20 January 2010

There Can Be No Bubble in China and the Madness of the Nobility

Just now on Bloomberg Television Peter Levene, the former Lord Mayor of London and distinguished chairman of Lloyds of London, said that there is no bubble in China because "China is so big, their domestic markets are so big, you cannot have bubbles there."

A sincere interpretation of the theoretical underpinnings of this statement would be that the potential demand in China is so great, there can be no possible bubbles there because they are incapable of excess. Interesting theory. Perhaps the US relief effort in the Caribbean is on the right track but insufficient. They can ship their excess and foreclosed housing for the poor souls there. Think of the demand gap that exists between sub-Saharan Africa and Europe. Well perhaps not.

My God, could this be a variant of Efficient Markets Theory? Or a cousin of Too Big To Fail? Apparently the logic in 'The bigger they come the harder they fall" has been repealed.

Of course China is in a financial bubble. It has been caused by years of pegging their currency at an artificially low rate to stimulate exports, multiplied by a state banking system that acted with command and control subsidies. And of course the US can been exporting monetary inflation for years through its dollar reserve currency. Someone had to absorb it.

But it is what China does next, how they react to the bubble, how they manage the consequences of their financial engineeering, that matters. The US has been in several bubbles of late, and is handling them rather badly, as a result of their tolerance for Mad Hatters like Larry, Tim, and Ben in key policy positions.

To be fair, Chairman Greenspan came out with his own howlers of this caliber, and was accepted by many intelligent people in the States for years. In fact, a whole industry was based on ideas and falsified evidence about the impossibility of a housing bubble in the US that in retrospect seems like barking madness.

Come to think of it, both of these fine men are nobility, KBE, Knights of the British Empire. Perhaps it is something deleterious, or even contagious, that occurs when one is subsumed into nobility? Caligulitis? Did the Queen give them a concussion in the ceremony?

I suspect Lloyds is exposed rather badly to China, and m'Lord is talking his book. What is Greenspan's excuse? Whose book was he talking?

This is why the banks and financial organizations must be retrained, because they seem to be peopled by an ersatz nobility that is disposed to spectacular flights of self-serving fantasy. Come to think of it, there is room in the asylum for the government as well.

The US needs a political system that is not so amenable to soft bribery in campaign contributions, and the world needs a reserve currency that is not controlled by the Anglo-American banks. Control the currency, control the world.

And as for the bubbles that keep taking down the developing nations, well, here is their mother.

When these trends break, and they will as all Ponzi schemes do, it will be notable.