile of cash? I think we are arguing on different levels here- I fully understand the rationale for gold investing within the financial system. But, in real physical terms, if all it can do is get paper currency in exchange then its not an essential store of value like oil, water, wood, food, etc. Really, gold is just the precursor of modern cash- some object we pick to represent value (I mean it could be sea shells or peanut shells!).

Anyways, sorry for getting all off track here, don’t want to turn this into a financial blog. 🙂

Richard, I still think you are giving the US an overly rough ride. Sure, Wall Street went bonkers and blew up the economy. But, even with all the nonsense of the Bush administration and its lunatic anti-environmentalism, can you guess which country has clearly emerged in recent years as the leader in Solar PV and Smart Grid tech innovation? Silicon Valley is switching full gear towards these and other cleantech sectors, and right when Obama shows up too. US wind power capacity has also exploded in the past few years. The great thing about this is the development of technologies and know-how that China et al. can benefit from it as well- The US can ask for its debts to be written off in exchange for clean technology transfer! If I were China, I’d agree- imagine, you are getting ACTUAL tangible value as opposed to worthless pieces of paper. Just a crazy idea, but it could work.

December 27, 2008 @ 1:40 pm | Comment

Yes, there is a lot to say for America. But did you read Michael Malone’s piece last week in the WSJ about how those Silicon Valley innovators are being for all intents and purposes wiped out by the lack of venture capital? Without money, these things are threatened.

About the US getting its debts erased for technology – well, I guess anything is possible, but it’s awfully dreamy. Replacement of the oil economy will take decades. Innovation can’t have much immediate effect on the immediate crisis. And honestly, I don’t have any answers – it’s like the US has been gutted, at least in the short term. Whatever the answer is, technological innovation will only be one aspect of it.

Have we exhausted this topic yet?

December 27, 2008 @ 1:59 pm | Comment

Richard – you missed my point. Any country can make mistakes, and America has made plenty over the past 20 years. The difference between China and America is (a) America’s ability to suffer the consequences of its mistakes without any substantial threat to its political system, geographic structure, and general way of life; and (b) America’s ability to look these problems in the eyes and change quickly (and painfully).

Yes, America got a fucked. So what? Remember that we are talking about the viability of economic and political models over long periods of time. It’s easy (and depressing) to look at America today and complain… you seem to be enjoying it… so… enjoy it while it lasts! 🙂

December 27, 2008 @ 4:14 pm | Comment


“If we are so brilliant and so clever and have such great resources, how did we end up so completely fucked?”

Because some brilliant people made these choices, very consciously and carefully planned.

I do think that 99% of the conspiracy theories and other extravaganza are false, or pure delusions.

But in my opinion, there is still that 1% that remains. And this 1% is probably having a big influence in our world. Much bigger than what we are ready to accept.

I see conspiracy theories as one simple thing: A conspiracy theory, consist basically to reverse-engineer a sequence of events leading to a given objective, be it political, social, financially driven, etc.

If we can reverse-engineer almost anything that was man made, why is it socially non acceptable to do the same with political systems, social mechanism, financial mechanism?

If the people that do so, can come with such elaborated theories, then what would prevent the most brilliant minds of the planet to create such scenarios as well?

I’m just not buying this, it would be like saying that the leaders and the top economists of the world are stupider than some part-time obscure investigative journalists?


“One of the lessons seems to be that we seem incapable of learning from past financial crises.”

Unless you see this under a different light, and understand that those are actual well known and mastered mechanisms, used to reshape / direct the economy at specific times of our evolution.

