Commodities plunge, gold soars

I took heat in other threads for maintaining that gold was more currency than commodity; you can always sell it and use it, in effect, as a currency. Thus, as true commodities like oil and copper deflate, gold goes up during times of economic uncertainty. No, you can’t buy a candy bar with it, but gold is always, always the safe haven during a crisis, and if this isn’t a crisis…. I think this theory holds water.

Meanwhile the dollar is doing great, for now. That’s not due to any great faith in the US economy, rather to the awfulness of other currencies (have you checked the Euro lately?). When the auto industry goes belly-up in April, the dollar will crash, hard.

Investors have taken to terming the flight from risky assets into gold a new currency trade. The ongoing concern about the enormous task of getting the world’s banks on track — bedeviling investors across the globe — has produced a safe-haven trade into the likes of Treasurys and the dollar. However, the dollar’s success is, in some ways, a mirage, improving only because other major world currencies have been dreadful.

The dollar has strengthened in the last couple of months, along with gold, which is an odd occurrence, and speaks to the dearth of worthy investments around the world. But the shift to gold has picked up as “everyone is trying to devalue their own currency against everyone else,” says Sean Peche, manager at BlueAlpha Investment Advisory Limited in London.

Gold is nearing its highs from last summer.

That explains the dollar’s strength of late, one founded on risk aversion. Since the beginning of the year, the dollar has gained 9.5% against the euro and 2.3% against the pound, while gold, in dollar terms, is up 9.4%. The yellow metal closed up $25.50 to $967 an ounce Tuesday, highest since July 17, 2008. “Gold is telling you the dollar’s rally is not going to continue,” says Lance Lewis, fund manager at Lewis Capital Partners.

Please fasten your seatbelts. Gold is going to $2,000. I know, I have no idea what I’m talking about, as my earlier posts indicate. It was 880 when I last posted about it two weeks ago; now it’s near 1,000.

Dali is like heaven. It wasn’t on our agenda, we sort of stumbled here, and don’t want to leave. Onto Chongqing tonight.


Tibet is, was and always will be….

A wonderful post by a China historian, inspired by a conversation with a Chinese friend:

Today YJ and I were discussing for the 1000th time the Τιbetan question and I suggested that my disdain and distaste for the Party line (and its supporters and parrots at home and abroad) had little to do with their opinion or right to hold such an opinion, but rather that the claims this group tended to make were of a different intellectual tradition than my own. The “Τιbet always has been, always will be part of China” crowd are starting from a point of certainty and proceeding to mine the past to create a narrative in support of that predetermined certainty. Complexity and nuance need not apply.

I’m not disputing the assertion “Τιbet is a part of China” or even “Τιbet was historically a part of China,” just that such assertions are built on unstable ground. The problem of Τιbet involves highly complex questions of sovereignty, authority, national identity, (de)colonization, and the evolution of empires into nation-states. Even the very definitions of these ideas, never mind how such ideas were understood in the past, are subject to discussion and debate. Thus the above assertion on Τιbet isn’t “wrong,” but the glassy-eyed certainty with which it is uttered and the narratives which support it deserve to be unpacked and the constituent parts looked at carefully and critically. For me, the counter to “Τιbet is part of China and history says so” is not “Τιbet is not part of China and history says so” but rather “How can you be so sure? Did you look at it this way?”

It then examines how historians’ minds work when it comes to reaching conclusions that then go on to become mainstream. shibboleths. This is not really a post on Tibet, but on drawing historical parallels in general. Its conclusion certainly got me thinking:

Indeed, the rhetoric of same sex marriage and gays serving the military disturbingly resembles the rhetoric against miscegenation and mixed-race army units in the 20th century. Similarly, the suggestions that PRC control of the Tibetan plateau was a strategic necessity, a humanitarian mission of liberation, or a benevolent paternalism which brought “modernity” in the form of hospitals, schools, and infrastructure to the benighted locals is fiendishly close to the justifications used by European and American imperialists in centuries past (and recent years).

Ouch. Please go read it all.


Good riddance

Bush’s listless, grim and thoroughly unconvincing speech tonight  was the last he’ll give as president. The world just heaved a huge sigh of relief.  

It’s tempting to rant about the damage he’s done, the loss of prestige we’ve enjoyed under his watch, the wars he started and the opportunities he squandered, the tortured syntax, incongruities and unabashed stupidity of his press conferences, the placing of loyalty above competency and the bankruptcy of a nation that in 2000 stood so much taller than any other that its supremacy and infinite capacity for growth were simply taken for granted. But I think we all know this by now.

