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Read Dean, Areddy and Ng on the management of China’s reserves during the crisis

by Brad Setser
January 29, 2009

Dean, Areddy and Ng key their story off Wen’s criticism of US economic management. But it is really much more about the political fallout inside China from China’s losses on investments that they considered safe.

The story breaks a lot of new ground. It highlights how China’s losses on Reserve Primary, Lehman, Morgan Stanley and WaMu influenced China’s decision-making It also confirms that China was very very nervous about its Agency exposure.

“The alarm for Chinese leaders started ringing loudly in July and August as problems deepened at Fannie and Freddie. Senior Chinese leaders, who hadn’t been apprised in detail of how China’s reserves were being invested, learned for the first time in published reports that the country’s exposure to debt from those two alone totaled nearly $400 billion, say people familiar with the matter. Fearing that the U.S. government might not fully back the companies, China demanded and received regular briefings throughout the peak of the crisis from high-level Treasury Department officials, including Mr. Paulson, on the market for U.S. debt securities — especially those of the mortgage giants.”

It seems like China’s top leaders knew less about China’s portfolio that American reserve watchers; it is not inconceivable (gulp) that I was the source for those published report about China’s Agency holdings. My own work with Arpana Pandey, incidentally, suggests that China’s holdings of Agencies were closer to $600 billion at their peak – though it is possible that China never held more than $400 billion of Fannie and Freddie debt, as there are other kinds of Agency bonds.

The Journal’s story also confirms that there has been a huge swing in the management of China’s reserves. The TIC data, which has shown a huge increase in China’s Treasury holdings, wasn’t off.

It turns out that one of China’s main criticism of US policy is simple: the government didn’t stand by institutions that China expected the US to support. Lehman. Wamu. And the Reserve Primary Fund. Dean, Areddy and Ng:

“Leaders in China, the world’s third-largest economy, have been surprised and upset over how much the problems of the U.S. financial sector have hurt China’s holdings. In response, Beijing is re-examining its U.S. investments, say people familiar with the government’s thinking. …

Chinese leaders have felt burned by a series of bad experiences with U.S. investments they had believed were safe, say people familiar with their thinking, including holdings in Morgan Stanley, the collapsed Reserve Primary Fund and mortgage giants Fannie Mae and Freddie Mac.”

….. The Reserve issue “is causing a lot of concern with a lot of financial institutions in China,” said the Chinese official. Some officials expected that the U.S. and its financial institutions would better protect China from loss. “If the U.S. is treating us this way, eventually that will be enough cause for concern in the stability of the [U.S.] system,” the official said

China’s leaders believed that China’s investments in the US financial sector would be protected, perhaps because that is how things are done in China. They weren’t. At least not consistently.

And that clearly has had a big impact on China’s leadership. And if I had to guess, I would guess that the CIC was not the only institutions in China that had a bit of direct exposure to Lehman. SAFE turned conservative at the same time as CIC. Though it may have been stung more by its losses on WaMu (Via a TPG fund).

China didn’t just stop buying Agencies. It also stopped lending out its Treasuries.

The Chinese central bank last year stopped lending its Treasury holdings for fear the borrowers will go bankrupt, according to people familiar with the discussions — a decision that disrupted the functioning of the Treasury market. Beijing rejected pleas by Washington to resume its lending of Treasurys, the people said.

Fair enough. China owns the Treasuries after all, and has no obligation to lend them out. But, well, its actions in both the Treasury and Agency markets weren’t exactly stabilizing.

China’s leaders have a major problem. They have accumulated an enormous quantity of US assets as a result of their efforts to manage China’s exchange rate But they don’t have a mandate to lose money investing the public’s money abroad. China’s losses have generated a public outcry. However, avoiding credit losses means piling into Treasuries and — well — that has risks of its own.

The internal criticism of China’s central bank and the CIC is a bit incoherent. They are getting blamed both for letting the RMB rise and for accumulating US assets.

“Around October, a lengthy Chinese-language essay began circulating on the Internet excoriating Mr. Lou and other top CIC officials, along with Zhou Xiaochuan, China’s central bank governor, for being too close to the U.S. and then Treasury Secretary Henry Paulson. The diatribe quickly gained wide circulation in Chinese financial circles. One passage charged that Mr. Zhou “colluded with Henry Paulson to buy U.S. bonds, forced [Chinese yuan] appreciation, attached China’s economy to the U.S. and broke China’s economic independence.””