December 27, 2008 @ 4:27 pm | Comment

Dror, I’m not enjoying it, but maybe there’s some schadenfreude because I said two years ago we were headed in this direction because of the housing bubble, and here we are. And I am not complaining; to me, this is just a matter of fact – we over-extended ourselves in every way and now it’s time to pay the price. I sincerely hope Obama and his team and that “good old American know-how” and “can-do attitude” can put things right. But it seems this problem is simply too big. We hypothesize a lot about how China could collapse, and that’s a fair conversation. But imagine if banks go under and the FDIC can’t handle the claims. That is not out of the question. We’ll know soon enough; the next wave of foreclosures will take place in April of 2009 and will be yet another jolt to the US banking system and, thanks to collateralized debt obligations, to the global economy. America of course is built upon a far more stable foundation than China and will survive. But we could see some very painful times ahead, with much more at stake than many of us are willing to admit.

No, I am not enjoying it at all. My brother-in-law just lost his job and my sister had to give up plans to send my niece to the school of her choice; it’ll have to be a nearby state college. Those are tiny examples, but I think just about every American knows someone with similar problems, if they aren’t experiencing them themselves. I am not enjoying the drop in business for the companies where my Chinese friends work. It is agonizing to think these people are losing their jobs. I might be “enjoying” the argument in here because it’s a good challenge to the brain cells, but I am not in any way enjoying the catastrophe. It is hitting close to home and I think it’s just starting. All of us will be affected.

December 27, 2008 @ 5:12 pm | Comment

It’s definitely going to be a bad year!
The important thing is that we’re healthy. This too shall pass.

December 27, 2008 @ 6:04 pm | Comment

It would be a great irony, after so much talk, that US collapses instead of CH. 😉

What I believe. The crisis will not be so long as some fear, but it will be very deep.

Time for a new deal and big infrastructure investement to get out of it? Maybe, but this time it will have to be a new deal and infrastructure investment at a global scale!
And I include also knowledge infrastruture not only physical stuff .

In the meantime, besides indexed funds, I have some gold investements too 😉

December 27, 2008 @ 6:46 pm | Comment

Just something more.

In a world of collapsing comsuption the only way out of massive un/under-employment in CH are massive infrastructure projects. But CH is not big enough to cope with all those new-grads searching for jobs.

It is time for global scale actions,… and maybe even beyond. Intense cooperation will be needed between main powers.

December 27, 2008 @ 6:52 pm | Comment

Ecodelta, hopefully neither will collapse. About the unemployment – yes, that’s a headache I wouldn’t wish on my worst enemy. Infrastructure projects, more meaningless jobs and a lot of welfare are probably the only ways out. As I wrote in an earlier post, at least the graduates re fully aware of this, and many are resigned to living at home and hot getting a job anytime soon. As long as you contain people’s expectations, that’s half the battle.

December 27, 2008 @ 8:02 pm | Comment

Oops seems that I missed the most interesting parts of the debate. Hope this message will find you all sound and well!

As I am re-reading Stefan Zweig’s Die Welt von Gestern, I am stricken by optimism, innocence and naivety of the European intellectuals at the wake of WWI. See the parallel here? I was a die-hard disciple of Tom Friedman and his revered World-Is-Flat-ism, just as Stefan Zweig and his peers were die-hard optimists.Now it is the time for me to have a second opinion.

Obviously as far as I can fathom, a WWIII is still a possibility too remote, but we have to bear in our mind that it is not FDR and his New Deals that pulled world out of the Great Depression, but the WWII.As we are quacking here, guys in Tehran or Pyongyang or other such lovely exotic locales are building nuclear arsenals in earnest and both India and Pakistan are mobilizing their troops along the border. Next summer over 6 million college students are graduating in this country and perhaps 20% or 30% or more of them will join the jobless right away. I won’t be shocked if some of those hormone-charged young men and women would like a little bit Molotov cocktails for the commencement ceremony.

The bright side of such doomsday scenario is that, should it be the case, we won’t have to worry any more about whether we have the gift or beauty to be a Cassandra, but stay focused on some more relevant issues like how we can manage not to die a premature death in a trench or a concentration camp.

In his books Zweig talks about an anecdote that just right before the war he was in Belgium, then a neutral state, when his Belgian friends were worried about a possible German invasion. He assured them that such thing would never happen and even joked that should such thing happen they could hang him on a light post. And the rest is the history.

