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January 21, 2008



The Chicom elites better be dusting off their old copies of "The Three Kingdoms" to prepare for this coming storm. I think you are spot on in pointing out they'll try to focus their spending internally.

This derivatives debacle has the potential to damage the current financial system beyond repair. Building up a new credit structure is going to take a lot of time and a lot of pain.

Fabius Maximus

This is one of the major debates about what lies ahead. Who will get hit, suffering the most damage: US, Japan, EU, or China? I vote "US", but the key aspect of this situation is its uncertainty.

For some background on the current financial/geopolitical situation see:

TM Lutas

Ok, let's assume that the US is going to go into recession and the PRC needs its 1.4T back. They're obviously going to sell at a loss. Nobody's got that sort of spare cash uninvested available to buy up those securities at current prices. Depending on how much they lose, what's left of the $1.4T may not be sufficient to ride out the economic whirlwind unleashed by this rebalancing. So why even go down the road if you know it ends in failure?

In that case, they will simply not try, instead pulling out sufficient funds to pay the army well and prepare for severe internal repression to keep the lid on. This has two advantages for the PRC elites that control the money. It reduces the add-on effect of their currency dumping to the US recession so we restart buying the PRC's stuff sooner easing their economic troubles. And second it lowers the losses, allowing them to take advantage of the recessionary fire sales that we're likely to have in our private economy and increasing the chance that they can sell for a profit later.

So how much does the elite trust it can salvage from its $ investments before the bottom drops out on the USD? That's going to determine the PRC's path.

Tibrim multo

"China disintegrating"?

Two points.

First, it is critical to recognise that Chinese are very patient people. Consider how long they put up with Mao. They could well take a significant economic downturn in their stride.

Second, when anything goes wrong, whom do they blame? It is almost always the foreigner, when one is available.

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