But the reality is that the RMB peg tied China’s economy to the US, and only by letting the RMB rise more than it has can China stop accumulating US assets.

China doesn’t really seem to want more exposure to the US. Understandably so. It already has way more exposure than makes sense. But China also doesn’t want its currency to rise, especially now. And there is no way to square that circle.

The funny thing?

China’s external portfolio actually has performed relatively well during the crisis. It only invested a tiny share of its total portfolio in risky assets. It holds a lot of long-duration bonds whose value rose as interest rates fell. And it is overweight dollars and the dollar rose …

The true risk in China’s portfolio is one that China’s leaders clearly knew they were taking, namely that the dollar will eventually fall against the RMB. China for a long time operated its own version of the TARP. The troubled asset it bought in huge quantities in 2007 and the first part of 2008 was the dollar.

79 Comments

  • Posted by Twofish

    To Qingdao:

    It also gets makes things needlessly complicated when people try to package about four different things in one policy.

    For example, I do think that China needs a less export based economy and much more social spending. I don’t think that China needs more consumption, and at least for the next two decades, I think that China should focus on capital investment. I don’t like the concept of “macroeconomic balance” because makes assumptions about what are good policies that I don’t think are valid.

    I do think that privately managed companies are useful, but I think that at least for China, it’s better that the larger corporations be state-owned.

    So do I agree or disagree with Lardy, it depends on the specific topic.

  • Posted by Indian Investor

    Sorry didn’t intend my previous comment in italics, I was replying to the comment below from Cedric.

    Cedric: I have to admit that me ‘an Nest Eggy are concerned as well about the USG handling of our finances.

  • Posted by Twofish

    DJC: That $2.5 billion is still alot of money that could buy 2 Aegis missile destoyers.

    Actually it can’t. Bill Gates (who has about $50 billion in assets) can’t just write a check for $2.5 billion and get Aegis missile destroyers. Money is necessary but it is not sufficient, and if all you needed to solve a problem is enough money, you are in pretty good shape.

    It’s pointless to bring up rural schools in China in this situation. Suppose BOC hadn’t lost the $2.5 billion, would that improve schools in China, and would China be able to suddenly get an AEGIS destroyer? I doubt it. So what is the point in bringing it up?

  • Posted by Twofish

    Investor: One thing that really made me suspicious at the time was that while so many guarantees were provided, the Agencies were left in doubt.

    And there are good financial reasons for that. Commercial paper and money markets are short term instruments, which means that you can withdraw a guarantee. The GSE’s issue long term instruments, which means that you can’t withdraw a guarantee. The GSE’s are much larger than the CP or money markets.

    Also, Treasury made those guarantees because the world was about to end. The current guarantees on the Agencies are enough to keep things from falling apart.

    Investor: Similarly, the overall trend has been that the Fed didn’t make a transparent policy to be applied to all DIs & IBs that might be in trouble.

    There are good reasons for that. Being in the middle of a fire is not a good time to make policy. Also things were moving much too fast to make coherent policy since anything that you say today would be useless tomorrow. See TARP for example.

    Investor: While we obviously can’t verify this, since there’s no publicly disclosed detailed information on loans disbursed by the Fed.

    But it there was some secret agenda, certain people would be screaming that aren’t. So either there is no secret conspiracy or everyone is in on the secret conspiracy, which makes it not much of a secret conspiracy.

    Investor: If the crash was engineered, as Twofish has been pointing out, there is little to fear.

    Actually there a lot to fear because people that start wars tend to regret it. Once you start crashing things, you end up opening Pandora’s box.

  • Posted by Ying

    Obama should learn from Putin’s mom’s advice to Putin in childhood: “don’t ask for help and don’t complain”.

  • Posted by Qingdao

    Two-fish: So: China needs fewer exports, more govt social spending; those 50 million people living on $1/day do not need more “consumption” but should continue to wait until the central authorities get around to “social spending”; but then: “China should focus on capital investment”; and because you like the idea of govt “owning the large corporations” that is doubtless where the banking system will continue to invest; and you dislike balance; prefer growing imbalances? Re-read what you wrote and ask yourself whether or not this is garbled.

  • Posted by Indian Investor

    Twofish: The GSE’s are much larger than the CP or money markets.

    I’d be glad if you could give me some numbers on this. What’s the size of the GSEs, versus the US Hq’ed money market mutual funds, and the CP market in the US?

