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To: Bill Harmond who wrote (37056)	1/27/1999 3:27:00 AM
From: GST	Respond to of 164684

Thank you William -- China is not at the whim of the speculators, but they are in the middle of a transition made more difficult by the value of their currency. They will devalue, but on their own timetable. <<Some foreign economists have estimated the size of China's bad bank debts at around $200 billion, equivalent to 20 percent of annual gross domestic product.>> Their debt problems will soar if they don't shut down state owned companies. Shutting them down is causing unemployment and unrest. They must grow fast enough to absorb the displaced workers. If exports are slowed too much -- and they are slowing -- that will determine the pace and timing of the devaluation. Observers will both over and under react to this depending on the day of the week. Japan is still the key. As large as China is, it is nothing compared to Japan. If Japan shrinks at 2 percent per year instead of growing at 3 percent per year, after two years this is equal to one entire year of Chinese output removed from the global market. Japan is also an important investor. The US runs a trade and current account deficit which will become increasingly difficult to finance. As investors, we tend to think the U.S. is so strong, so important, that the rest of the world does not matter. The 'Asian' crisis just reinforced that view. We will see.

To: Bill Harmond who wrote (37056)	1/27/1999 3:37:00 AM
From: GST	Respond to of 164684

William -- I forgot one thing -- Japan must reflate. The government is borrowing vast sums to try to do this, but it is always too little and too late. I keep in regular touch wit people in Japan --they are fearful. The private pension system is underfunded by $1 trillion dollars or more. They don't trust their own banks. If this goes on, the effort to reflate is going to require a massive growth in yen liquidity, and with it, higher interest rates. Between Chinese devaluation and Japanese reflation, Japan is the bigger story. The impact of Chinese devaluation might be to amplify the Japanese effort to reflate. I really don't think more than a few people in the world have thought through the implications. I know I have not figured it out yet.