Just a disclaimer: should something nasty like a WWIII happen tonight or tomorrow, please don’t hang me!

December 27, 2008 @ 9:26 pm | Comment

“I am stricken by optimism, innocence and naivety of the European intellectuals at the wake of WWI.”

Very interesting point Song, this is exactly how I feel when I hear many people speak out their take on what’s happening right now. The inability for some people to understand and get out of their comfort zone, is astonishing. I would say that most of our societies do not encourage such behavior anyways, so it’s not that surprising in reality.

If indeed this cycle is to repeat itself, then war is definitively not out of the equation and is probably the only possible continuation of this painful process.

Is there a way to stop all this? I don’t think so and it’s probably too late. Is it needed somehow, for the sake of humanity’s survival on the long term? Is it all part of an overly and unbelievably complex plan?

Maybe, who knows…

December 28, 2008 @ 12:19 am | Comment

It’s such a different world today. True enough, it was WWII that made America the most powerful country in the world, with just about every other power in shambles and America all but untouched and brimming with wealth and resources. But now, with all parties having nukes… Can a similar scenario actually happen in such a transformed world?

Agree with what you say about people being in their comfort zones. Totally human nature. It will take something really dramatic to shake them out of it. That’s still ahead.

December 28, 2008 @ 1:19 am | Comment

The nuclear bomb is not the ultimate weapon. Although it’s a very powerful one, but nowadays, it’s probably the equivalent of the gun powder when it was discovered, a very brutal and uncontrolled force. I’m pretty sure there is something else around the corner. And I also think that this is exactly why the US and Bush have been so hurried in making sure the nuclear shield project is being deployed around the world. The latest news say one thing: It is functional and operational now.

Making sure that the nuclear threat is rendered worthless, giving back the advantage to the surprise the US probably holds now.

Quiz Question: Who’s not part of NATO?

And no, it’s not for Iran or North Korea. What a joke, but how convenient for them. The masquerade goes on… These states are decoys, but their symbolism and political ties points to two bigger nations, I’ll let you all guess which one they are.

Do you know Richard why I believe in some conspiracy theories? Because it’s my last hope in humanity, the last hope to believe that we are not stupid enough to auto-destruct ourselves in some stupid territorial or ideological war and that some people somehow and somewhere, are aware that something on a larger scheme needs to be accomplished to save the human race. These global NWO plans, or whatever they are, might be a better solution than to let our civilization crumble upon itself. If that’s the case, then there is a high possibility that most of us, including me, won’t be there later on to debate about it, but at least humankind will still be there.

The earth is not endangered, cool, warm, or whatever, the show will go on, the earth will prevail. What is at stake right now, is the future of the human race.

This is the true debate.

The jury is still out on this one, are we heading for some stupid and repetitive large scale psychotic so much too typically human behaviors, or are we heading toward some long term solutions?

I just don’t know. But something is bound to happen.

December 28, 2008 @ 1:45 am | Comment

“NATO is closely watching China’s military expansion, with an attitude of rising concern and wariness. Led by the United States, NATO members are starting to view China as a possible emerging common adversary.”

This is a hint. Now think about what has been rolling out this year.

And I’ll take the occasion to introduce a new character to the play: Ariel Cohen

December 28, 2008 @ 2:05 am | Comment

Fascinating and very insightful documentary, thanks a lot for sharing this Stuart.

Sorry for the spam of 3 posts in a row, but I think it’s worthwhile to emphasize this documentary for others to watch.

This is the first link, click on the right side on More From: MoOnL1ght123 to get all the other parts.

December 28, 2008 @ 2:48 am | Comment


But imagine if banks go under and the FDIC can’t handle the claims

FDIC only has a limited amount of reserves, but it is backed by the US treasury and unlimited financial resources (because it can print money) of the US govt. So it will always be able to pay its claims.

