“This is basically a kind of insurance product. The main issue is: how good is the party issuing it? If it’s going to be paying out huge numbers in the event of a crisis, will it be able to meet it obligations? Insurers can buy reinsurance for their liabilities, but the buck has to stop somewhere – there’s a limit to how much a private insurer can pay out. Only the government can cover unlimited losses,”

http://www.risk.net/risk-magazine/news/1590861/citi-plans-crisis-derivatives

and from Felix Salmon | Reuters

Citi reinvents end-of-the-world insurance

In hindsight, one of the silliest and most dangerous excesses of the Great Moderation was the large number of companies — foremost among them AIG, although there were lots of monoline insurers in the same trade — basically selling insurance on the world coming to an end. It’s a great trade: either the world doesn’t come to an end, and you make lots of money, or the world does come to an end, and it doesn’t matter ‘cos you’re bust anyway. Now, however, after seeing how that trade worked out, we’re wiser, and no large and leveraged financial institution would have the chutzpah to start selling world-coming-to-an-end insurance. Would they?

http://blogs.reuters.com/felix-salmon/2010/02/08/citi-reinvents-end-of-the-world-insurance/

Meanwhile in the real world

Payback’s A Bitch For Banks Stuck Holding Euro Debt

First the governments bail out the banks who were (are) basically insolvent. Then these governments, especially in Europe, see their balance sheets explode and face escalating concerns over sovereign default. The IMF now predicts that the government debt-to-GDP ratio in the G20 nations will explode to 118% by 2014 from pre-crisis levels of around 80%. Now, the ball is put back onto the banks because many have exposure to the areas of Europe that are facing substantial fiscal problems right now. According to the Wall Street Journal, U.K. banks have $193 billion of exposure to Ireland. German banks have the same amount of exposure and an additional $240 billion to Spain. Many international bond mutual funds also have sizeable exposure to sovereign debt of Portugal, Ireland, Greece and Spain as well. Contagion risks are back. Stay defensive and expect to see heightened volatility. In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

http://www.businessinsider.com/rosenberg-paybacks-a-bitch-for-banks-stuck-holding-euro-debt-2010-2

and a really downbeat view of tea parties, politicians and the US economy:

We’re Weimar

By James Howard Kunstler | February 8, 2010 6:35 AM

As the contest heats up this year between Tea Partydom and the Weimar-like remnant of the party in power expect to see a political vortex form that will suck the little remaining coherence out of American life. Personally, I’d like to see Mr. Obama have a little fun with his adversaries, even if it seals his fate as a one-term president.  I’d like to see him start by using the just-proposed national forum on health care reform as a rope-a-dope moment to expose opponents to reform as the bought-and-sold errand boys they are.

And a good overview of the state of play in Europe from Edward Harrison dated Feb 2009: It’s much worse now!!

The European problem

Europe is having a problem right now. In truth, it is many problems more than a single problem. Countries in the former Soviet bloc are in a deep downturn which has been significantly worsened by turmoil in currency markets. Western European banks are hemorrhaging losses – some will probably be nationalized. Spain, the U.K. and Ireland have all seen massive property bubbles implode. Greece, Ireland, Spain, Portugal and Italy have all seen credit warnings and downgrades. And Ukraine, Hungary and Latvia are but three nations that have been forced into the arms of the International Monetary Fund for a bailout. Clearly, the credit crisis has moved to Europe in a massive way. In my view, this was always inevitable given the available evidence after the panic in September.

read more: http://www.creditwritedowns.com/2009/02/the-european-problem.html

Tin hats time again?

Tim,
Le Touquet, France

The last administration spent more money from current funds, and indebted us more deeply into the future, than any in history.  Was it all just bad management and fake wars?  Or was it as intellectually simple and negative as the current GOP refusal to vote for any single bill?  It’s a simple strategy.  Did it work?

When the Republicans invited President Obama to address their congressional House delegation in Baltimore today, they probably had no idea how badly it would turn out for them.

Presumably the Republicans thought they’d get a chance to grill the president on live television. But instead, Obama – following on from his state of the union address on Wednesday night – turned the tables by highlighting the Republicans who opposed his policies and refused to bend, yet were prepared to “turn up and cut ribbons” when their constituents reaped the rewards.

