1. Unconditional support to financial system that resulted in rampant speculation while real economy suffocated.

2. Failure to make China play by open market rules.

I read somewhere, that the critical mass of poverty is around 20% of the population, after that things become explosive. Poverty is a perception, it doesn’t matter what the official statistics like unemployment rate, lack of healthcare, etcetera tells us…

So, the yuan will appreciate soon, that is inevitable, otherwise the unemployment in US will worsen. The question is if the level of life standard will improve and where – in the US or China. Whoever is second, will get the revolutiuons first. It doesn’t matter if life standards are at different levels in these two countries, all it matters is the comparative change of life standard in each country.

While the Japanese yen rose by more than 300% over the past three decades, the U.S. trade deficit with Japan exploded – exactly the opposite of what would be expected. More recently, when China did revalue the yuan by 20% vs. the dollar, our trade deficit with China only grew. Even more recently, as the dollar plunged vs. the yen and the euro, import prices from those regions have actually fallen in the past twelve months.

It is not currency valuations that drive global trade imbalances. It’s disparities in population density that drive big differences in per capita consumption. The result is a nearly automatic trade deficit when a reasonably populated nation like the U.S. attempts to trade freely with grossly overpopulated nations like Japan, Germany, China, Korea and others.

Our trade deficit won’t change until we become as clever as other nations in protecting our domestic market.

Capitalism is people use their savings as capital to invest and build more and better things. No more, no less.

In the US, savings have been almost zero for a decade. Investments were financed by the Treasury borrowing money from foreigners and the Fed printing more money. This is not capitalism.

If the trading of goods and services in a country is relative free, then we have a free market. Capitalism does not necessarily mean there is a free market.

Now consider the international situation:

Is trade between US and China capitalism? No. Is that trade free market? No. The trade is governed by WTO rules.

So what do you call US companies building factories in China and make tons of money buy importing the stuffs back? Or China takes the US dollars it earn from exports and, instead of converting them to its currency, use most of it to buy US debt?

Call this anything you want but it is not capitalism nor free market. It is simply a set of special arrangements between two countries. Both did it for its own benefits. And both will have to handle the down side.

US used the China trade to finance two wars, speculate on nonsense, had a splendid good time for 20 years. China used the US trade to raise its standard of living, invest in infrastructure and education, and improve on security. Both made a ton of money – but each spent it very differently. Tell me who practiced capitalism.

So US-China now find the special arrangement may be no longer beneficial enough. Then its up to them to address it. It is not a problem for the world, and not an issue of capitalism or free market.

I still think Sheng1 is right about the ineffectiveness of currency float. China doesn’t build just inexpensive goods. It seems to do everything. The USA was heavy on chemically based products: paints, solvents and glues. I think the PVC pipe and fittings was USA made but there were no labels on them. Some lumber products were also US made. Canada and Mexico also show – Mexico for at least one Frig but I couldn’t find the “Made in” labels on most of them. Italy claims a place with ceramics and stone products. They have for centuries.

Sheng1 is right about the textile industry. The garment district in New York is so small the City is trying measures to keep the last two blocks alive: I suppose, because it is a convenience for the theater industry in Midtown. It is threatened by rising real estate prices and sky-high rents.

The average wage in China is $3000; the average wage in USA is $35,000. I don’t see how currency manipulation will change anything. If China didn’t do it as government policy, the so called “”free market” will and not to China’s interest, so I don’t see what difference it will make? The central argument is – who gets to profits from financial manipulation, isn’t it? China will always be able to undercut the competition at least here. But the floating Yuan might make it possible for other countries to give China more competition. But maybe not? Their currency will be stronger and they can boost production with all the productivity increases we claim. Some of our touted productivity increases during the 90′s were attributed to the computer and changes like self-service gas stations or self-service check out lines at the Grocery store. The Chinese can simply start to pump their own gas and check out and bag their own groceries. They can use the computer more if they don’t already. They are large enough they could write their own software for internal use if they don’t already. Even Micro soft has Kow-Towed on censorship software.

China has the luxury of enormous numbers of able-bodied workers who will sooner rather than later do everything – at any level in their economy. The USA has an aging population that needs comparative fortunes – even to live at public assistance levels. That is no exaggeration. And healthcare at very level – is a rip off. The Chinese government could beat the US at that. If anyone could create a nationalized and accessible heath care network they should be able to do that, don’t you think? .

Lets move out of the vagueness of financial theory and ask – what possible benefit will the Forex cowboys, sharks and hustlers bring to this discussion? None of you can be so naive as to think they will provide a public service for the benefit of world economic health, can you? Even your argument Sergei, about the “free flow of capital” is almost sounding a little too like something said by the local Chamber of commerce. It almost sounds naïve.

And forget violent upheavals and social revolutions. This is the birth decade of cradle to grave surveillance. A blogger on another page is very interested in getting in on the ground floor of that exciting new growth industry. China seems to me a country that can already do that with frightening efficiency. It somehow made 10,000 demonstrators disappear in the Tibetan unrest. That was so unfortunate because I don’t see why the Chinese government can’t learn to live with a “Vatican City” of Buddhism centered on the Potala Palace. Instead of picking and stuffing their own preferred replacement for the traditional head of Tibetan Buddhism.

I have worked in the general economy and found that employment was really a matter of looking busy and waiting for something to do. I worked in a minor department of a defense contractor and it really was one of the least productive jobs of my life. I had to work much harder with fewer benefits when I went on my own. I consider most American jobs a form of featherbedding.

China – on the other hand could increase worker protections, and still win the shelf wars. A stronger Yuan will make them all richer relative to the outside world. And since they already make most of the consumer goods, why would the majority of them shop anywhere else? They certainly won’t find better bargains anywhere else will they? And like Japanese cars, which were so much more sensible and better built, they might produce a fleet of lighter – more efficient and “greener” automobiles for a world market. They could win at that too.

Real estate is never measured as a guage of inflation, at least in the US. If it had been our rate of inflation would have been staggering. I don’t understand why not? In the age of mass production of everything, including buildings, they are really only another form of consumer good now. They depreciate and can be replaced by newer models. The USA is trapped in “slurbia” as FL Wright called suburban sprawl over 60 years ago. China isn’t. Brazil isn’t either. Most of Europe isn’t. They all have active and expensive mass transit networks. They all win on that efficiency too. WE can’t even dream about that here. And whatever we do will be achingly expensive and take decades in court battles trying to reclaim or recreate transit ROWs. Boston spent the last ten years or so rebuilding its transit system and it appears there are no abandoned ROWs left in the Metro area.

I know none of this is orthodox economic thinking and I believe the World Bank and the IMF want the Yuan to float. But I have now and again listened to the financial channels here and never heard so much adrenaline laced, hormonal or Zoloft or Prozac induced “positivist” rhetorical clap trap and self puffery (much on or over the line of conflict of interest) in my life. And it gets on the nerves as well. I suppose the halls of the IMF and World Bank are much more subdued but I’m sure their people aren’t immune to the hype either.

Maybe this country is just plain old screwed? The party is definitely over unless China remembers how to be a party girl herself?

And to M. What made this country the economic powerhouse was the fact that it had a continent to exploit and it didn’t get blown to kingdom come during World War II. The rest was just more chamber of Commerce rhetoric. The continent has been exploited and the oil is still cheaper elsewhere than it is here. One good thing to say about getting blown to Kingdom come: All those other world powers had the chance to do an extreme makeover.