    Besides, as I’ve pointed out there hasn’t been much public attention on re-verifying the bankruptcies. The only “scam” that came up was that on the day of the Lehman bankruptcy filing, Sept 15, 2008, a German Landsbank in Bavaria was found to have a $400 million transfer to Lehman still in process. There was a public debate in Germany and a minister resigned, being unable to defend the Landsbank’s action to lend such a large amount to Lehman, knowing very well that Lehman was in a well known process of either a sell out or a bankruptcy.

    At the same time, it might very well be that the Fed was issuing loans to Lehman, and since this kind of info isn’t public, you can’t tell how the 2008 credit pandemonium was being used by profiteers to siphon funds out of large banks, and perhaps even the Fed itself.

  • Posted by Indian Investor

    @Qingdao: I think Twofish is trying to strike a balance between various options that are in different directions. In my opinion this approach is generally good in many government departments. There are various people demanding different things and you have to strike a balance amongst different interests. Usually striking a balance involves just being lazy and not doing anything, which is good, since in any case, as Twofish has frequently pointed out before, bureaucrats aren’t paid much, so it’s ok if they’re lazy.

  • Posted by Twofish

    Qingdao: China needs fewer exports, more govt social spending; those 50 million people living on $1/day do not need more “consumption” but should continue to wait until the central authorities get around to “social spending”

    Since those 50 million people don’t have cash to spend, I’m wondering what you suggest as an alternative. The important thing is for the government to get an education and health system together and then increase credit to rural regions.

    Qingdao: “China should focus on capital investment”; and because you like the idea of govt “owning the large corporations” that is doubtless where the banking system will continue to invest;

    The big banks are likely to continue to invest in SOE’s unless forced not to. Something along the lines of the Community Reinvestment Act would work, as would recapitalizing the Rural Credit Cooperatives.

    Qingdao: and you dislike balance; prefer growing imbalances?

    I think balance is the wrong model to apply here.

    Qingdao: Re-read what you wrote and ask yourself whether or not this is garbled.

    It’s complicated because reality is complicated. I don’t think that I can summarize what I think the policies should be for the Chinese economy in one paragraph. It would take at least four pages, and then another 20 to justify those four pages.

    I’m very distrustful of simply solutions to complex problems, because they tend to make things even worse.

  • Posted by DJC.

    DJC: That $2.5 billion is still alot of money that could buy 2 Aegis missile destroyers.

    Twofish: Actually it can’t. Bill Gates (who has about $50 billion in assets) can’t just write a check for $2.5 billion and get Aegis missile destroyers.

    DJC: Actually $2.5 billion can get you two Aegis destroyers if you are a client state. If Taiwan is willing to pony up the money, the Pentagon will be glad to deliver the Aegis warships from its order backlog. That would be in addition to the PAC-3 Missiles, AH-64 Attack helicopters, Harpoon Cruise Missiles that are already on order from Taiwan’s Ministry of Defense. The US only restricts the export of Nuclear weapons to Taiwan which would cross the declared “red line” of the China PLA for total military assault of Taiwan.

    Twofish: It’s pointless to bring up rural schools in China in this situation. Suppose BOC hadn’t lost the $2.5 billion, would that improve schools in China.

    DJC: Oh please, there are dozens of US and Hong Kong based NGO that if given a fraction of the $2.5 billion wasted on US subprime garbage, could go a long way improving the education of millions of impoverished Chinese children.

  • Posted by Indian Investor

    @DJC: There are plenty of ways to spend the forex reserve amounts on local fiscal stimulus. e.g. China could just subsidize oil prices.
    But the danger involved in reducing the forex reserves at this stage is that there could be a drain out of external loans that are outstanding in China. Overall, it’s important for China to maintain its reserves since avoiding a currency crisis is important.

  • Posted by Indian Investor

    I think China’s one child policy should be replaced with a two child policy. Apart from eliminating the concept of brothers and sisters, a one child policy is simply unsustainable in the longer run. Soon you will get 4 grandparents, 2 parents and 1 little kid if the policy succeeds perfectly. So 2 people have to take care of 4 old people and 1 kid by working hard. Plus, you’re going to have a massive reduction in China’s population. I worry that if the one child policy isn’t changed, soon there may not be any Chinese people left in the world.

  • Posted by Twofish

    Investor: I’d be glad if you could give me some numbers on this. What’s the size of the GSEs, versus the US Hq’ed money market mutual funds, and the CP market in the US?