Obama also displayed a rare grasp of policy and legislation, wrong-footing his questioners with some stern rebuttal and in some instances quoting their own positions back to them to highlight the contradictions. He mocked the GOP for presenting healthcare reforms as a “Bolshevik plot” – and got a laugh, even from the Republican audience – and suggested that their approach was counterproductive:

Frankly, how some of you went after this bill, you would think that this thing was a Bolshevik plot. That’s how you presented it. I’m thinking to myself, how is it that a plan that is pretty centrist — no, look. I’m just saying. I know you guys disagree, but if you look at the facts of this bill, most independent observers would say this is actually what many Republicans — it is similar to what many republicans proposed to Bill Clinton when he was doing his debate on health care.

So, all I’m saying is, we’ve got to close the gap a little bit between the rhetoric and the reality. I’m not suggesting that we’re going to agree on everything, whether it’s on health care, energy or what have you. But if the way these issues are being presented by the Republicans is that this is some wild-eyed plot to impose huge government in every aspect of our lives, what happens is you guys then don’t have a lot of room to negotiate with me.

I think we can confidently predict this is the last time the Republicans invite the president to a similar format. Indeed, because the hall the Republicans are holding their event seemed to have just a single TV camera, Obama literally took the spotlight away. Republican questioners showed up as shadowy figures, and when caucus leader Mike Pence kicked off the Republican questions at first he couldn’t be heard at all.

At the end, shaking hands with the president, Pence’s face looked as if he’d sucked a lemon for an hour – and in a way he had.

A sign of how compelling the footage was: the US cable networks, always so trigger-happy and ready to move on if an event is looking boring, stuck with the live feed, although Fox did cut away first for analysis.

The net effect is that Obama looked serious, reasonable and intelligent. The Republicans got to sound like whiners, complaining about various pet peeves and chewing over their old laundry list of tax cuts and opposition.

CNN quickly compared it to weekly question time in the House of Commons – and Twitter is seeing an avalanche of comments calling for this to be a regular event. Not if the Republicans have any say in the matter.

Richard Adams Friday 29 January 2010 18.36 GMT | guardian.co.uk

http://www.guardian.co.uk/world/richard-adams-blog/2010/jan/29/barack-obama-republicans#

See also:

Why do people often vote against their own interests?

The Republicans’ shock victory in the election for the US Senate seat in Massachusetts meant the Democrats lost their supermajority in the Senate. This makes it even harder for the Obama administration to get healthcare reform passed in the US.

Political scientist Dr David Runciman looks at why is there often such deep opposition to reforms that appear to be of obvious benefit to voters.

http://news.bbc.co.uk/2/hi/americas/8474611.stm#

The 2 articles above nicely illustrate the view from the UK, one covers an amusing episode in the confrontation and the other the frustration.  Who would want to be a politician these days?

China is one of Washington state’s top trading partners. But Strategic News Service publisher Mark Anderson warns local companies should be more cautious about doing business there. He spoke with KPLU’s Dave Meyer.

Listen Here

Lacking magic wands, we have another tool — money — in limited amounts. That, combined with ingenuity and goodwill, can take care of some short term things.  Stop the dying.  Provide food, shelter and basic sanitation.  Help the Haitians to restore basic utilities and bury their dead. Repair the ports and roads enough to get commerce flowing again. So far, no arguments.

It’s when we start talking about longer-term solutions that the discussion gets clouded by preconceptions, dogmas and real world practicalities.  Sixty years after the Marshall Plan proved that foreign assistance can work, some of the time, we still find our best-meant schemes mired by bureaucratic inefficiency, corruption, and unintended consequences. Nor does any political side have a perfect recipe. If the American left has often shown itself to be treacly and naive, the right is already back to its old, cynical sneer, deriding “the failed and discredited utopian fantasy of so-called Nation Building” — an actual neoconservative mantra, up till the very month that they plunged the U.S. into the most costly, inefficient, corruption-ridden and ill-conceived nation-building exercise ever undertaken.

In contrast to Iraq, Haiti has several traits that make it seem a rather good candidate for national makeover.  It is small, nearby, desperate — and yet peaceful – enough to be a possible test case. (Our misadventure in Somalia showed how necessary the “peaceful” component is.)

On the downside, you have a near total lack of infrastructure, education or reliable civil law. Still, despite the challenges, suppose we wanted to really accomplish epochal and effective change in Haiti?  Aside from humanitarian aid, what endeavors would be most helpful over the long run?

1) Cooking. It sounds simple, even banal.  But a major driver of Haiti’s tragic deforestation is the chopping of wood for cooking fuel. For years we’ve seem efforts to offer solar cookers to people in developing nations — a worthy endeavor, but not very popular among the poor women who need to boil up the rice and bean now — without spending hours worrying about clouds.

