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China should prepare for worst outcome in Europe [Copy link] 中文

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Post time 2012-6-8 12:10:11 |Display all floors
China should prepare for worst outcome in Europe

By Sun Lijian  |   2012-6-8  |     NEWSPAPER EDITION

MASS protests against austerity have erupted in debt-laden euro nations like Spain, casting a pall over the worsening sovereign debt crisis.

Under these conditions, European Central Bank officials have mentioned the possibility of a Greek exit from the euro.

Why could troubles in a few nations have grown to the extent of triggering a full-blown, region-wide crisis that has severely impaired global recovery and cast into doubt the euro's future?

In effect, economists including Robert Mundell, often known as "the father of euro," and Nobel Prize laureate Paul Krugman, envisioned long ago a scenario in which a supranational currency would succumb to three combined factors and fail.

They argued that if a country keeps overprinting its currency to fill budget deficit, and meanwhile struggles to maintain a stable exchange rate, a currency debacle is inevitable when that country opens up its capital account to foreign investors.

The debt crisis that has swept Europe is akin in nature to the scenario prophesied by Mundell and Krugman in three respects.

First, there's an inherent flaw in the euro's exchange rate policy. Since the eurozone is a single currency bloc, depreciation is not a viable option regardless of whether the economic fundamentals of Greece, Italy and Spain are in dire straits.

Even if the ECB devalues the euro to boost the export advantage of indebted eurozone members, that will do little to improve Greece's fortunes, for exports represent a tiny proportion of its national economy.

Its pillar industry of tourism, however, is seriously hobbled by a sluggish Western economy.

Germany: the locomotive

But if we look at the eurozone's overall economic well-being, we'll see that a steep depreciation should not be in the cards.

Germany, the eurozone's locomotive, is still full speed ahead, thanks to its export strengths.

Germany's spectacular performance indicates that a depreciation, though highly unlikely, will be short-lived, for German growth will soon make the euro strong again.

Another consequence is that a vast number of hedge funds will rush to speculate on the interest rate differences, and with the complicity of the ratings agencies in their countries of origin, they will buy euro assets at rock bottom prices, adding to the euro's miseries.

Second, the eurozone is naturally deficient in macroeconomic control.

Although a single monetary policy greatly contributes to the euro's global creditability and status, the region's inability to bail out members in trouble the same way the Fed saved tottering banks is its Achilles heel.

In the absence of fiscal discipline, indebted euro nations had expanded their expenditures on social welfare well before the crisis, something encouraged by a credit market once awash in liquidity.

But now with the crisis in full swing, Greece, unable to get fiscal help from the EU, can expect no monetary policy to work magic either.

Moreover, the lack of coordination within the EU has widened the gap of distrust between member nations whose taxpayers are against bailout of their neighbors and debt-ridden nations whose citizens oppose austerity.

As that gap widens, the market is gripped by mounting fears of a Greek, Italian or Spanish default. Those fears have prompted a cascade of fire sales of euro assets.

Finally, the lack of effective financial oversight has created room for speculators to short-sell euros.

European financial markets, wary of a credit crunch, will be even more reluctant to lend to Greece to service its debt.

A vicious cycle emerges that compounds the euro's woes.

If Western nations or the International Monetary Fund can join hands in regulating the financial market and curtailing the short-selling of euros, the vicious cycle may relent a little.

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Post time 2012-6-8 20:33:41 |Display all floors
Quite a comprehensive analysis - of course, it is possible that Europe's leaders reach consent some day. But don't count on it. The possibility, that the financial markets in the whole world can be regulated to not speculate against the Euro, however, is close to zero.

Personally, I also believe that the possibility of Greece leaving the Euro is currently higher than the chance for Europe's leaders to finally decide on a good common solution.

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Post time 2015-7-9 11:19:48 |Display all floors
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Post time 2015-7-9 11:38:26 |Display all floors
incarnate Post time: 2015-7-9 11:19

China has a bigger....more urgent is called the Shanghai and Shenzhen Stock Exchange.

I've made my living, Mr. Thompson, in large part as a gambler. Some days I make twenty bets, some days I make none. There are weeks, sometimes months, in fact, when I don't make any bet at all because ...

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Post time 2015-7-9 12:03:09 |Display all floors
incarnate Post time: 2015-7-9 11:19

Economics during the time of Deng was an empirical science, because he insisted on testing every prescription its proponents espouse for China to obey.  He insisted that China should feel the stones every step of the way as it crosses the river, and that every foot should be standing on solid ground at all times.  Chen Yun, his original economist and friendly rival, tried to rein in Deng's impulsiveness nevertheless by harping on the fact that the party must consolidate, summarize and solidify its experience, which led to many pilot projects being used to explore new ways of improving the economy before they are approved as standard policy.

Nowadays, glib talks and gullible minds are all it takes to get China embarked on looney economic ideas, such as the current dogma that the GDP is not important, and that consumption instead of production should be the way the GDP is supported (forgetting that you cannot consume what you have not yet produced), but then, they provide the "answer" to this dilemma, by saying that Capital Account Surplus should replace Current Account Surplus, without revealing that Capital Account Surplus means simply selling off Chinese factories, Chinese land, and Chinese assets to foreigners to generate such a "surplus" in capital, which can never replace what China had been doing since Deng, which was to accumulate Current Account Surplus that only comes from maintaining a positive trade balance, a healthy export volume that exceeds import volume, and depends on China producing more than what it consumes (or there would be no surplus to export to earn foreign currencies).  In this topsy-turvy world, consumption is the goal, not productiion, and letting foreigners own Chinese factories, Chinese corporations and banks, and Chinese land is the highest aim, instead of China accumulating foreign currencies to buy foreign factories, corporations, natural resources and land to benefit the Chinese people.  And they call it "advanced economics".  It is the crap that nobody in the governments of the West would even bother to pick up, though they would gladly give it to China on a silver platter to induce it to consume it.

They trumpet this as "Economic Reform" even though it is the opposite of the Real Economic Reform that Deng engineered.  In Chinese, this modern "reform" movement is the old trick of 挂羊头,卖狗肉!

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Post time 2015-7-9 19:58:56 |Display all floors
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Post time 2015-7-9 23:44:00 |Display all floors
incarnate Post time: 2015-7-9 19:58

wow........what is that all about?

Church of Heartland to take over China?

I've made my living, Mr. Thompson, in large part as a gambler. Some days I make twenty bets, some days I make none. There are weeks, sometimes months, in fact, when I don't make any bet at all because ...

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