All I want to do now is see the stables cleaned and the patient’s body purged of the Bush poison – the war on science, the larding of public agencies with Heritage Foundation cronies, the no-bid contracts to companies owned by political friends and family, the willful ignorance of threats to the environment, not to mention torture, complete secrecy and unaccountability, and…. Well, let’s just say it’s a long list. Obama has his work cut out for him. The country was remade in BushCheney’s image, and now we have to reclaim it, reshape it.

I won’t fisk the speech; it’s not worth it. (For a good takedown of tonight’s last whimper I suggest you check over here. I especially enjoyed the list of topics Bush never mentioned.) He still believes all that we’ll remember was his brief moment in the sun when he picked up a bullhorn amid the rubble of the WTC. And he wasn’t all bad. His policies on Africa and AIDS were good, better than his predecessor’s. There were a few – precious few – moments when I respected him. But all in all, he leaves us with little more than a train wreck.

I read articles today about the possibility of a total collapse of Ireland, Mexico and Pakistan, and other countries may be faring little better. Obviously America can’t be blamed for everything. But we can be blamed as the hub of the financial crisis for jump-starting the mess. As America’s economy goes, so goes the world in this jolly age of Globalization, a term that will soon be ridiculed much as we now ridicule the fantasy of the “New Economy” during the dot-com era, when the wealth would just continue multiplying exponentially – which turned out to be just another version of Dutch tulips.

The Bush administration had all the evidence about the housing bubble and collateralized debt obligations right before its eyes and chose not to look at it. This was symptomatic of the Bush era, when regulation was the enemy, getting rich by any means no matter how questionable or corrupt was extolled, and gutting the government of the competence required to make things work was a celebrated policy. And here we are. Goodbye and good riddance to an incurious little man who no more belonged in the White House than Madoff belonged as the head of NASDAQ. A blight, a disaster and a tragedy, in every conceivable way. A tragedy.

On a more mundane note:

I’ve changed my email address (too much spam on yahoo), so if you write to me please use the new one linked in the sidebar (it’s capcha-equipped to stop the spam bots, so sorry for the extra step). Also, I’m going to be a lot nastier about comments following a spate of bad ones last night. So please be nice. Have a good weekend as we all go into Chinese New Year-mode.

Update: Nice to know that thanks to more interesting news, Bush’s swan song was largely ignored. Fitting.


2008’s Most Loathsome People

Let’s take a break from China for a minute and savor this list, which spans across ideologies and targets figures on all sides of the aisle, including our newly elected president. Of course, the Michelle Malkin blurb was especially enjoyable:

It’s a remarkable achievement in unconscious projection that the author of a book called Unhinged could lose her fucking marbles over a patterned scarf in a donut ad, but that’s what Michelle Malkin did when she sounded the nutbar clarion call and sicced her half-cocked league of masturbators on Rachel Ray and Dunkin Donuts for the flatly absurd notion that they were sending a message of solidarity with Palestinians. Right, Michelle—you just can’t sell donuts without joining the intifada these days. What did the nauseously spunky Ray do to incur the wrath of the Malkinoids? She wore a black and white scarf. A paisley scarf. A scarf that was clearly not a kaffiyeh, which, by the way, is just a hat that Arabs wear, not some universal symbol of jihad. In terms of completely false outrage, the only thing that rivaled this travesty of reason this year was the “lipstick on a pig” metaphor panic. But what puts this embarrassing sham over the top is that Dunkin Donuts actually apologized and pulled the ad, rather than try to explain to the fact-phobic horde that they were just blind, raging idiots with the collective brain-power of a lobotomized howler monkey.

49 other selections, each one devastating, even if I don’t think some of the choices deserve to be on the list. The Sarah Palin and Bernie Madoff selections are also wickedly funny. Their server has been off and on, but keep trying.


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.


China: Calamity or Calm? WaPo vs. NYT

For some background perspective, just yesterday “Dr. Doom” Roubini said China is on the verge of “falling apart.” That’s a pay site, but here is a chunk, thanks to another site:

[T]he risk of a hard landing in China is sharply rising; a deceleration in the Chinese growth rate to 7% in 2009 – just a notch above a 6% hard landing – is highly likely and an even worse outcome cannot be ruled out at this point. The global economy is already headed towards a global recession as advanced economies are all in a recession and the U.S. contraction is now dramatically accelerating. The first engine of global growth – the U.S. on the consumption side – has now already shut down. The second engine of global growth – China on the production side – is also on its way to stalling.