The current crisis is fundamentally about a lack of demand (people don’t have enough money to buy goods). But the world has a surplus of productive capacity. It has the same number of factories and educated laborers as it had last year.

China currently has way too little demand to satisfy its productive capacity (trade surplus), while America had the reverse problem until last year (trade deficit). The massive dollar reserves of China is a side effect of that. If the US wanted to reduces those and balance its trade account, it could simply impose a tariff, or use the scheme Buffett suggested a few years ago. (

A scheme like the above will automatically stop the buildup of reserves in China, and balance the trade deficit. It will also encourage China not to try to manipulate the dollar-yuan rate, because it will be counter productive. In this environment the bulk of the adjustment due to the credit crisis will fall on China (fairly I might add), because China has a huge shortfall of demand compared to its productive capacity. It will encourage the Chinese govt to do more to expand demand domestically. It would be less painful for the US because it had too much demand compared to productive capacity in the last few years. With shrinking demand, and some factories moving back to the US (increasing its productive capacity) the US would be able to recover with a balanced trade account.

December 28, 2008 @ 7:45 am | Comment

If the FDIC’s reserves are wiped out and it has to print money (which is what I meant when I said they wouldn’t be able to handle the claims), that’s yet another catastrophe. Money will hardly be worth the paper it’s printed on. There would be hyperinflation in the Weimar Germany tradition. We may be heading that way anyway; an FDIC in effect turned into a printing press will make it a guarantee.

The current crisis is fundamentally about a lack of demand (people don’t have enough money to buy goods).

No, that’s just one aspect of the crisis. Lehmann Brothers didn’t go down because people don’t have enough money to buy things, nor did Bear Sterns. The crisis is a combination of unspeakably greedy and reckless behavior on the part of the financial industry, with the full blessing of Alan Greenspan, leading to a collapse of their system. The crisis is mainly about banks being unwilling or unable to extend credit to businesses; instead of being able to get a loan as in the past, many businesses face going into bankruptcy. People not being able or willing to buy stuff is part of the ripple effect of the breakdown. Because of the huge self-inflicted blow to the investment banks caused by their “creative” and exotic loans, nearly everyone I know has lost at least 30 percent of their 401K and IRA money. So people are hysterical and are not dishing out money for Christmas gifts and non-essentials. So factories close in China, where as you say there is already absurd over-production. But the crisis goes much deeper, as we’ll see as millions of other loans go bad in just a few months. Banks will be hit even harder, and the vicious circle becomes more vicious. It’s the rotten fundamentals of the financial system that is the problem; everything else is a by-product of that, and exacerbates the vicious circle (no spending, more bankruptcies, more strain on the system, etc.).

Buffet’s idea is interesting but seems awfully simplistic. Will imposing a simple tariff be the answer? If so, I wonder what’s keeping us from doing it.

December 28, 2008 @ 10:21 am | Comment

The notion that China is going to come out stronger and much less affected than the US or the rest of the West seems quite farfetched. China has a ton of its own serious problems, which I know most of you already know (corruption, having an efficient judiciary, health care, effective banking system, food regulation, job creation, ethnic/ separatist conflicts), which it needs to deal with before it even begins to approach the level of a regular developed nation.
Sure many Chinese have a lot of cash savings, but this isn’t for spending, it’s to cope with the lack of effective state support in health care, education, pension and so on. Sure the government can build shiny, new airports, highways and trains, but what about good hospitals, universities and schools and so on?

A lot of people love to say India is weakened by its chaotic democracy compared to China with its “harmonious” and efficient government, and this is also flawed.
The political chaos of India is easily reflected in its policies, but the chaos of China is reflected in its internal domestic state, which unfortunately isn’t carried much by the media except for the really big ones like Tibet this year.

Hopefully what I say isn’t repetitive because I didn’t have the patience to read through all these comments.

December 29, 2008 @ 2:25 pm | Comment


Money will hardly be worth the paper it’s printed on. There would be hyperinflation in the Weimar Germany tradition.