    GSE’s are about $6 trillion. CP is about $2 trillion. Money market funds are about $2 trillion.

    Investor: Besides, as I’ve pointed out there hasn’t been much public attention on re-verifying the bankruptcies.

    That’s because there aren’t any car wrecks that people are interested in.

    Investor: The only “scam” that came up was that on the day of the Lehman bankruptcy filing, Sept 15, 2008, a German Landsbank in Bavaria was found to have a $400 million transfer to Lehman still in process.

    And that’s because someone forgot to shut down a computer program. The funny thing is that if they had sent that money a day earlier or a day later, they would have gotten their money back. You have a computer send money from the German bank to Lehman. A day later the computer sends the money back.

    Investor: At the same time, it might very well be that the Fed was issuing loans to Lehman.

    The Fed has better computer geeks.

    Investor: Since this kind of info isn’t public, you can’t tell how the 2008 credit pandemonium was being used by profiteers to siphon funds out of large banks, and perhaps even the Fed itself.

    You might not be able to tell, but most people in the industry can, and most of the information is public. You can go through Lehman’s bankruptcy filings.

  • Posted by Twofish

    DJC: Oh please, there are dozens of US and Hong Kong based NGO that if given a fraction of the $2.5 billion wasted on US subprime garbage, could go a long way improving the education of millions of impoverished Chinese children.

    Probably not…..

    1) NGO’s have their limits. They can only target specific counties, and the amount of social improvement they can undertake can be quite limited.

    2) More money sometimes kills an NGO. An NGO that is set up to run programs with $100,000 tends to get blown apart if you give it $1 billion.

  • Posted by Indian Investor

    Twofish, now that I think of it, if a two child policy succeeds perfectly, you get 4 grandparents, 4 parents and 4 children. This means each adult is taking care of one old person and one kid. If the policy is just one child, you get 4 grandparents, 2 parents and 1 kid. This means each adult is taking care of 2 old people and half the work of handling one kid. Both seem to be the same load for a family. But a 1 child policy means that soon there won’t be any Chinese people left. Every 30 years the China Communist Party is planning to halve the number of Chinese people with its miscalculated one child policy.

  • Posted by Indian Investor

    Twofish: You have a computer send money from the German bank to Lehman. A day later the computer sends the money back.

    Why does this happen? I mean, what is the logic of this computer program? Why should $ 400 million go from some state owned German bank to Lehman, just to be sent back the next day, even if this is exactly what happened. And if that’s what happened, why can’t the $ 400 million be paid back to this German Govt. bank, since it has made a computer mistake it can say sorry and everybody can move on.

  • Posted by DJC.

    DJC: Oh please, there are dozens of US and Hong Kong based NGO that if given a fraction of the $2.5 billion wasted on US subprime garbage, could go a long way improving the education of millions of impoverished Chinese children.

    Twofish: Probably not….. NGO’s have their limits. They can only target specific counties, and the amount of social improvement they can undertake can be quite limited.

    DJC: In the United States, non-profit NGO institutions and volunteering account for more than 7 percent of the entire national GDP. That’s approximately $1 trillion annual budget for NGO’s in the United States. What did you say that NGO’s can only undertake a limited tasks?

    http://www.globalphilanthropic.com/subpage.php?p=66

  • Posted by Twofish

    DJC: If Taiwan is willing to pony up the money, the Pentagon will be glad to deliver the Aegis warships from its order backlog.

    Again not true. Taiwan would love to get Aegis destroyers. It’s not getting them. Money is not an issue here.

    If you really want to help rural education in China, you are wasting your time worrying about Bank of China and subprimes. The big issue is the $150 billion bailout that needs to be done for the Rural Credit Cooperatives and the Agricultural Bank of China. Rural credit is basically frozen because all of the rural credit institutions are broken, and they are broken because there are seven other things that got higher priority.

    And then there is the whole system of public finance in China that needs to be overhauled.
    But people have been working on this problem since 2008 and there has been lots of progress. It just takes time.

  • Posted by bena gyerek

    i agree with ndk. china needs to diversify into commodities and the euro.

  • Posted by Indian Investor

    @bena: any idea if the same circular trading pattern is going on with the UK Govt. Bonds … HM Treasury Secs , bought by the public, and then the BOE lends the cash from the HM Treasury money mainly to Barclays and RBS …? And if not, where did the BOE get the huge new credit money from?