Thus, with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters. The sharp recent fall in commodity prices and the near collapse of the Baltic Freight index are clear signals that Chinese and global demand for commodities and industrial inputs is sharply falling. Thus, global growth – at market prices – will be close to zero in Q3 of 2008, likely negative in Q4 of 2009 and well into negative territory in 2009. So brace yourself for an ugly and protracted global economic contraction in 2009.

John Pomfret of the Washington Post wholeheartedly agrees with the doomsters (and Roubini’s track record is spectacular, there’s no denying that). He also specifically takes issues with the NYT editorial board for its somewhat rosy belief that China can spend its way – and the world’s – out of a recession.

There’s been a lot of talk in recent weeks about how China could ride to the rescue of a global recession, using the latent power of 1.3 billion consumers to power global GDP. Who would have thought that we’d be calling on China to save our bacon? Witness a New York Times editorial on Oct. 26 with the remarkable headline: “As China Goes, So Goes….” What the Times called for, and what others have seconded, is for China to unleash domestic demand, ramp up imports, thereby keeping the global economy afloat.

First, before we get into why this probably won’t happen, let’s pause for a second to reflect on just how amazing it is that we’re asking China to prop us up. Yes, yes, China did yeoman’s work during the Asian financial crisis of 1997. But that was a pretty localized mess. What the Times — and others — are asking China to do is not just be a responsible player in its region (which at the time simply meant not devaluing the yuan). No, what the Times and others want China to do is to step forward and in a flash take over the United States’ position as the engine of global growth. That’s a pretty big demand for a country with a per capita GDP that’s in 109th place on the International Monetary Fund’s World Economic Outlook Database, squarely between Swaziland and Morocco.

As to whether China will take up the challenge: I think not. China would have to restructure its economy if it wanted to significantly grow its domestic demand. But right now China’s economy is facing real problems.

You have to read Pomfret’s entire post to see why he so strongly agrees with Roubini, and why he believes the crisis will make the CCP only more reactionary (as opposed to enlightened, as the NYT editors optimistically hope). After looking over the dismal situation, he comes back to his central thesis, first discussed here back in 2004, i.e., that as long as China’s pig-headed reactionary government is in charge, they will keep blocking their own path to superpower status and will probably never arrive there.

Unlike Pomfret, I’ve predicted China would have yet another soft landing. I’m willing to consider that I may be wrong, unlikely as that may be. The Roubini-Pomfret scenario is too frightening to imagine. If they are right, we are talking about the possibility of civil war. If there were a true financial collapse in China, either that or anarchy are not inconceivable. China’s situation is so, so tenuous, despite the amazing strides it’s made. That’s why so much here is subsidized and the iron rice bowl is still an important crutch, and why the government is going to be the candyman for the unemployed, either simply handing out money or setting up massive infrastruture projects to keep people employed and, most important, pacified.

Which brings me to my last half-baked point. I was speaking with a friend today who is involved with one of those gigantic Chinese manufacturing companies; this one makes concrete. When I expressed my worry that concrete makers would feel the pinch when overseas orders drop off and Chinese businesses stop expanding and building new structures, he said that scenario is simply wrong. “China is about to pour billions and billions of dollars into infrastructure projects to keep the economy going,” my friend reminded me. “This company is planning on a huge expansion of business.” So again, can China spend and build its way out of this? Stranger things have happened, no?

So many tectonic plates rubbing against one another, so many ways this whole thing can go, not just for China but for the world. For now, perhaps out of willful ignorance, I stick with my prediction: a relatively soft landing for China. Pomfret’s one of my heroes and I’ve agreed with him on just about everything in the past. Same with Roubini. But this time, they both had better be wrong. Otherwise, we are all in a lot more trouble than we ever imagined. It won’t be at all pretty, no matter how much we may dislike the CCP and hope for its demise.


Open thread, or whatever

[Bumped up to keep an open thread on top.]

Busy with some big events. But want to share some links and open a thread now that the ones below are running out of steam.

First, a superb book review on the life of China’s female migrant workers who leave the countryside for work in cities like Dongguan.

