Dragon Tales

Hang on to your hopes, my friend
That's an easy thing to say
But if your hopes should pass away
Simply pretend that you can build them again
--Bangles

Vitaliy's argument that China is a central planning accident waiting to happen resonates w/ me. As he notes, planning has been hailed as superior to unhampered markets a few times in the past century (usually after economic downturns that were driven by planning) only to have the subsequent results, um, disappoint.

Currently China attracts that 'superior' aura.

The problem with central planning systems, as Vitaliy observes, is that bureaucrats in a room are certain to misallocate capital on a large scale over time. This leads to lower standard of living when the bloom comes off the rose.

And absent any market mechanisms to wipe away those misallocations, then those lower living standards are likely to persist (see, East v West Germany, for examples, or the former Soviet Union).

China's GDP has been growing like gangbusters, and now ranks #3 in the world. But much of this is 'blind' growth driven not by capital formation and demand, but by bureaucratic whim. Signs of big capital misallocation patterns are beginning to emerge. For example, Ordos, a city built by planners to house 1.2 million people in Inner Mongolia, remains largely uninhabited.

It is unknowable to forecast with certainty what factor(s) will turn things sour. But it is knowable with certainty that this system will sour.

The world is currently betting a goodly portion of its chips on the Chinese story in interlinked fashion. If the story unravels, then the global economic picture likely turns a hazy shade of winter.

position in Treasuries