  • Posted by Twofish

    Investor: Why does this happen? I mean, what is the logic of this computer program? Why should $ 400 million go from some state owned German bank to Lehman, just to be sent back the next day, even if this is exactly what happened.

    It’s an interest rate swap. The German bank sends Lehman $400 million, the next day Lehman sends back an amount which is more or less $400 million depending on the interest rate.

    The problem is that in between the time the order went from the German bank to Lehman and the time Lehman was supposed to send the money back, it declared bankruptcy.

    Investor: And if that’s what happened, why can’t the $ 400 million be paid back to this German Govt. bank, since it has made a computer mistake it can say sorry and everybody can move on.

    Because Lehman doesn’t have $400 million, and that $400 million gets added to a pot that gets split with all of Lehman’s creditors.

    Now if the German bank had sent the money a day later, then either the contract would have been in effect or not. If in effect, Lehman would have had to send back money since it was a post-bankruptcy contract that has been assumed. If not, then Lehman would not be entitled to the money, and would have to return it.

  • Posted by DJC.

    Twofish: Again not true. Taiwan would love to get Aegis destroyers. It’s not getting them.

    DJC: The Aegis Destroyers weren’t being ordered only because the opposition Kuomintang controlled the Taiwan Legislative Yuan which blocked the Aegis acquisition for the past decade. The Kuomintang stonewalled every DPP legislation from former President Chen Shui-bian. The DPP pro-independence party was booted out of office to the annoyance of the Washington Neo-con elites.

  • Posted by Twofish

    Investor: And if not, where did the BOE get the huge new credit money from?

    Same place the Fed gets it’s credit money. Ye old printing press. Actually, it’s gone electronic, so if the Fed, the BOE, and the PBC wants to lend some cash, it just clicks a few keys and that cash magically comes into existence.

  • Posted by Cedric Regula

    Indian investor:

    I don’t believe the crash was engineered in any grand sense. There were probably moves made by IBs to profit in specific instances as things started to crumble of course.

    But it was just a result of systematic risk building up over a long period, then the underlying economy and weakest parts of the financial system started to go in decline, which started the massive de-leveraging and accelerated the process.

    Lots of people knew it had to happen. Chaos Theory and Game Theory mathematicians tried modeling how it goes and you could read stories about building sand piles until you get an avalanche as far back as 2006. Since I’m half Italian, I’m genetically incapable of performing math at that level, so I was content to let the Asians do it.

    But me an’ Nest Eggy were out of stocks in 2007, the stock market peaked in Oct. 2007. Early in 2008 Roubini called the beginning of the recession in 12/2007. That was confirmed a year later by the USG. Bear Sterns went down in March. The sandpile avalanche began. The Chinese mathematical models caught on in mid year and they ganged up on Paulson for the GSE guarantee.

    So it was a rough time for me an’ Nest Eggy. Nest Eggy is in charge of bringing home the bacon, but we talk about things of course, and she calls me her Trophy Husband. She’s sweet. So we made it thru the year with a few scrapes and bruises and ended up the year in the black and blue. But I’m not letting it go to my head. This year could be just as bad or even worse for me an’ Nest Eggy.

  • Posted by MakeMeTreasurySecretary

    DJC: The PPI is much more than the price of hamburger, it is the price of everything. But then you knew that but you are checking us. China is certainly not as poor as the $2,000 per capita GDP statistic (manipulated as it could be since it depends on renminbi/dollar rate) that you chose to use to make your point.

    The Middle Kingdom has, undoubtedly, the right to play the game as they see fit. The problem is that the US government, in ideological shackles, cannot take the decisive action that needs to be taken: Slap a 30% tariff on anything that is imported until, one way or the other, the current account is balanced. Sounds drastic? Not as drastic as wasting trillions to prop up banks.

  • Posted by Indian Investor

    Cedric: it was just a result of systematic risk building up over a long period

    I think current account “imbalances” and perhaps to some extent the EMI/monthly income outflow of ordinary citizens are being blamed as “build up of systematic risk”.

    Current account imbalances were never the “Cause” of credit expansion. They were always the “effect”, in a world of hard currencies payable in gold.

    It’s important to know how the “imbalance” and re adjustment theories were formulated, by 19th century economists. Remember all international trade in those days were settled with hard currencies, meaning they were payable in gold. As credit expanded in one country, foreigners gained by being “mercantilist”, i.e. they accumulate a lot of the hard currency through exports. Whenever a credit panic got triggered, foreigners would lose faith in the local currency, and trigger a run on the country’s gold reserves. Left with no gold reserves, a new cycle would begin. This time round, imports from foreign countries has collapsed, because the country has no more gold to attract foreign trade.