The women’s road from village to factory job is lined with manipulators and cheats, and the schools, which busily copy one another’s curriculums, in turn teach the virtues of lying as a means of getting ahead. “People who are too honest in this society will lose out,” one instructor told the author.

That’s true in a lot of places. Here especially, for lots of reasons.

Second, a surprisingly intelligent Dowd column of Colin Powell’s endorsement of Obama and the knee-jerk revulsion so many Americans feel at the notion of a Muslim in their midst.

In a gratifying “have you no sense of decency, Sir and Madam?” moment, Colin Powell went on “Meet the Press” on Sunday and talked about Khan, and the unseemly ways John McCain and Palin have been polarizing the country to try to get elected. It was a tonic to hear someone push back so clearly on ugly innuendo.

Even the Obama campaign has shied away from Muslims. The candidate has gone to synagogues but no mosques, and the campaign was embarrassed when it turned out that two young women in headscarves had not been allowed to stand behind Obama during a speech in Detroit because aides did not want them in the TV shot.

Violence in Taiwan:

Taiwanese television showed Zhang Mingqing, vice chairman of a mainland association handling cross-strait relations, lying on the ground beside his eyeglasses. Other footage showed an elderly woman hitting his car window with her cane and a pro-independence activist with a green headband stomping on the roof of the car.

That followed an incident Monday in which about 200 demonstrators yelled, cursed and heckled Zhang as he took the podium at Tainan National University of the Arts. Zhang was in Taiwan for an academic symposium, ostensibly in a nonofficial capacity. Taiwan and China often communicate through unofficial channels, given their strained relations.

Finally, Pomfret sounds gloomy about how the global financial crisis will affect China.

Any time the official New China News Agency files a piece with the headline: “Experts: China’s economy has ability to recover from slowdown,” it’s time to worry about China’s economy. You’ve already heard the news, no doubt.

Five straight quarters of slower growth. China’s National Bureau of Statistics announced this week that the nation’s economy grew at an annual rate of 9 percent in the quarter ending Sept. 30, the lowest since 2003 — when the SARS epidemic turned the economy upside down. Exports are shrinking so fast that some economists are predicting the sector will not grow at all next year.

More ominously for “social stability,” however, are the lay-offs. More than half of China’s 7,000 plus toy makers are out of business. More than 67,000 small- and medium-sized enterprises have gone belly up in the first nine months of this year, according to a report in the China Business News this week. There are an increasing number of reports about labor unrest among those turfed out of work.

For the record, I think Pomfret’s view is way too bleak. China has what it takes to deal with the situation: Money.

I think the only good news today is that Al Qaeda “endorsed” McCain. They endorsed Kerry the last time and look what happened.


George Soros: China Rising, US Declining

Funny, how what sounded like such a crazy notion to some just a year ago now seems to be pretty much accepted as a given the world over. Soros saying as much gives the point – obvious as it always was to the prescient – added weight.

China will be the biggest winner of the current financial crisis, US billionaire and philanthropist George Soros said. The financier gave an interview to Germany’s Die Welt, in which he told of the roots of the crisis and said that the mortgage bubble only triggered the process, which entailed the economic collapse. The businessman also explained the reason why the Bush’s administration proved to be unable to cope with the crisis.

The United States and a part of Europe will have nationalized banks and huge debts. China will become the new global financial empire….

“The USA’s influence has already begun to decline. For the past 25 years, we have been running a constant current account deficit. The Chinese and the oil-producing countries have been running a surplus. We have consumed more than we produced. While we have run up debt, they have acquired wealth with their savings. Increasingly, the Chinese will own a lot more of the world because they will be converting their dollar reserves and US government bonds into real assets. The power shift towards Asia will occur as a result of the sins which America committed during the recent 25 years,” Soros said.

You can ignore Soros at your own risk. His track record has been nothing short of astonishing. And for my right-wing friends who fell for the Fox News smears of Soros as a deranged leftist, all I can say is do your homework. Soros is a man of principle, a great philanthropist and a huge friend to liberal causes. Yes, he has a few – very few – skeletons in his closet (insider trading in 1988) like other billionaires do, but all in all he is a hero, and a role model for other billionaires.

We all know how much China sucks in so many ways. Most of us also know what an amazing country it is, how splendid many of its people are and what promise it holds for the future. Right or wrong, fair or unfair, we are in decline while Asia in general and China in particular are rising. That is not a judgment call on whether China should hold this honor. It’s just the way it is, like it or not. And in a lot of ways I don’t like it. It’s just what’s so. They were smarter than we were. I have to hand it to them.


