Financial Schools Reviews

As we continue to walk our economic tightrope between recession and recovery, in many people’s eyes one of the biggest factors keeping us upright continues to be China. As the bond buyer of first resort — for now — in our everything-must-go debt bonanza, as well as supplier of cheap labor and consumer goods, China has wedded its fate to our own. Its economic future and, perhaps more importantly, its policies are inextricably linked to ours.

Over the past few weeks, there have been a few developments in China that I’d like to comment on here.

Floating Chinese currency passes the swim test

First off was the market-moving news about three weeks ago that the Chinese had decided to abandon the currency peg that sets the exchange rate between the yuan and the dollar. Although the Chinese were careful not to say precisely what the new currency regime would entail or how much the yuan would be allowed to move in value compared with the dollar, that headline still created a fair amount of commotion.

It’s not yet clear what the full implications of this change will be, because it’s not clear exactly how much, and by what means, Chinese policy will change, especially in the short run.

However, this shift does fit a pattern of the Chinese moving ever so slowly toward an economy led more by domestic demand, which would benefit from a stronger currency. That said, in the medium term, China still needs to export; thus nothing dramatic is likely. A stronger yuan, if only marginally, also will ease trade tensions around the globe, so from that perspective it’s a positive development.

With regard to the impact on the U.S., it seems ultimately bearish for the dollar and for Treasury bonds, though not in an immediately meaningful way. I expect that in the coming months the Chinese will accumulate fewer dollars and, by extension, bonds — a trend that will probably accelerate as time goes by.

Capitalism with a big ‘C’

More recently, China was the skunk at the earnings-inspired July 13 stock market party. Its market declined about 1.5% while nearly all other markets rallied. The cause was the Chinese government making clear that it intended to “strictly” enforce its recent policies designed to prevent speculative real-estate investments from getting further out of hand.

It’s interesting to note how that country has been addressing the white-hot property markets that exist in its 10 or so largest cities. It clearly wants to prevent those markets from becoming even wilder and ultimately more dangerous down the road.

Thus I find it surprising that folks who maintain that China is experiencing a full-blown bubble don’t acknowledge that Chinese authorities seem to be at least trying to do something about it. There probably is somewhat of a bubble in those big-city real-estate markets, but to extend that argument to the country overall is a stretch, especially when one looks at the balance sheet of the average Chinese consumer.

Contrast that approach with the policies of the U.S. Federal Reserve, which claimed that it is impossible to see a bubble until after it has burst and, more importantly, that terrible damage would be done if it lifted a finger to attempt to thwart bubblelike behavior. Of course, both of those points are nonsense. Bubbles can be identified and dealt with, as the Chinese are showing, without ruining the economy. Officials at the Fed should have focused on bubble prevention, thus avoiding the disastrous aftermath we are now enduring, rather than honing their post-bubble management skills.

Behind the Irony Curtain

So on the world stage it is now hard to escape the conclusion that China is the monetary leader in the fight against bubbles. (Of course, Canada should get a tip of the hat as well, for never allowing its banking system to get as drunk as the rest of the West’s, but that’s a different subject.) And as if that were not bad enough, we have Russia showing us the way on tax policy.

As readers may recall, I made note of this a few years ago when the Russians copied one of the planks of my “platform,” that being a flat tax (theirs is 13%). They have now decided they are going to abolish capital-gains taxes starting Jan. 1, 2011. (Unfortunately, in Russia there is no serious rule of law, and for that reason I would never invest 10 cents there, as intelligent as their approach to taxation appears to be.)Nevertheless, the irony is inescapable. As America’s policies continue on their socialistic bent, two of history’s biggest erstwhile enemies of capitalism are embracing a level of monetary discipline and a pro-capitalistic tax agenda that probably has Mao Zedong and Karl Marx spinning in their graves.

It would be funny if it weren’t so sad — and the consequences so unsettling — for us.

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