In actuality Chinese put their bread and butter money into real estate, not stocks The SSE is only a small portion of GDP compared to the real estate market.

If China’s real estate continues to drop – and it is very quickly – and if the continued measures to boost it back up don’t work – and they aren’t – Chinese people will start figuring out where they stand in this global equation and the real bickering will begin, and Beijing will come up with some serious policy changes in their upcoming Nov. meetings, which will probably add another interesting spin on all this chaos.

Of course, the threat of war usually follows nationalistic fervor and practices…Stirred by bankers and businessmen that desire ‘what is over there’.

Globalization might be a thing of the past, unless one considers colonialisim to be globalization.

So the loop we mock of the Chinese loaning us money to buy our junk was actually *us* loaning ourselves money to buy Chinese junk. The Chinese really were propping up our government during this fiasco, allowing us to really hang ourselves.

The Agency purchases, to be fair, were an important exception because they went directly to the heart of the bubble, helping to push up housing prices, which in turn provided the equity which supported most of the borrowing. I don’t think the foreign banks were intending to destroy us; but the way the intervention worked out (pushing up housing prices to sustain empty loans within our economy) was almost tailor-made to wipe our financial system out.

The capital surplus China and others hold don’t seem terribly relevant to me, as they are simply fiat currency or financial assets denominated in and supported by fiat currency. Presumably they have amassed a sufficient hoard to defend their own currencies to a point, but they would eventually be swamped by incompatible policies by the US and EU.

Regardless of how much value one places on the capital surplus, the other hurdle–trust–looms even larger. Why would the world participate in such a scheme? Faith would be required that those in charge of the ACU would act responsibly and (less importantly, perhaps) for the greater good. Neither seems easy to accept in the near term. Consider too the example of the EU. The fractured interests among the euro’s membership is enough to send holders scurrying, and ASEAN has a long way to go to even reach that low degree of demonstrated coherence and cooperation.

You think London and New York, to say nothing of Washington, will stand to see global monetary policy set in Asia?

I believe the only way to get all players to sign on is to de-politicize the system. BW-I and BW-II are a reflection of the US' standing in the world atfer WW2. This is no more. But no other country has stepped up. There is no country that dominates now the way the US dominated in '44. So I don't see how you get a buy-in by all the players unless the system is somehow "neutral", whatever that means.

As previously stated, the most likely scenario for the inevitable replacement of the Bretton Woods framework is the introduction of an ACU (Asian currency unit) as has been discussed at length in both APEC and ASEAN +3, followed by an introduction of other currencies into that framework.

Although capital surpluses are huge in China, when they are taken together with the rest of north Asia and other Asian states, they become decisive.

This is clearly the most likely path for the new economic world order over the next 3-5 years.

Why Setser repeatedly omits the ACU in his discussions is beyond me. Normally his Asian analysis is above average, but this omission represents a real shortcoming in his otherwise commendable work product on Asia, in the view of this writer.

Matt Dubuque
nospammdubuque@yahoo.com

Rrrrring

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Although the 1929 stock crash and subsequent Great Depression was not exactly the same as the current ‘disappearance of money’, it was similar. Once stock prices that had been purchased with as little as 10% margin crashed, the ‘money’ that speculators thought that they had quickly disappeared, never to be seen again. Well, had the investors held their stocks untill 1954 they would have broken even or perhaps made a profit, depending on the dollars being adjusted for inflation.

One could say that the Great Depression was partially caused by the crash of 1929, although many other factors came into play.

Loss of confidence of investors/consumers after the crash of 29, and a drying up of credit, was similar to what we are seeing today, imo.

A more interesting question is this: what will BW-III look like. Thoughts, anyone?

If yes, then won’t shutting off the valve and, moreover, destroying many of these assets leave the world short of dollars? The immediate consequence of this would be an appreciation of the dollar (which happens to be what we are seeing now–and I’m not convinced it is the result of a pure-hearted “flight to safety”) and an obviously major risk of deflation, at least in the short term. It seems to me that the western central banks created this problem not only by creating conditions that made it easy for banks, investors, and homeowners to have a big bubble-party, but also because they failed to provide a direct increase in the money supply so as to directly meet the demand from emerging markets joining the global markets.