Wednesday, March 17, 2010

The Paper Dragon... losing its teeth at an alarming rate. It is increasingly obvious (finally) to the rest of the world that a bubble based on infinite foreign demand for goods WITHOUT a correspondingly strong, ubiquitous currency that enjoys "favored reserve" status for nations that desire to net save Financial Assets will pop at the first sign of waning demand.

The U.S. can comparatively ramp up export production until the next large cycle (I have argued that U.S. success in manufacturing post-war guaranteed the switch to our current manifestation of large capital account surpluses, implying large current account deficits, large trade deficits, etc.) How can it do this? By providing both security and rule-sets that protect allies and give order to the world. We export ORDER.

Conversely, China enjoys a tremendous amount of industry, but without the same Actonian strictures we place on our government (to the extent this may be changing in this country is a subject for another post...or another blog). Corruption and cronyism on a massive scale was inevitable. But there is no symmetrical ability, like the United States has proven, to adapt to adverse economic consequences and shift production and demand. The obvious reason is central planning cannot, has not, and will never work.

Readers here have known this for over three years, and soon we will focus on other parts of the world that I have alluded to in previous posts. This Junk has sailed.

March 17 (Bloomberg) -- China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.

The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”

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