Will Money Vanish?

choi

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Regarding Wenzhou, a Chinese comments: "如果经济活动同样火热，钱不会消失，只会转移，从实体老板那里转移到虚拟经济投机者那里."

I disagree.

(1) It is simply wrong.
(a) Aiming to stimulate the economy, the Obama administration threw $1b in the form of loan guarantee to solar power companies (Solyndra and Evergreen Solar). Chinese makers  outflanked both, which declared bankruptcy. Setting aside the wisdom of stimulus, where has the money gone?
(b) Of course money vanishes. Subprime mortgage crisis was another example.

James Freeman, How the Money Vanished; A close look at the collapse of Bear Stearns. Wall Street Journal, Mar 3, 2009.
http://online.wsj.com/article/SB123630340388147387.html
(book review on William D Cohan, House of Cards; A tale of hubris and wretched excess on Wall Street. Doubleday, 2009)

Indeed Wenzhou--even China--is hoisted as Exhibit A of China's counterpart of US subprime mortgage crisis.

(2) China may or may not implode economically. The motion is dismissed principally due to China's unprecedented foreign reserve. Who knows? (Many vultures have circled above China: Mr James Chanos is one.) But one thing is certain: if China debarcles, it will be a bang rather than a whimper.

(a) Lisa Pollack and Robin Wigglesworth, China Sees surge in CDS on Slowdown Fears. Oct 6, 2011 (front page).
http://www.ft.com/cms/s/0/45d2e390-ef6f-11e0-941e-00144feab49a.html
("The net value of outstanding credit default swaps on Chinese sovereign debt has soared to $8.3bn, according to data released this week by The Depository Trust and Clearing Corporation. The market for China CDS is now the world’s 10th largest, bigger than those for Portugal and Bank of America. Two years ago there was a net $1.6bn of outstanding China CDS, making it only the world’s 227th largest at the time.")

(b) credit default swap
http://en.wikipedia.org/wiki/Credit_default_swap
(section 2 Uses: generally CDS spreads increase as credit-worthiness declines, and decline as credit-worthiness increases)


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