** 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

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.

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.

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.

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.