As I have argued many times before, what we face now is deflation, due to the lack of demand. Just look at the commodity prices. So money is becoming worth more and not less. So hyperinflation is not an immediate threat. I have no doubt that the Fed would raise interest rates when inflation starts creeping up, which will only happen along with an economic recovery and the recovery of demand.

No, that’s just one aspect of the crisis. Lehmann Brothers didn’t go down because people don’t have enough money to buy things, nor did Bear Sterns. The crisis is a combination of unspeakably greedy and reckless behavior on the part of the financial industry, with the full blessing of Alan Greenspan, leading to a collapse of their system.

I disagree. If the demand held up, the Fed or the US Treasury or the American public at large wouldn’t care less about Lehman going down. It is not the govt’s business if a few Wallstreet bankers lost their jobs or some investor’s lost their money. It was the accompanying lack of demand (because credit was not available and people were scared about their future to spend), and the resulting loss of jobs which makes the crisis so painful.

Buffet’s idea is interesting but seems awfully simplistic. Will imposing a simple tariff be the answer? If so, I wonder what’s keeping us from doing it.

Why is Buffett’s idea simplistic? It makes perfect sense. It attacks the trade deficit problem directly. The reason it hasn’t gotten as much support as one would have hoped is two fold:
1. The free trade ideology, and the belief that any tariffs are bad. I believe in free trade too, but not when your trade partners are manipulating their currencies.
2. When things are going fine, nobody wants to think about the long term. The economy was growing, American multinationals were making profits in China, and the congressmen were getting their campain contributions.

In spite of all the inertia, various tariff proposals had gotten significant momentum in Congress even before the current crisis. The urgency would only grow.

December 30, 2008 @ 4:21 am | Comment

After many years here, I’ve finally found how I’ve been feeling living in China for all those years. I just watched tonight for the seconf time in my life, Soylent Green.

The only recollection I had from this movie, when I was young, was the scene where they eat books (the leather part, boiled).

But watching this movie again, made it appear under a new light.

Soylent Green, if you have the opportunity, watch it again today in your life and internalize the message, it’s very informative to say the least, and very sad at the same time

December 30, 2008 @ 5:14 am | Comment

MT touched on another point that self-centered US journalists don’t like to mention: The crisis was largely caused by the simple fact that while the world’s trade system is relatively open, one major player in that system manipulated it’s currency and cuased the whole thing to go extremely out of balance. It might not be in fashion today, and the Americans don’t like to fret on this point due to other interests and general political correctness… but China has a big part of the blame for everythign that is currently happening. The Chinese committed ane economic “suicide bombing” by keeping the Yuan low and spending all their dollars on US treasury bonds that give the Americans more money to spend at low interest rates. Unfortunately for China, a suicide bombing only hurts one person for certain – the instigator.

December 31, 2008 @ 7:23 am | Comment

MT, it’s not deflation we face. It is disinflation to where prices ought to be. And this will be followed by inflation. Watch oil carefully in the weeks ahead. And the dollar.

We see the crisis as different animals. We’ll have to agree to disagree.

Dror, all you say may be true, but it’s not as if the Americans didn’t welcome China’s investing in US treasuries. That was to everyone’s advantage, short term.

Anyway, I really think we’ve exhausted this topic. Bottom line: I am right about everything.

December 31, 2008 @ 9:19 am | Comment

Of course the Americans welcomed it, because they are used to spending money when money is available within… and this type of behavior does not noramlly cause and extreme imbalance within a free. American’s main fault is at not drawing the line earlier and/or putting some trade barriers to force China to let the RMB fluctuate freely. This would have saved both countries a lot of trouble.

But America needed Chinese support on other issues (Russia, Korea, Iran, Iraq)… so it turned a blind eye to China’s economic “crimes”.

