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To: mishedlo who wrote (20717)	10/26/2004 10:17:10 AM
From: el_gaviero	Read Replies (1) \| Respond to of 110194

Mish, I don't know if the Gave argument is right or not but I do think it is worth considering. Seems to me that you have misunderstood his argument. He is not saying that the value of Chinese assets will not drop. Rather, he is saying that even though they will drop, the government will not sell them. Instead, the government will keep such assets on the books, and cover their cost by printing money. Now is this inflationary or deflationary? THAT, it seems to me, is not clear, and I wouldn't be as confident as Gave seems to be that the process ends up in an inflation. After all, the assets (factories or whatever) are still there, still putting out product that cannot be sold at a price sufficient to cover cost. That sounds deflationary to me. The value of the analysis to me is to get us thinking about how structures of ownership affect outcomes. Maybe such matters are obvious to others, but I am dense, and need to be hit with a two-by-four. The real structure of property rights in China (((who actually in the end makes decisions about things))) is bound to make a difference, and to do so in ways outside our historical experience, therefore with unexpected outcomes from our perspective. We should be alert to such things.

To: mishedlo who wrote (20717)	10/26/2004 10:29:27 AM
From: russwinter	Respond to of 110194

When input costs are already up 40% yoy, the 50% increase in wages is just the icing on the Train Wreck cake. By the way, farmers in the countryside are pretty flush right now, as it looks like China enjoyed it's best harvest in four years. There is also a strange demographic in China, a scarcity of women in their twenties (civilized people: threw them in rivers and down wells in the 70's), and they are the preferred labor force for many factories who make US consumer goods. <prices of manufactored goods from China has NOT increased with those production costs. What is stopping them?> They don't have a free market.The government subsidizes money losing operations with loans, thereby fueling even more maladjustment and excessive resource usage. <Someone please explain to me the transition in those last two paragraphs> I've been explaining this concept for a year, so don't ask me to start from scratch.

To: mishedlo who wrote (20717)	10/26/2004 7:43:29 PM
From: glenn_a	Read Replies (1) \| Respond to of 110194

Re: the "Misconception: China will Remain a Deflationary Force" article, I must say I didn't find it particularly convincing myself either. The Illuminating I did think it presented a good case for differentiating distinguishing between the "army" of country folk from the wage pressures being felt in the coastal provinces where demand for labor is acute (or so says the article). Re: the "demand-led cycle" that China is experiencing, I mean fine, but households need to have the wealth/earnings power to actually "pay" for these goods, and corporations have to be profitable to justify manufacturing these goods. But that small detail re: the Banking System Most importantly, however, I thought the article glossed over the implications for bad debt built up in the banking system, and the fragility of the global financial system generally. Regarding China's banking system, I mean any Government can ultimately extend credit to socialize losses in the banking system - whether the banks are privately or publicly owned. But I don't think it's that simple. If it were as simple as monetizing bad debt in the banking system, Japan would have emerged from her recession years ago, and American wouldn't have had her banking system collapse in the 1930's. IF the global banking financial system is seriously overextended and undercapitalized, there's no quick way to ultimately fix this situation by monetizing debt IMO. Debt is not ultimately an asset. The asset is the earnings power that supports the debt - be it corporate earnings or government tax revenue. You just can't create capital out of thin air. You can create fiat money, but not capital. If you monetize the debt in the banking system, you basically just move the debt from commercial banks to the central bank. Fine, but you still don't have any additional capital underlying your banking system. Rather, you've just created a greater percentage of your banking system collateralized by debt. The only long-term solution to my mind is to go through a debt-liquidation process which genuinely recapitalizes the banking system. I could be wrong here BTW, but more and more I'm coming to view the problem as a deeply-overindebted global banking system. And any solution that involves monetizing debt to my mind is ultimately a non-solution. It only makes the problem worse, and makes the banking system yet more fragile, with all the economic distortions that go along with this scenario. Some day, you have to bite the bullet and actually recapitalize the global financial system. And I'm coming to feel that this must ultimately be deflationary, because it is going to involve debt liquidation. Thoughts? TIA. Glenn