Amore prosaic palliative might be to establish communal kitchen facilities all over the island, where families could not only get food aid, but have access to shared, gas-fired stoves and ovens to prepare it. But whatever approach is chosen, we need to be clear about one unintended consequence of food aid. Distributing uncooked rice is tantamount to killing trees.

2) Reward self organization. Infrastructure projects and jobs should flow toward those neighborhoods that manage to organize themselves to better benefit from the aid. For one thing, this is the simplest way to bypass corrupt national officials, relying instead on simple metrics, right there on the ground.  For another thing, it would leverage upon islands of enthusiasm and competence, without imposing any preconceptions upon HOW the locals organize themselves.  (See an article in the LA Times about such neighborhood committees, already in motion.)

However they do it – via communes or coops or by working with local landowners, those that remove the trash and set up kitchens and have work crews ready for labor every day, and who present a fait accompli structure that can be relied upon, those should get top priority.
The lesson would spread.

3) Empower law and civil society. Go look up the work of Hernando de Soto (not the explorer, but the radical economist-reformer). The nation of Peru instituted his plan to get the people  clear title to their land, so they can then improve or borrow against it. The resulting surge in the market economy proved that left and right could work together, when not trapped in idiotic dogma, resulting in a boom in Peru. Peru’s reform laws should be instituted in Haiti, with the one proviso that they be translated into French.

Unfotrtunately, right now is the very time when those with property rights in Port-au-Prince are most likely to be bought out, cents on the dollar, by Haiti’s own oligarchs. (See a silver lining to this, below.)

4) Take advantage of the quake. Now, with the capital city in ruins, is the time for urban planning in Port-au-Prince.

Sure, those words sound pathetically sixties-ish.  But I am not talking about utopian nit-picking, meddlesome zoning regulations or over-specifying architecture — (though there are modern alternatives to cinder-block construction that could be cheaper, faster and much more quake resistant… and this would be a good time to start setting up firms over there, trained in these alternative methods.)

No, what I mean by “urban planning” is the very basics.  Core essentials that are utterly pragmatic and that would best be done now, at the very moment that Port-au-Prince lies shattered.

As soon as people are being fed and all the children are safe, even next month, corridors and rights of way should be laid down and razed — wide swaths stretching from the port to downtown, to the airport, and to the factory zone.

Yes, superficially it sounds horrible — plowing aside the tottering shops that still stand along such broad paths.  But the benefits — to all Haitians — would be overwhelming. If done well, such corridors would allow very cheap installation of the organic elements needed by a modern city, the circulatory, pulmonary, lymphatic, nervous and other systems of a future, healthy metropolis.  I’m talking about mass transit, sewer, water, fiber-optics, gas, electricity…

ALL of these services are fantastically expensive — in nations like the U.S. — primarily due to right-of-way costs and having to insert and maintain them through already-existing streets. The actual conduits themselves (rails, sewer pipe, water pipe, optical fiber) are fairly cheap, if laid down in a linear fashion. (Commuter trolley lines can be established aboveground at first. But if the land-siting is done right, a trenched subway can go in, later, at trivial added expense.)

Combine this with the laying down of several grand boulevards and parks, and you could have the makings of a great and impressive city, rising from the ashes, drawing commerce and (even more important) proud confidence among its citizens.

Note that this needn’t be done rapaciously. e.g. imagine if the poor and displaced got shares in the soon-to-be valuable plots that front upon these new boulevards, and first-options at the resulting apartments.  Is such fairness really likely, especially in Haiti? Of course not.  Already the country’s few-dozen elite, oligarchic families are swooping in — partly to perform beneficent acts of noblesse oblige, and partly to seek opportunities within the chaos.  If my suggestion were undertaken entirely on the oligarchs’ terms, with elites owning all the utilities and boulevard frontages, excluding even the people who used to live there, it would be a travesty.

But travesties are normal for Haiti.  In this case, at least there’d be boulevards, parks, utilities, sanitation, trolleys fiber-broadband, WiFi and commerce.  The elevated people could then engage in politics — the torts and rights and wrongs — later.

Anyway, what if foreign influences leaped onto this project first, with strong intent to insert fairness as a priority? Note that a single billionaire could, right now, offer to do this in Port-au-Prince. His share, downstream, could be worth billions, without incurring any bad karma because, with just a little care to note who lived where, the chief beneficiaries would still be the poorest citizens of Haiti.

