The China Vortex

Actually, quite a lot.

Today’s US stock market tumble of 287 points highlights the dangers of the expanding subprime mortgage backed securities problem, which is now expanding into international markets.

In the period from 2000 to 2006, US regulators failed to put a check on the issuance of these derivatives, creating an enormous amount of credit, which in turn created excess liquidity globally. Basically, the US Fed lost the monopoly on credit and money creation, flushing markets with credit, which often got turned into cash.

Money is just like any other commodity; if there is too much of it, it loses its value. This means that it costs more money to buy the same goods. In China, food prices have gone up significantly in the past year, which is another way of saying that the value of money has gone down. It’s called inflation.

Over the past year in China, inflation has showed up in higher food prices. On the streets of Beijing and Shanghai, you can frequently hear complaints about how much more expensive food has become, both in markets and supermarkets, and in restaurants.

The big question everyone is asking now is how much of this new credit and liquidity was caused by this runaway train of subprime mortgage securities? Many of these packages have been packaged, repackaged and sold so many times that it will take time to find out what they were backed by. We are just at the beginning of what it likely to turn into a huge financial scandal, with its own need for scapegoats and finger-pointing.

The sooner it can be cleared up and the excess credit flushed out of the system, the better. But the need for scapegoats, political investigations and recriminations are likely to mean that it lasts longer. This will have an adverse effect on most economies and business, as everyone waits on the sidelines for things to clear up.

The implications for the American economy are huge. American regulators failed to do their job, creating what has now become a bubble of global proportions, and it is now popping dramatically. The US is a leader in capital markets because it is more transparent and properly regulated than most other markets. It has taken decades to earn this trust; now it is disappearing.

The implications for American economic and financial leadership are huge.

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