    In the modern world the “operative gold standard” is the US dollar. This isn’t due to “soft power” reasons. It’s due to the exclusive agreements and control over international trade in petroleum. When Cheney reportedly said that the US Dollar gets 90% of its value from the US military, he was probably right.

    Which is why Afghanistan is so important. Afghanistan and the Caspian Sea Oil Pipeline Palmistry.

  • Posted by Don the libertarian Democrat

    “China’s leaders believed that China’s investments in the US financial sector would be protected, perhaps because that is how things are done in China. They weren’t. At least not consistently.”

    Our investors believed the same thing. Investors all over the world were investing on the assumption that our government had made an implicit guarantee to intervene consistently and forcefully in the case of a financial crisis. They were right, up to a point. Not understanding this is a major failing of the last administration.

    By the way, on the Sunday before Lehman fell, investors were already looking at Merrill failing due to counterparty risk. In other words, the Calling Run, Debt-Deflation possibility, was already understood by many investors.

  • Posted by Rien Huizer

    Twofish,

    A bit late perhaps, but I do not understand your comments to my comments. Qianlong (as you know the same name LKW gave his firstborn son, now PM of Singapore) may have had many reasons for his stance vs a vs the british, but according to you he was posturing (though some historians believe he never finished his PhD in economics) in order to avoid the risk that dealing with the British in the “British” way would create domestic/colonial problems not worth the benefits available from dealing with the British.

    You know more about this than me, probably, so then I should not try to read culturally based posturing into the myth about Paulson’s visit. If Paulson did a favour to one market participant at taxpayer’s expense, that should have been disclosed. If not, subsequent changes in Chinese market participation would appear perfectly rational.

  • Posted by Cedric Regula

    indian investor:
    Current account imbalances were never the “Cause” of credit expansion. They were always the “effect”, in a world of hard currencies payable in gold.

    I think credit expansion is systematic risk, especially when it gets to the point that all the shock absorber is taken out of the economy at consumer, corporate and government levels. The ability to pay back credit is a fundamental building block of capitalism.

    Cheney is full of it. The Deutsch mark wasn’t worth crap in the ’30s and ’40s. All paper currency values are supported by the strength of the economy, financial system and ability to pay back credit.

  • Posted by Jen H

    Brad / Arpana: Liked it a lot. Certainly no back of the envelope effort. Was speaking with one of your colleagues on the ‘what do we do about it’ question earlier this week, so some informal reactions straddling substance and tactics:

    ** Your hunch on China’s quiet, insatiable appetite for US corporate bonds, circa 2006, is one I’ve long suspected as well. My larger concern/frustration is why this wasn’t more of a story, particularly given the healthy above the fold scrutiny that befell the Blackstone deal at the time.

    ** If recessions and wars are both relative, and — if i’m reading you right– your grounds for concern over China’s long-standing and recently revitalized appetite for tbills is the destabilizing potential involved, how do you reconcile this alongside the fact that the Treasury is now a rather more equal opportunity debtor, no longer just China? Wouldn’t this greater redundancy bring more stability than the US-China MAD to which we have grown so accustomed? Broader point: the manner in which so many economists attack on imbalances as bad solely on grounds of their destabilizing potential has always struck me as a bit sterile and an avoidance of the larger geopolitical point. We in the US hold congressional hearings on China currency manipulation less because we are concerned about the stability of the global financial system and more because, in either perception or fact, its just plain not fair. Is there a broader case to be made that imbalances are bad for reasons beyond destabilizing potential? (acknowledging the question as leading and that your formal answer came back in October, just a call to link the two arguments at some point)

    ** Some discussion of the likely fate of the dollar, apart from the imbalances question would seem apt. My own view– so long as the RMB is rising in real terms, even as its appreciation against the $ slows, any SED or other US attempt to bring the Chinese to the table, regardless of the players, will be made considerably more difficult.

    On your assessment of the EM’s role in all of this:
    ** Decoupling questions are always packaged and scrutinized as inherently binary, all or none propositions. While obviously the emerging world is hurting worse than anyone could have expected, their abiding progress remains evident. Certainly compared to previous crises — and quite possibly compared to the US / UK in this crisis– the EM’s will recover more quickly than most economists expect in both absolute and relative terms. And not a minor point, if again we take recessions as a relative game

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