And the result… making money by increasing the value of a city that becomes a wonder and source of pride for all… would seem worth pondering.

Obama-Volcker on target, avoid Glass-Steagall

The furore over bankers’ bonuses illustrates one aspect of current financial market conduct that has wide implications: the casual slippage back to “normalcy”, interpreted as business-as-usual 2007-style. It seems clear to us that normalcy is a long way off (if it has ever existed). Indeed, complacency in many quarters about economic recovery, and the illusion of normalcy, is itself a reason why renewed economic and financial trouble, probably crisis, is likely. The drop in bank shares yesterday on the announcement of new regulatory plans by Mr Obama, originated by former Fed governor Volcker, is a classic case of blinkers falling from the eyes of financial markets that have been amazingly credulous of delusions in recent years (if not always). One thinks of the Latino debt farrago (“countries can’t go bankrupt”), the high-leverage, saving-andloans bubble, the tech bubble, as much as the recent alphabet-soup mortgage bubble. These were obvious cases where a little scepticism, and willingness to look at situations from multiple perspectives, seemed to be beyond the reach of market participants, or their educators.

http://ftalphaville.ft.com/blog/2010/01/22/132991/dumas-on-volcker/

This doesn’t seem too aggressive to me, just a spot on common sense take on the way forward.  But from Felix Salmon at Reuters:

[Mark Thoma is as pessimistic as I’ve seen him] [WP strikethrough not working?]

Economics of Contempt is pessimistic when it comes to the chances that the Democrats will line up behind Obama on this one:

I don’t even know why I took the time to write about this, because there’s zero chance the proposals Obama announced today will ever be law. This was a fairly transparent political stunt — the White House needed to do something to take the media’s focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama’s proposals, because even if the White House fights for them (which they won’t), Chris Dodd has no intention of inserting them into his committee’s bill.

http://blogs.reuters.com/felix-salmon/2010/01/22/a-closer-look-at-the-volcker-rule/

Back to Dumas, because the “poodles” have in fact been responsible for far more creation of the weapons of choice (Derivatives – running at $600bn per day in early 2008) than Wall Street, an interesting obvservation:

The lack of international coordination has been lamented in some quarters. But it was always a chimera. A strong lead from a man like Volcker is so obviously vastly superior to prolonged negotiations with a bunch of muddle-headed continental Europeans, who do not understand and dislike finance in the first place, that we should all emit a sigh of relief on that point. The British will behave much more justifiably like “poodles” (a much maligned breed, by the way) on this issue than on others in recent years, and the rest can just follow along when they make up their minds to do so.

So:

President Obama probably feels he has had a bad week. But it may prove to have been a good one for world welfare!

Maybe.

For example, if you use Seesmic to view Twitter feeds it already decodes the short URL and shows you the real destination in a bubble popup (and thumbs of images at Twitpic or active Google Maps from geotags) so the technology looks very doable.  I’m surprised this bubble is not yet used for ads (opt in or not).

Maybe users might even pay for such a time-saving and irritation reducing feature:-)

On Wednesday, I’ve agreed to speak at, and moderate, part of a larger event.  For the last seven years, the Australian government has sponsored Australia Week in the United States, which showcases the country’s culture, business, food and fashion — in addition to showing off some of its brightest celebrities.

As part of that celebration, the Aussies took it a step further in 2007, when they started inviting the country’s most promising new technology startups to compete in California for venture cash to break into the U.S. market.  It’s called the Innovation Shootout. Select companies will appear at the Microsoft HQ in Mountain View and do a business model competition before a jury (I am the MC, a judge and speaker), who will vote for the winning company.

The panel of judges includes: Deborah Magid, of IBM Venture Capital Group; Allison Leopold Tilley, of Pillsbury; and Chris Shipley, of Guidewire. Microsoft’s Dan’l Lewin will be there as host, and one would guess many others.

This year, we will be taking a look at companies providing physical surveillance and IT security systems; solar-energy tech; emissions assessment and reduction systems; and labor management software.

Australia is increasingly seen as one of the most pro-innovation environments, where government and industry work closely in tandem to position themselves globally – as in the passage, and implementation of, the National Broadband Network – a project that seems to have inspired the Obama administration.  Perhaps the US will finally get its own broadband policy and initiative, thanks to our friends from Down Under.

Is this how we do business now?

I think it is very important, and enlightening for the rest of the world, that those who suffer cyber attacks after crticizing China, should go public IMMEDIATELY.

