"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Saturday, October 9, 2010

George Soros Warns China of Global Economic Collapse

The imbalances caused by the current global economic system, exasperated by fiat currency that is easily manipulated and expanded, have caused a new economic power to rise.  China has a lot more power than most understand.

From the UK Telegraph:

George Soros warns China of 'Global Currency War', (emphasis mine)

George Soros has warned that a global “currency war” pitting China versus the rest of the world could lead to the collapse of the world economy.

Mr Soros told BBC Radio 4’s Today programme that China had a “huge advantage” over international competitors because it can control the value of its currency.

He said China could also influence the value of other world currencies because they have a “chronic trade surplus”, which means the Chinese have a lot of foreign currencies. “They control not only their own currency but actually the entire global currency system,” he said.

Writing in the Financial Times, Mr Soros added: “Whether it realizes it or not, China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it.”

China’s central bank governor Zhou Xiaochuan defended the world’s second largest economy, however.
“We’ve already started to have exchange rates reform for quite long time...[but] it is gradual... it is good for a large economy otherwise it may be dangerous,” he told the BBC on the sidelines of this weekend’s International Monetary Fund meeting in Washington.
Misthos Here.  Here's another way of looking at the issue:  Extreme imblances in global trade and the historic accumulation of sovereign debts has created the need for many nations to devalue their currencies.  I'm going to set aside the argument that fiat money is at the heart of the matter - and just analyze the current system as is - assuming it is sustainable.

Debtor and trade deficit nations need to devalue their currencies to 1) increase exports and 2) better manage the servicing  (paying of interest) of their current debts.  Historically, nations would devalue against the existing world power's currency.  But that is not the case today because the current world power, the US, needs to desperately devalue as well.

So who has the next largest economy, and therefore currency to devalue against?  It's China.  And they don't want to play that game.  They want to hoard their surplus, and crush the competition.  But you know what?

We live in a fiat debt-backed paper world.  If you want to export your economic output, without trying to allow world trade to be somewhat fair - you too will lose in the end.  You are exporting your economic output for pieces of debt backed paper that will collapse in the end.  And you, a great exporting power - are accelerating that collapse, and with it, your own economic demise.

I'm targeting this to China - but I'll also say this:  Germany, are you listening?

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