The U.S. Market Rescue: A Farce

Author: [Mu Zi]
Source: [Fund Analysis]
Article type: Recommended article
Published: 2008-11-3 8:45:48
Column: Expert Perspectives

While China was on holiday for seven days, the U.S. House and Senate went back and forth, causing onlookers to jump with every twist, and finally passed a poison-pill rescue package. But global financial markets were not particularly grateful — most closed sharply lower that day. Setting aside the actual effectiveness of this rescue, the question that must now be asked is: is this $850 billion rescue fund manna from heaven?

What must be made clear about this global economic adjustment is that the ultimate task should be the thorough dismantling of the dollar system that has dominated the world economy for decades. The reason the American economy has reached this point is entirely self-inflicted. In previous economic crises, the existence of the dollar system allowed the U.S. to shift crises onto the rest of the world — maintaining an abnormally extravagant pattern of overconsumption and overuse. This pattern has already exceeded what the planet and the global economic system can bear. The arrangement where America consumes and the world picks up the tab — the time has come for it to be broken. America is now repeating its old tricks in an attempt to maintain the existing model. The original American model and the U.S.-dominated global economic order of recent decades — without thorough change — this global economic crisis will drag on endlessly with no resolution in sight.

Now the $850 billion rescue plan has passed. But this $850 billion is absolutely not manna from heaven. It ultimately derives from the further inflation of the dollar bubble. The root cause of this global economic crisis is that the dollar has become thoroughly bubblified. The greatest risk and the greatest crisis is the dollar itself. This $850 billion not only further inflates the dollar bubble, threatening a full-blown crisis for the USD-denominated foreign exchange reserves of China and other nations, but will also cause liquidity in global financial markets to surge via the multiplier effect, pushing oil, grain, gold, and other commodity prices toward further frenzied rises. This will ultimately accelerate the bursting of the dollar bubble, which in turn will trigger the bursting of the commodity bubble — dragging the world economy into a dangerously regressive state.

Facing this crisis, the correct Chinese posture should be: don't follow the herd. Absolutely do not tie ourselves to America's war chariot. Moreover, the current mode of market rescue is extremely wrongheaded. The government should not directly enter the market through fund vehicles. Instead, it should actively cultivate and lead new economic hotspots, creating more sectors for liquidity to participate in, thereby massively attracting capital that is seeking to decouple from the dollar system. As long as we ensure sufficiently long investment horizons for such capital and provide a favorable investment environment, allowing the capital to settle into the tide of China's far-more-promising high-speed development — then a large new reservoir, a new great world locomotive based on the RMB, can be established. America's crisis should become our catalyst for accelerated development.

What demands particular attention now is that the government's entry into the stock market has already become a fait accompli. Therefore, the exit timing must be managed carefully to avoid repeating the debacle of the 1990s "777" rescue.

As long as we can act with our own interests as the priority — observing America's farce without participating, guarding only against the damage that America's farce-induced economic crisis might inflict on China's economy — then we have ample reason and confidence to preserve our strength through this global storm, adjust our economic development model and structure, and emerge after the storm in a new posture, rapidly entering a new cycle of economic growth.