“Frankly, I am surprised at the “Bad China” attitude in Simon’s post. I think they did pretty well for themselves.”

By abusing trade and finance every bit as much as did the U.S. and placing themselves in a financial trap with no route of extrication that does not damage themselves and likely the world financial system itself? Really?

Frankly, I am surprised at the “Bad China” attitude in Simon’s post. I think they did pretty well for themselves.

I really want the dollar to plummet, the appreciation of the dollar has radically changed my finances for my MS at Stanford this fall.

And I am vastly amused by people who romanticize Chinese power in this way. China has no barganing power here. Despite its rhetoric, it continues to consume dollars and treasuries at a near-record levels, increasing its cumulative holdings hand-over-fist. It does this because it must. When you “must” do something, you are not in the driver’s seat. The view that this is a unipolar power issue is remarkably naive.

this is true as far as it goes, but there’s a difference between us and japan — our current account balance.

as john hempton has pointed out, japan was awash in deposit funding as a result of its CA surplus even before 1990 — indeed its excess deposits helped fuel its boom. these excess despoits are a direct product of the CA surplus, which the banks intermediate, and enabled (when loan demand collapsed following the asset shock of 1990 on) ZIRP and malaise.

the US, however, has long imported scads of wholesale funding for its banking system through its CA deficit. this has resulted in a systemic deposit-to-asset ratio of 66%. there are no excess deposits; there is only a massive pile of wholesale funding that must be rolled or systemic assets must be liquidated. the fed has stepped in as the wholesale-funder of last resort, but that merely means the government now has to import the capital rather than the (now collapsed) private interbank and securitization markets.

this is why, imo, we’re seeing rocketing treasury yields. our problem isn’t like japan’s; it is instead rather more like 1998 korea, or for that matter 2007 iceland. we MUST import capital to prevent an asset liquidation spiral in the financial system as we slowly wean ourselves off wholesale funding; in the meantime, there remains ever present a real possibility of a sudden-stop capital flight.