A strong statement, which is utterly unsupported by current circumstances.

It is the BRIC countries which are leading in growth, led by China.

To assert that this situation will end ‘like’ 1927 is forecasting an argument by analogy – very weak.

I don’t disagree. We have the very real possibility of a world-class mess here, and too many people are taking false comfort in the fact that the real economy so far hasn’t taken a hit (that is, of course, if you believe the bogus GDP and job creation stats).

Advanced economies run on credit. If the financial infrastructure sustains too much damage due to the greed and stupidity of its business managers, the combination of reduced lending capacity plus fear to take on too much risk among those who are relatively unscathed can easily tank the real economy.

Just my two depreciating cents.

But to your point, if the analogy that the current situation brings to your mind is 1927, I think that proves Palley’s point. Even though the train wreck of the Depression damaged the US severely, it took a toll on other countries as well. It wasn’t a win/lose, but a lose/lose, with the US taking the worst hit.

The practice of central banking around the world is fixated on avoiding a recurrence of the Depression. Bernake’s academic claim to fame is that he is an expert in it. That’s why I don’t think that Bernanke wants to drive down the dollar. I see him as hostage to domestic interests and pressures (witness the Wall Street Journal front page story of roughly ten days ago that depicted him as being heavily dependent on the Street for advice).

Remember, the FT’s Martin Wolf has pointed out that another game of chicken is at work; the financial institutions versus the central bankers. And he has concluded that the central bankers will always swerve.

In fact an op-ed piece in today’s FT by former Treasury Secretary George Shultz argues that the decline in housing investment (meaning not the fall of the dollar) is what has led to the improvement in the US balance of payments (although one can argue these stats a lot of different ways).

Asian neomercantilism has created the current reality of export-addicted, artificially undervalued Chinese and Japanese currencies, whereas free-floating currencies have been artificially overvalued.

But whenever the trade deficit stabilizes, and it appears to be doing so fairly rapidly already, it is always the mercantilists who suffer. An analogous situation was in 1927 when the United States tried to maintain overheated circumstances by propping up its peg to the sterling. When it all blew to pieces, the UK suffered pretty badly, but it was nothing compared to what happened to the United States.

The Chinese have consistently refused to revalue the yuan, because millions would be thrown into unemployment as low-margin businesses would be forced to close. It is a shortsighted political decision that will perpetuate the global trade imbalance.

Bernanke, I believe, is devaluing the dollar to bring the trade imbalances issue to a head. America will suffer inflation from a falling dollar, but China’s artificially cheap peg is causing them to massively oversterilize and thus inflict raging inflation upon their economy.

This has caused more and more Chinese savers to take their money out of savings deposits in banks and dump it in the Chinese stock markets, because the real interest rate is negative three percent according to *official* CPI, which does not reflect a broad array of unsustainable price caps which have been in place since September–and which were lifted the very day of the Fed’s October meeting.

You should read Michael Pettis’s blog (piao hao report) for more details on that.

But the Chinese are playing a game of currency chicken and everybody knows it. When two Chinese drivers fight over a highway lane, the MO is to not look as you merge, and one person always eventually blinks. But Western banks don’t need to look to see what a mess the Chinese have made of their economy, regardless of what the headline statistics say.