December 31, 2008 @ 12:31 pm | Comment


Of course the Americans welcomed it, because they are used to spending money when money is available … and this type of behavior does not noramlly cause and extreme imbalance within a free market. America’s main fault is at not drawing the line earlier and/or putting some trade barriers to force China to let the RMB fluctuate freely. This would have saved both countries a lot of trouble.

But America needed Chinese support on other issues (Russia, Korea, Iran, Iraq)… so it turned a blind eye to China’s economic “crimes”.

December 31, 2008 @ 12:58 pm | Comment

Totally, 100 percent agree.

December 31, 2008 @ 3:17 pm | Comment

Hhhmmm… This could mean it will be easier now for the new US administration to raise trade barriers, the EU will follow suit that’s for sure. All this combined with a world wide reduction in CH exports demand can only mean greater difficulties for CH in the current crisis environment.
Also the recent CH product scandals may will be used to the hilt to justify/push forward increasing CH products import restriction/difficulties. There will be a greater sensitivity to new scandals too, justified or not.

The clouds over US economy look dark, in the EU too but due to stronger social safety net and difficulties for firing employees it will be less painful (may take longer to recover though due to the associated lack of flexibility of such system)… but for CH the sky start to looks pretty menacing.

Do not like the scenario, but I fear it is going to get more painful before politicians dare to try different solutions that do not imply increasing restrictions too trade.

December 31, 2008 @ 6:07 pm | Comment

“All this combined with a world wide reduction in CH exports demand can only mean greater difficulties for CH in the current crisis environment.” = doh…. wake up and smell the melamine. China is in a much worst state than most of the world, for a variety of reason, and the challenges it will face in short and medium term are immense.

December 31, 2008 @ 7:21 pm | Comment

“China is in a much worst state than most of the world, for a variety of reason, and the challenges it will face in short and medium term are immense.”

Yeah. But I still not putting all my bets in a collapse of CH. Call me a hopeless optimist, but I believe an agreement will be reached by the main economic powers to pull the world through this crisis, and CH will have not a small part on this.

I also feel there is a collective will of CH normal people not to fall again into an abyss. Using that feeling, if CCP plays its cards well, they may even pull it through. Not an easy task though. Even more difficult to predict the final social/political result

2009 will be an interesting year. Any bets about what may happen?

December 31, 2008 @ 8:02 pm | Comment

@ecodelta: As I have stated above, I think that the chances of a collapse are very low. I am not saying China will collapse. The only thing that bothers me is that people fail to see how fragile China is, and fail to notice the reasons that brought China to this state. This type of tragic pride and blindness brought plenty of calamity to this great country, and I hope this time things will be different.

Also – it’s now in fashion to blame America for everything (and also in fashion for Americans to blame themselves for everything). I think it’s time to look at things clearly and understand China’s role in creating the current economic crisis.

December 31, 2008 @ 9:14 pm | Comment

We can talk about how much more fundamentally sound American systems are compared to China’s, but this post certainly provokes some thought:

One important thing to note is how cash reserves are vital to stop a financial crisis. If you look at the Chinese banks in the 1990’s. They were totally insolvent with liabilities far in excess of assets, yet there was no crisis. Now compare Bear-Stearns and Lehman Brothers. A year ago they seemed to be doing fine, and the time between when they started having problems and the time in which they died was less than a week.

The reason for this was cash. Even though the Chinese banks were insolvent, they have about 50% of their assets in either cash or government securities. Standard fraction for commercial banks in the US is 10%. Standard for IB’s such as Lehman and Bear-Stearns was 3%. What this meant was that the Chinese banks had lots of time. When people went to the bank to get their money, their money was there, and that kept other people from lining up demanding their money. So the Chinese banks had about five years to figure out what to do, and then about 10 years to actually do something. By contrast Lehman and Bear-Stearns had one week between problem and destruction.

Cash. It’s everything now.

