Whistling In The Dark

Mr. Prime Minister, the U.S. Special Representative is a . . . Bernie Madoff

It’s rarely the first pebble that people remember. Chinese concerns about the integrity – safety -of their U.S. holdings and their chief addict’s health (“unsustainable model of development characterized by prolonged low savings and high consumption”) come overlate.

In her defense, even China’s worst case mongers could not have envisioned so much irresponsibility created by so many for so few. So China is riding a proverbial tiger bloated on Tyvek housing insulation and utterly disposable knick knacks from Guangzhou. Whither the beast? It staggers now towards the hyperinflation savannah but it also is poised to tucker out and slough it all off in the stagflation lowlands.

Beijing’s three concerns are: what to do with over a trillion in currently held dollar denominated assets?; what to do with trade surplus-generated holdings going forward?; and finally, what about the bloated tiger’s appetite in the future? Some of the short term problem will take care of itself with export contraction and reduced pressure to recycle trade deficits. Beijing is unfortunately screwed should it wish to play an even semi-status quo role in the global economic order – to wit, its current holdings by almost Newtonian physics will depreciate regardless due to U.S. fiscal policy. Whether they are merely reduced or eviscerated will be determined by U.S. (in)ability to pull back from hyperinflation. Going forward, in for a penny in for a trillion – Beijing hesitancy to buy more U.S. paper to finance a soft landing is a gun to its own holdings.

All muted about today as Beijing ponders the ultimate wipeout – U.S. default (a concept people immediately dismiss now but which will become a common place analytical possibility quite soon). We happen to agree with Naked Capitalism that China is laying down a marker. To be called in later.