Running Dogs of Capitalism

That's what Mao and Chou used to call the US establishment in the 1950s and '60s. Now we have the fastest running dogs of capitalism in China itself. Yesterday, Treasury Sec'y. Snow pulled his punch on currency manipulation by China and greenlighted the dogs to run for at least another six months. This was a mistake. China's remarkable growth over the past ten years has far outstripped the development of its banking system and financial controls generally. There have been several bank bailouts and the private or "stir fry" economy has been allowed to circumvent the banking system entirely and flourish. The banks in fact are used as ATMs by thieving employees, the political leadership, and their lackeys (another favorite Mao term). Lengthy discussions about unpegging the yuan from the dollar and letting it float have drawn in extra billions of speculative capital awaiting a hoped for positive revaluation of the yuan.

Allowing the peg to continue for months more will give the speculators more time to pour more hot money into China, some to remain liquid and some to go into an already vastly overbuilt real estate sector. This will put increasing strain on a shaky financial establishment, already outgunned by the warm unofficial welcome given to speculation. It's big bucks for the mandarins in Beijing, but the house of cards, now well under construction, seems destined to grow as a result. Economic risk will continue to rise in Asia.

The US went through this with Japan in the 1980s. It mistakenly took a soft line on rampant Japanese mercantilism. Billions of speculative capital flowed into Japan behind the trade dollars, creating real estate and equity market bubbles the popping of which was long term ruinous to Japan. The US, faced with dealing with a large budget deficit, is currently poorly positioned to ride to the rescue should events knock China's house of cards down. The US is willing to take a possible upward hit on its long term rates in the shorter run to avoid the costs of financial catastrophe and destablization it foresees in China.

For now one can just hope that the ace of spades is not added to the abuilding house.