The coming China Depression

Wait. That is not my theory, but that of the author of an article written more than four years ago that a reader pointed me to and that I recommend you read. Not because it’s necessarily right, but because it’s fascinating to see where we actually stand four years after the writer’s prediction.

Today, the currency and export policy of China is anchored around its peg to the dollar. The main reason for this is that by artificially undervaluing its own currency, and therefore overvaluing the dollar, China artificially stimulates its manufacturing exports. The second reason is that by buying the excess U.S. dollars and reinvesting them in U.S. government bonds, it acts as a foreign lender to the United States. The third reason is that this foreign lending stimulates American demand for Chinese manufacturing exports and allows the Chinese government to relieve its current unemployment problems… No doubt, most of these loans will turn out to be very expensive because they will be repaid with greatly depreciated dollars, which in turn will exacerbate down the road the growing financial distress of the banking sector in China.

Therefore, it is clear that China travels today the road to Depression. How severe this depression will be, will critically depend on two developments. First, how much longer the Chinese government will pursue the inflationary policy, and second how doggedly it will fight the bust. The longer it expands and the more its fights the bust, the more likely it is that the Chinese Depression will turn into a Great Depression. Also, it is important to realize that just like America’s Great Depression in the 1930s triggered a worldwide Depression, similarly a Chinese Depression will trigger a bust in the U.S., and therefore a recession in the rest of the world.

Unless there is an unforeseen banking, currency, or a derivative crisis spreading throughout the world, it is my belief that the Chinese bust will occur sometime in 2008-2009, since the Chinese government will surely pursue expansionary policies until the 2008 Summer Olympic Games in China. By then, inflation will be most likely out of control, probably already in runaway mode, and the government will have no choice but to slam the brakes and induce contraction. In 1929 the expansion stopped in July, the stock market broke in October, and the economy collapsed in early 1930. Thus, providing for a latency period of approximately half a year between credit contraction and economic collapse, based on my Olympic Games timing, I would pinpoint the bust for 2009. Admittedly, this is a pure speculation on my part; naturally, the bust could occur sooner or later.

Of course, macro-economic predictions like this usually prove to be far off the mark (except those made by me), the most (in)famous perhaps being Gordon Chang’s prediction of “The Coming Collapse of China.” In the case of the article above, the story seems to have occurred almost in reverse – a US (and increasingly European) crisis is what is plunging the world into a recesion, not government-generated inflation in China. America’s economic crisis, not China’s, was the catalyst for the tailspin, and if China is be plunged into a depression, it will be for reasons very different from what the author envisaged. (He was shrewd enough to say that his theory might be offset by “an unforeseen banking, currency, or a derivative crisis spreading throughout the world.” And what we are seeing today was certainly unseen by most in 2004.)

However…however… I honestly believe China is going to be one of the few players that emerges from the current crisis relatively unscathed (and “relatively” is a key word.). Simply because of the size of its own domestic markets and the trade it carries out in Africa and Asia. It will suffer, lots of factories will continue to close and lots of dreams will be erased and jobs lost. But it won’t be depression. What it will be, more than anything else, is a test for the CCP. Running a country the size of China with the staggering problems is hard (to say the least), but it sure helps when the economy is roaring year after year.

One of the most frequently repeated motifs is that as long as the economy is kicking, most Chinese don’t give a damn about human rights and censorship and corruption. Once things slow down and people have more time (and more fear), as they see their opportunities dimming, as they realize the joy ride they were counting on was finite while the ruling classes are doing just fine – will they lose some of that Zhongguo jia you spirit and begin to demand their government do better? Will they look at they way America ousted the Republicans, and demand that same freedom? Short answer: probably not; at least not yet. China is better positioned to weather the current storm without enough rampant misery in the cards to get people thinking about revolution. The government can still spend its way out of this mess they way it usually does. One day China will face an economic moment of truth, the way America is facing one now. I’m pretty sure this isn’t it. Yet.

I swore I wouldn’t post anything today, that I’d focus only on my homework. The Internet is such a monumental distraction. And that will be the subject of an upcoming new post.



How did Palin do in the debate, in which the bar was set lower than ever before?

Who won the debate, based on the polls?

How bad is the economy looking compared to two weeks ago?