Like Google, and like SNS, the effect of this should be obvious: depriving China of the cyberattack tool it has recently deployed.  Google claims that 34 other corporations were also hacked.

OK, CEOs of these corporations, it is time for you to step forward.  We already have a human rights student from Stanford willing to stand up and say NO.  Are you CEOs more afraid than she is? 

I now want to point out something obvious in our conversation on China: the angry, obvious Communist Chinese writers are: angry and the most aggressive.  We in the non-Chinese world are feeling our way here, brothers, so give us a little breathing space.  We began by giving your country the benefit of the doubt; so far, it has not worked out properly. 

We really do want to have China join the world trading group as a “normal” member, which means, China really does have to become “normal.”

This would mean that China would have to protect Intellectual Property, from all countries.  This would mean that China would prosecute and disavow IP theft.

This would mean that China would have to allow imports, as well as exports, without structural barriers, as in wind farm equipment.

This would mean that China would allow its  currency, like almost all other currencies in the world, to be fair priced.

We look forward to having China as a real partner in the world, not on its own private terms, but on terms well understood by global trading partners.  All of us look forward to this, but our optimism in having China joining world commerce should never be confused with bad acting, illegal behavior, IP theft, structural barriers, or other current practices which need to be dissolved before China is a trusted member of the trading community.

In short: All of us want to trade with China.  But China seems to have a model which harms its partners.  Fix the model, and join us.  Right now, through the WTO, the EU, the US, and other organizations, you hear us asking: Please fix your model. 

We welcome you, but we do not welcome your model.

This issue is retroactively dedicated to my friend Sergey Brin of Google, for having the courage to say No to Chinese censorship.

» What Is China?

 Most people probably assume that the reason for China’s enormous economic growth rates is simply size: anything powered by 1.2B people is bound to make a big splash. But India, with the self-proclaimed “oldest democracy in the world,” is about to exceed China’s population.

 What makes China so different?

 Westerners remember China’s turn toward “socialist market economics” under Deng Xiaoping (Teng Hsiao-ping). Deng was a political adept who outmaneuvered Mao’s hand-picked successor, Hua Guofeng, and often ruled without a specific single title of power. (See our “Takeout Window” for more biographical data.)

 Deng once said: [chinese characters]

 Translation: “It does not matter whether the cat is black or white; as long as it catches the mouse, it is a good cat” (commenting on the whether China should turn to capitalism or remain strictly in adherence with the economic ideologies of communism). Westerners assumed this meant that Deng, the pragmatist, was turning China toward free markets.

 Deng did not turn China into a market economy; far from it. Here is a quick description of early Deng achievements, from The Hutchinson Encyclopedia:

 “By December 1978, although nominally a CCP vice chair, state vice premier, and Chief of Staff to the PLA, Deng was the controlling force in China. His policy of ‘socialism with Chinese characteristics,’ misinterpreted in the West as a drift to capitalism, had success in rural areas.

 “His reputation, both at home and in the West, was tarnished by his sanctioning of the army’s massacre of more than 2,000 pro-democracy demonstrators in Tiananmen Square, Beijing, in June 1989.”

 In summary: the fellow who brought market economics to China, really didn’t. Instead, he helped install an economic model designed to gut its trading partners, described in detail below.

 Too often, today, sloppy thinkers and Western optimists assume that China is just a Big America, or a Big Vietnam, or a Fast India – or their Next Big Business Partner.

 Wrong. At a time when the world thinks the communist model has been proved obsolete, China remains a communist country. In fact, under the current leader, Hu Jintao, human rights in China have recently suffered and are now in serious decline, according to Amnesty International-USA, the Committee to Protect Journalists, Human Rights Watch, and others.

 China has tens of thousands, perhaps hundreds of thousands, of human censors monitoring citizen clicks and comments on the China government–controlled Internet. When my friend’s teenage daughter (a U.S. citizen) taught English there last year, police came to her apartment and grilled her about specific computer entries she had made. When one of Australia’s top mining firms, Rio Tinto, refused to allow China’s Chinalco to double its ownership interest last year (to 18%), China arrested local CEO (and Australian citizen) Stern Hu and three managers, who remain in jail today, under espionage charges. China denies any connection. In politics, thought, and business, China remains a police state.

 We all refer to China as “China” now, as though it’s just One of the Gang, like “Ohio” or “Denmark”; after all, it’s a member of the G7, right? Just another market economy finding its way in the global river of events —

 No, it’s not. And it isn’t in the G7. In fact, it isn’t even part of the G8, which includes Russia.

