Great quote from Rodrik at the top of your posting. You are correct that it applies just about as well to the United States as to developing countries.

But I read the rest of Rodrik’s piece. Rodrik goes on to misdescribe China’s development strategy as being economic diversification, but that is only part of the story.

The other part is mercantilism. The loans that they made to the United States suppressed Chinese consumption while enhancing Chinese investment in tradable goods production. At the same time, they enhanced American consumption while suprressing investment upon tradable goods production in the US.

We called China’s strategy “Dollar Mercantilism” in our 2008 book Trading Away our Future.

No, I don’t have any inside information, but I believe that China and other Asian countries will decouple from the United States during the next five years, partly because the American economy will remain moribund, partly because American policy will continue to be incompetent, and partly because their own domestic market and financial systems will be able to bear the burden. Regional cooperation among Asian currencies passed a major milestone on May 3, as the Far East Economic Review reported yesterday.

Less important than the specifics of the agreement is the fact that it includes all the countries of the region. This is a major challenge to the International Monetary Fund, which always objected to a regional Asian initiative outside its purview, as well as to the United States.

The Asian exit from the dollar will be turtle-slow and gradual. China and Japan between them have nearly $2 trillion worth of US Treasury securities and will do nothing to jeapordize their existing investment. But the collapse of governance in the United States and the Obama administration’s response have turned the US into a zombie economy, and the dollar into a zombie currency.

http://blog.atimes.net/?p=1031

On the subject of society, the templars military and religious orders 12/14 c were the messengers of Christianity and mandated to and distribute the spirit of religion to the heretics.They came back very rich and more arrogant at the time when the coffers of Philippe le Bel (king of France 12 Ce) were depleted.
A failed between the order of the Hospitaliers and the Templars was the pretext given to Philippe le Bel to put 130 Templars in the bonfires and confiscate their wealth.
If the finance industry is far from close to the templars and could be with merits of its own,thrown to the bonfires, the governments of today need to find late culprits (fiscal paradises, finance industry) and replenish their coffers. Civilisation may change but the spirit,will remain.

Sounds like you think there is something unusual about Landesbanken making bad investment decisions. Not true, this is what they have been doing all along. There has not been a dumb way to lose “public” money that they have not been involved in. Real estate, various kinds of stupid bonds, derivatives, you name it. If you worked for an investment firm, these were ideal customers. Sophisticated and able to understand complex structures. Given the right introduction of course.

But what is the relevance for this topic? Germany is neither an emerging market nor a deficit country. It is just full of financial people that are expected to perform miracles and regularly do, as you noticed.

Most of this post seems to address sovereign debt. I’m not sure to what extent flows are fungible and there was meaningful distinction between AAA-rated USD-denominated varieties of paper, whether Treasuries, Agencies or Hocus-Pocasies.

Chris Whalen’s shop, IRA, put up an interview with a German bank analyst the other day. I think it’s fascinating with regard to interaction between “state” and “private” sectors. The whole thing is well worth a read, here are some teasers.

Hans-Joachim (“Achim”) Dübel: “Individual banks, such as WestLB, LBBW, BayernLB, HSH Nordbank sit on high double-digit € billion exposure positions. Compare these pictures to peak outstandings of US high-risk markets in €, e.g. Subprime RMBS of € 575 billion in 2007, and you get an idea about to what extent the Landesbanken funded Wall Street. Take all high-risk securities markets at peak levels together – from leveraged loan CLOs to Alt-A RMBS, and I think we are looking at some 15% of the Buy Side demand.” (((I think it’s safe to assume what’s now called “high-risk” was originally marketed as AAA, no?-AM)))

“The irony of the Landesbanks is that they did not lose a penny on investments and loans Germany. All of the losses were caused by investments in foreign assets, primarily from the US. The overhang of assets was caused by the failure of the EU Commission to limit debt issuance by the German banks. Thus the question came: where to put the money raised via the issuance of debt? The US was the choice. Had there been a capital markets boom in China, the Germans would have invested there instead. The choice of asset selection was completely opportunistic and engineered by Wall Street. Don’t forget that many other nations in Asia and the Middle East were given the same treatment by the American banks….

“Everybody knows the Iceland story, but few know that, for example, basically all of the banks in Düsseldorf went bankrupt in the crisis. My suspicion is that they all talked to the same investment bankers on road shows….

“The salient point is that there was only a time limit set in the agreement, but there was no volume limit, so the German state banks started to issue massive amounts of state-guaranteed debt after 2001. This money was not used to finance German or even European lending but simply to park funds in investment vehicles and make more money on it to boost their bottom lines.”

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=362

tis the difference between reserve growth financed by capital inflows and reserve growth financed by a current account surplus.

Luo Ping, a director-general at the China Banking Regulatory Commission, put it nicely in an interview back in February: “Except for US Treasuries, what can you hold? US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion [of bonds] we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

“We hate you guys?” Now that really does have the ring of marital breakdown. Let’s hope Mr Geithner is good at ducking crockery. Like divorces, major shifts in the balance of power are seldom amicable.

http://www.telegraph.co.uk/comment/5424112/The-trillion-dollar-question-China-or-America.html

We know pretty much what Treasury Secretary Timothy Geithner is hearing in Beijing this week because the Chinese have been grumbling about American profligacy for months. “We have lent a huge amount of money to the United States,” Wen declared in March. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried.” Soon after that, on the eve of the G20 Summit in London, the Chinese central bank governor Zhou Xiaochun proposed that the US dollar might eventually be replaced as the world’s main reserve currency.

“The United States is making policy decisions purely according to domestic considerations and is giving little thought to the outside world,” complained Zhang Ming, an economist at the Chinese Academy of Social Sciences, in April. “This being so, the Chinese government should prepare its defences. We can keep buying US debt but we have to attach some conditions.”

http://www.telegraph.co.uk/comment/5424112/The-trillion-dollar-question-China-or-America.html