http://en.wikipedia.org/wiki/File:Oil_Prices_1861_2007.svg

The gold standard need not handcuff a nation’s monetary policy. The exchange between gold and the nation’s currency can be changed as needed. With a gold standard, however; it is hard to change the value of currency secretly – which is a good thing. It builds trust, honesty and stability into the market economy.

It is interesting also to note that globalization isn’t guaranteed to make everyone more prosperous as we have been told. As a result of globalization China and the US have found themselves in a pathologic relationship from which they may not be able to easily extricate themselves. This of course has major global implications.

In the end globalization can only be as effective at bringing prosperity to mankind as are the relationships that form between nations because of globalization. I think that is worth noting.

Bomlat, if injecting liquidity causes prices to be higher than they otherwise would have, at a macro level that is indeed the same as appreciating the currency. Because of the impact of currency on foreign debt and money assets, and the impact of higher prices on domestic debt and money assets, there are some distributional effects and possibly financial distress effects.

Joseph, I don’t know the Global Insight study and have no idea what they mean by their numbers, but suspect that they are defining their way into a conclusion. My main point is that the idea of China as being the world’s factory is, like much of what is said about China, pretty meaningless – no less so than the idea that the US produces only services.

George, if I understand your question, then yes, China’s reserve and currency policies are complicated by the adverse impact they might have on Europe.

MoneyIllusionist, the PBoC would offset dollar outflows by buying central bank bills, but these are a close enough substitute for money that it won’t have much effect on the overall money supply. It is hard for me to figure out how monetary policy works in China except to say that it is far more complicated than open market operations.

David Pearson, I agree with your comments. I think China has a much better understanding of fiscal issues than the US did in the 1930s, although it is not clear that fiscal expansion is going to be easy even if they understand the magnitude of the needed expansion.

Seatrus, the foreign bond defaults in the 1930s were painful to US bondholders and so may have affected their consumption, but it was not the primary cause, or even a major cause, of the US contraction.

LEON: “The short term weakness in the stock market both in China and HK is actually the greatest opportunity of a decade. Best buying opportunity is when things are looking absolutely the worst if you got the facts right.”

I have been bearish on China for a few years but I actually think it may end up being the largest and most important economy in 50 years. The stars are aligning in its favour but it will go through serious issues, including dismantling the totalitarian system they run. In any case, to answer your thought…

Even if you have a long-term bullish view of China, there is always the possibility that you will end up bankrupt if you get in too early. Remember, someone in the 1920’s could have argued that USA would end up being the dominant economic power, with great prosperity in the long run. Yet if they invested in the stock market or in most businesses in the 1920’s or 1930’s, they would have likely ended up bankrupt.

So, my concern is that if you invest too early, even if your long-term macro view is correct, you will end up with big losses. Now, one could argue that my thinking will lead to them missing out on the bottom. Yes, you probably won’t get the bottom. But if your macro view is as bullish as you are implying, whether you invest now or in 6 months or an year or whatever won’t matter in the long run.

Furthermore, if China is to become a world economic power, it will have to open up its capital markets (they have been doing this very slowly over a decade.) This may not happen until they democratize their government but I don’t see them becoming an economic power without getting access to foreign capital. For instance, from what I understand (I’m just a newbie sitting over in Canada), China doesn’t really have a bond market to speak of; or any sort of venture capital market. You don’t necessarily need foreigners to fund their businesses but most of the private wealth (not goveernment wealth) is held by citizens in the wealthy countries. Governments are very bad allocators of capital and generally don’t know what the hell they are doing anyway. So access to foreign private capital will help China. For example, a big chunk of the railroads in America in the 1800’s was financed by Europeans.

If what I say is correct, then, when they do open up their local stock markets, we will have far greater investment opportunities, including smaller companies or rural companies, or whatevever. Right now, you are pretty much limited to a few Hong Kong or Chinese red chips. If you are a small investor like me, what are the chances that these widely followed stocks are mispriced? Except for the contrarian macro case you are suggesting, there is little reason to believe that you will price these large-cap Chinese companies better than the market.

Anyway, I share your sentiment but feel it’s way too early. I personally am waiting to see how China handles a big recession (2nd one after the 1997 crisis) before doing anything…

Thanks very much in advance for your response.

The point is simple from this equitation:

cash_from_FX_reserves=exchange_rate*size_of_FX_reserves

Can you see?
Your target is that to keep the Sum_money on level.
Of course the multiplier fall rapidly (as we can see it in the US) so they have to work hard to keep it in line.
Parallel it,the FW reserves fall rapidly too.

But, if you want to keep the sum of the money on level,you can do it by issuing new money OR by simply allow to the currency to be stronger.
Both have the same monetary effect,but the xchg rate will give money to that who know how t use it,in the case of the inflationary money it will go to the corrupt officials.

Result?

China and the US try to increase the Sum_money.
The outflow of the hot money help the US to reach this target,and the US have better system to pump inflationary money into the economy with a higher efficiency.

China down,US up.

When the mercantilist countries grow faster than other countries, an imbalance sooner or later emerges where the wilingness to produce and accumulate overwhelms the depreciation plus the willingness to consume.

What is produced on the margin becomes increasingly worthless. Today China produces on the margin.

This is mirrored financially. China is working like crazy to add to its dollar reserve, but 1% of inflationary value destruction of the existing reserve requires an ever higher addition to reserves. They are collecting fruits, but have collected and stored so much that the stored fruits are rottening quicker than new fruits are added.

This forces China’s economy down AND their consumption up. Unfortunately there is a mismatch between what THEY want to consume and produce, because they have produced for the Americans. That is, some Chinese investments are worthless.

The mismatch will be corrected as exports are replaced by domestic consumption. Made investments must be written off, new investments must be made.

There is a point in a small country keeping a currency reserve in a large country. But less the other way round. As China grows, it makes ever less sense with huge US reserves. China should now use these reserves. Why not distribute the currency reserve to the population. Could there be any more optimal use…