 So now ask yourself: When is the last time you called Communist China, Communist China?

 You’d better get used to it. There is no indication that the Chinese Communist Party has any intention of giving up any power at all, or of changing its power structure. In fact, discussion of anything political is basically off limits inside China; it is not done. Ah, you heard that there were some small moves toward shadow property rights in China? Sorry, that move has recently been reversed.

 Wait, you say – what about the spread of democracy, at least in town and provincial elections? Didn’t Hu Jintao just give a speech praising democracy? Well, that turns out to have been another false start: today, democracy seems to be declining rather than growing, and it never reached the national stage. In fact, these days Hu is insisting on a new policy of “no debate” on government decisions, even (and especially) at the highest levels.

 It is time to look at China, not for what it says, but for what it does, and to judge it accordingly. It is time to tell the truth about what Nobelist Paul Krugman calls “a misbehaving superpower,” rather than letting misplaced greed dictate the conversation. China is not what we hope it could be. China is what it is.

 Those who take this new tack will have a differing view, in general, from the global media – and a much more accurate one.

 ___

What Is China?

 Most of our readers are more interested in the economic aspects of this question than in issues of human rights, media control and censorship, military buildup, or the country’s increasingly interesting international political alliances. All of these areas are worth study, and, in general, all veer from the view generally portrayed in Western media. The story of an increasingly aggressive Chinese navy, about to become a Blue Sea (open water) force with its own carrier fleet, buttressed by continued additions of attack nuclear-armed submarines, is not much told, although I can’t see why not.

 The successful Chinese shoot-down of a satellite by a land-based missile got media attention, for a week. But it should be taken on a much more serious level, as a direct threat expression against any nation intending to use satellites in war.

 The now-documented cyber attacks by Chinese-sourced computers against Western economic and military targets, suddenly ramping up on a straight line for the last two to three years, deserve more public conversation. Recent estimates are that 80% of such global attacks on U.S. economic, infrastructure, and military targets come directly or indirectly from the Chinese government and military.

 And China’s continued shipping of weapons and parts to Iran, and general violation of U.N. sanctions against North Korea and other dangerous nuclear wannabe states, is disconcerting at best.

 But in this discussion we will focus on economics, both because it is in SNS members’ near-term interests and because the successful implementation of Chinese economic policy enables all of these other programs.

 What Is the Chinese Economic Model?

 Although the politics of China remains communist, the economics might be called Advanced Mercantilist. China has taken the lessons of Japan and South Korea in dealing with the West and modified them with “Chinese characteristics.”

 Here are the basic tenets of the Chinese Model:

 1. Steal Intellectual Property. IP represents the crown jewels of the global economy; they are the peak achievement of Western civilization, and of all of China’s competitors. China steals IP daily, in every possible way: through force, through simple copying, through reverse engineering, through industrial and government espionage, through common theft. China also has a national policy which prevents non-Chinese firms from selling in China unless companies transfer their most valuable IP to China as the price of market access. The clueless ones obey; just ask Boeing.

2. Use Slave Labor Rates to Become the Low-Cost Producer of All Goods and Services. If you are building a downtown tower in Shanghai (and there are a lot of them, many empty), you may not have to pay some of your workers for six months to a year. Or you fire them just before that: free labor! It doesn’t work that way in Chicago or Paris, does it? With 800MM country folk in line for coastal jobs, there is perhaps a 30-year supply of poverty-level wage earners happy to make export goods at below global cost. The rest of the world’s workers are paying, with their own jobs, for this unhappy result of near-term Chinese economic history, and of the past actions of the Communist Party.

3.Sell Stolen IP Back As Global Exports. Japan opened this model, but China has perfected it. In addition to the usual pirating of IP, for domestic markets and for export, there is a new twist that further harms the global marketplace. It isn’t enough to find Windows – or a foreign film on DVD – for sale for $1 in Hong Kong these days. How about in Nebraska, California, or Texas? No global market is secure from pirated IP.

4. Industrial Policy: Subsidize Key Industries. Japan also started this idea, but China takes it much further. Originally, the government (or the People’s Liberation Army) owned virtually all large enterprises, but even today, it retains  strong interests in most key export companies, which makes government assistance less transparent. Many outsiders assume they are dealing with “real” companies, when they are actually dealing indirectly with the Chinese government. Examples of subsidization and export dumping would include tires and, more recently, steel exports (sound like Japanese history?), now being tariffed by the E.U. and the U.S.

