Sunday, January 10, 2010

The Emperor's New Financial Statement.



I have friends that are taking Mandarin Chinese lessons because they say the handwriting is on the wall: China will own the world. There are so many levels to reject this on. First being that no nation owns the world; A few rich mega billionaires do. We are just allowed feudal occupancy at the foot of the castle walls. You know? Where they dump the slops.

And then there is economics. Sure, it looks as if they have all the bank statements in their favor. We alone owe them trillions. But frankly it is a bad debt. If they called it due at this minute they would only get mere pennies on the yen. And they know that so they just lend us more. World economy is a house of cards. It all rests on the premise that the participants will not say it is all false. Like in the story The Emperor's New Clothes.

And frankly, there is China. So very much could go wrong there: Bird flu, People's Revolution, Mega Earthquakes, massive deaths because of the pollution like what happened in London with the burning of coal. Katrina did not help our economy at all and I doubt seriously another major earthquake or epidemic would help China.

But I seem to be in the minority about my thoughts on China. I wondered, frankly, if I was merely in denial. Then came this wonderful article by the man, James S. Chanos, who heralded the fall of Enron. Remember them? New York Times in its article Contrarian Investor Sees Economic Crash in China, states that Mr. Chanos is warning that China's hyper-stimulated economy is headed for a crash, rather than the sustained boom that most economists predict. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. "Bubbles are best identified by credit excesses, not valuation excesses," Chanos said in a recent appearance on CNBC. "And there's no bigger credit excess than in China."

One of the things that caught us off guard at the onset of WWII was the lack of munition factories. We even purchased our gun sights from Germany, a practice we continued through part of that war. We had to manically convert auto plants to make tanks and airplanes. It is a credit to the American people that we could do that so quickly. But that was another generation. What do we make for ourselves now? What do we even have the knowledge to make for ourselves?

If the house of cards, that is China, falls what will we have to learn to live without? Anyone for a class on spinning yarn? Or lighting one match fires? Opps, no match fires?