Dror, agree there’s a lot of unrealistic notions about China and that China played a role in the catastrophe. However, the role of the US and designers of exotic financial instruments and the men at the top in government who ignored mounting evidence and allowed the madness to continue..,all this makes the US far and away the main force behind the breakdown. China was one of its facilitators, but I wouldn’t even go close to blaming them for doing what everyone in America for years depended on them to do seems extreme.

January 1, 2009 @ 6:51 pm | Comment

I recommend investing in:

1) a brewery.
2) R and D in surveillance equipment.
3) Agricultural land.
4) Chinese company that can plaigurise american clean technology and surveillance equipment.
5) Fishing equipment.
6) Bankrupt stock – cycling equipment.

January 1, 2009 @ 9:37 pm | Comment

Richard – all is true, but the difference is that the US banks you mentioned are already gone and so are all the people and policies who were responsible for regulating them. In China, all the failed banks, procedures, and administrators are still here…. cooking the next big mess :).

January 2, 2009 @ 12:26 am | Comment


You cash is king comment is applicable to individual US companies. But it is not applicable to the US govt or companies which are supported by the US govt. All US liabilities are in US dollars which the US govt has an unlimited supply of. I would worry about the US govt not being able to pay its bills when the US is forced to start issuing debt in foreign currency.

The rampant speculation and imprudent lending of the last few years were the symptom of the massive imbalances built up by non-profit oriented actors (Asian and middle eastern govts) buying US debt. This caused the interest rates to be much lower than what a free market would dictate. If Lehman and Bear didn’t use that cheap money to improve profits, then somebody else would. So unless all the participants in the market were very prudent, the speculation was bound to happen. The only sure way to fix this is to stop the buildup of imbalances. The US was trying to pressure China the last few years to adjust the Yuan, and thus solve the problem. It was China who wasn’t interested. Sure the US could have done more like slapping tarriffs etc. earlier to force China, but you can imagine all complaining from people who are now making China out to be the victim.

January 2, 2009 @ 2:17 am | Comment


I mostly agree with you. I hope Obama and the Chinese leadership can figure out a way to unwind the trade imbalances gradually without ending up in a trade war. But I also think that you have to threaten a trade war to get any action from the CCP.

January 2, 2009 @ 2:19 am | Comment

The US and China will be at war, in less than 3 years. So get out of here while you can and plan accordingly.


January 2, 2009 @ 3:10 am | Comment


I am happy to take the other side of that bet anyday.

January 2, 2009 @ 3:25 am | Comment

It’s not a bet. I wish it was that funny, light and simple.

But it’s not.

Reality is much more complex and not very bright recently. Trends and trends, all the time.

January 2, 2009 @ 3:30 am | Comment


You said “The US and China will be at war, in less than 3 years. So get out of here while you can and plan accordingly.” I am trying to help you plan for the war. If war does break out, at least you win some money from the bet, which could come in handy to pay for your ticket out of US/China 🙂

January 2, 2009 @ 5:03 am | Comment

Last comment before I close this thread: I’m not going to give China a lion’s share of the blame for the global economic crisis for its having done exactly what the US wanted it to do, buying US debt. The US often gets unfairly blamed for many of the world’s problems, but in this instance the fault lies squarely with the US, with de-regulation, with Wall Street’s greed, with the Fed that blessed the exotic new loans that have shaken the world, with mortgage companies and, on a whole other level, the real estate brokers and lending houses, and if you want you can even put some blame on homeowners who didn’t read the fine print (but not much). But to blame China for doing America’s bidding….well, it seems a bit much. We are big boys. If we cannot control our own greed, why should we expect China to control our greed for us? The US has been pressuring China for years to adjust the yuan, but if it really wanted to solve this problem it would have acted years ago to crack down on these loans and regulating its own financial industry that brought the house down.

About war – anything’s possible and it would certainly stimulate the world economy. But I don’t see it Yet.

Thanks to everyone for a great thread. Happy New Year and I am sure we’ll be discussing this in later threads very soon.

January 2, 2009 @ 10:55 am | Comment

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