Look at the big sales of wireless 4G LTE gear in Europe for the last six months, and ask the local competitors (Nokia Siemens, Alcatel) why they can’t match price, and have been losing out to Huawei and no-brand upstarts from China? Or why the final (China) bid price is sometimes as little as 10% of the European group bid price average? Does this sound a bit like Japan in the U.S. TV market back in the ’60s and ’70s?

Here is a rather fascinating question: Given China’s model, is it possible that ALL exports in government-selected industries represent poverty labor and subsidies, and therefore the practice of dumping?

5. Prevent (or Restrict) Unwanted Imports. Use structural rules to prevent any real competition in your domestic market in any areas targeted by industrial policy. (Example: wind power equipment sold today into China must be made using Chinese manufacturing tools, and must fit a non-standard Chinese watt figure.) China has chosen the original path of allowing two kinds of imports: food and raw materials – the latter for making things to be value-added and exported back to the seller – and industries such as cars and planes, in which IP needs to be stolen domestically before the local industry can be created.

Members will note that both the auto and aerospace industries are just making this turning point during 2010, and China will soon be an exporter in both markets.

6. Use Currency Manipulation to provide artificial aid to your export companies. Why play fair? The Japanese perfected this through currency market (forex) intervention, but the Chinese did them a step better, by locking into the (U.S.) market they wanted to parasitize. This “dollar peg” recently has had the added benefit of devaluing the yuan vs. virtually all other Asian and emerging-nation currencies as the dollar dropped, giving China a further global competitive edge and enraging past trading partners, from Brazil to Indonesia.

7. Price for Export, Suppress Domestic Consumption, and use domestic savings to drive the above policies. While everyone is talking about how wealthy the new Chinese coastal middle class has become, they forget that there are another 800MM+ Chinese still waiting inland on the farm for anything good to happen to them. Despite the latest boom, the Chinese people are still among the top global savers. China seems to be allowing faster wage growth, and is encouraging domestic consumption, more than Japan has.

China has further modified this Japanese model by building domestic investment pools through imbalance of trade accounts, the direct result of the policies described here. China is no longer a poor country; it now holds the largest currency reserves in the world. This leads to a big public relations issue for the country, as the rest of the world asks anew: What is China?

8. Create the Appearance of Free and Fair Trade, Without the Fact. By making certain promises for the future, and by pointing to talk vs. the action inherent in the  above policies, the global community somehow allowed China to join the World Trade Organization, although, in fact, China  has not signed off on all of the WTO requirements, which might surprise less-informed members, and it regularly loses cases before the WTO. Even so, China achieved its primary goal: market access around the world, which is key to its own mercantilist model working properly. The results have been spectacular: on Wednesday morning, the Wall Street Journal declared China the new leader in global exports, beating out Germany and the U.S.

9. Encourage Foreign Direct Investment – But Don’t Allow Controlling Ownership. We’ll take your cash, the message is, but you don’t get anything for it. Sure, outsiders can invest; but we’ll hold all the poker chips. This is China’s improvement over the Japanese and SK models, and it is a meaningful one. Japan has since become the largest source of FDI in China. But the Japanese are smart: they build assembly plants, not design and production plants, and leave their IP at home.

Does this combined policy set sound anything like free markets, or free trade? Not at all. China has made use of markets only on the most limited basis. If you doubt it, take a close look at Chinese banks.

I have found myself increasingly frustrated by the gap between what the media seem to think about the Chinese model vs. what it appears to me to be. At our recent SNS Annual Predictions Dinner in New York, I mentioned the uneasy relationship between reality and the public Chinese GDP figures. When they were publishing 11%, I was figuring 11%-15%. Then publicly announced rates dropped to 6.5%, at which point the government spent about 3X more than the U.S. on stimulus (on a GDP basis, but there you go again) and brought it right back up to its pre-announced, politically required sweet spot: 7.5%-8%.

This is not a market, it’s a lever. Want a different number? No worries.

 Earlier, while speaking to the Orange Wireless CIO Forum in Hampshire, England, I read the audience a quote from the Financial Times which perfectly described the problem, and which I will paraphrase here:

 “The top two Chinese banks announced record profits this quarter, although note must be made that, in this case, the definition of costs and revenues, and therefore profits, are dictated by the government. Their stocks subsequently rose in Hong Kong.”

This is not a joke; it’s the FT. Revenues and costs are decided by the Party, so profits are decided by the Party, then “free market” equity trades occur on the Hong Kong stock exchange as a result. Are you kidding?

Chinese banks are not banks; they are cash distribution pipelines, generally controlled or heavily influenced by the government. Selective industries are fed loans, based on the flavor of the week, on terms dictated from above. When the pipelines are empty (as they are now), the government just inserts more money into the other end.

(Yes, in the days of the TARP, one is forced to make the comparison to recent U.S. and U.K. behaviors; but these are a “bailout,” and the Chinese banks have operated like this for years. Unlike their Western cousins, they are supposed to operate like this.)

What can one say about an economy in which numbers are not numbers and banks are not banks?

So, before the world continues on in its near-breathless wonder at the Chinese Miracle, let’s reassess:

It pays to steal IP, to use slave labor wages, to lie about trade practices, to ship pirated goods into foreign markets, to force IP disclosure in return for limited market access, to subsidize exports, and to manipulate currencies. Is there any part of this that is legal in international terms, or that should be applauded by the world community?

Not that I can determine.

Remember how China dealt with 3G – at the time, the most important (patented) technology in wireless communications in the world? Instead of letting out contracts to foreign firms, as all other countries did, China stole the IP from Qualcomm, with some help from Siemens and perhaps local firm Datang. It took years to reverse-engineer and then differentiate the tech into TD-SCDMA, now coming to China’s consumers about five to seven years late.

When will the world catch up to this kind of charade? The answer just might be: now.

I think there have been two turning points, and we have just recently passed both. First, China’s “friends” suddenly find themselves equally the victims of China’s model, their currencies undercut by 30%+ per year, and their trade balances going deeply into the red. Surprise! Suddenly they, too, can see how the model works, and the U.S. doesn’t look quite so stupid anymore.

And second: Copenhagen.

China appears to have gone to the December Copenhagen meeting on climate change with the intention of blocking a major agreement while scoring political points against the U.S. In practice, perhaps thanks to some quick moves by President Obama, the opposite seems to have happened. (See “Quotes of the Week.”) By sending a lackey in Wen Jiabao’s place to leadership meetings, and then blocking agreements, while Obama came up with a global financial solution to the rich/poor debate, the tables were turned on China.

There is even some talk that Obama and Secretary of State Hillary Clinton were tipped to a secret “blocker’s meeting” being held between China, Venezuela, Brazil, and a few other countries, which they literally “crashed” (walked in on, uninvited) and turned to their advantage, bringing Brazil back to the table.

China came out of Copenhagen appearing to have played a saboteur’s role, and no one in the world (except Venezuela’s Hugo Chavez) is happy about it.

 Who’s Counting?

Without accurate or standardized accounting, even China’s equity markets are intrinsically dangerous, insofar as there, too, the numbers are essentially made up, or are arbitrary at best. And without the rule of law, specifically as regards theft of intellectual property, there is literally no way of the nation getting from where it is now to where the civilized world is now, without decades of work on judicial and legal infrastructure.

And then there is the issue of a command economy in the modern world. One recent study on Chinese pricing found the equity market vs. real estate market pricing with a 7X larger gap than was found in Japan, just before its own real-estate bubble collapse decades ago. Clearly, there are asset bubbles inside China: real estate is overpriced while apartments and offices lie vacant in huge numbers in the cities. China-made steel has gone from under- to over-supply, and is now going begging on the global markets.

Indeed, the global outcome of a fast-growing command economy has been the government-determined explosion of asset bubbles all over the world – not because China is growing, the cause assumed by most economists, but because the government is buying resources (and their future options) on the global market, forward for 5-20 years. The result: instant commodity asset bubbles, worldwide, and further destabilization for non-Chinese consumers of these commodities. Of course, if the Chinese play the bubbles wrong, they will lose even more as prices collapse.

Could the Chinese create a global catastrophe by commanding all of this leverage into the wrong assets at the wrong time, by deflating the value of high-IP goods, by forcing global competition against unsustainable cost bases, and destroying non-Chinese business infrastructure? Sure. In fact, this is almost a “when,” and not an “if,” question. What could possibly be more dangerous to the world than a command economic system run on a global scale?

(One good answer: five evil traders on the 7th floor at Goldman Sachs.)

In summary, China should not be treated as though it were just another fast-growing free-market nation, with inevitable road bumps making things a bit uncomfortable; it isn’t. China is a top-down, completely controlled system, running on a zero-sum economic model made to produce one winner, and many losers.

 So What Is China?

There is nothing like it. It is a communist country that has fooled the West out of its money, and the West has been only too willing to go along for the ride. Now, as China’s other trading partners come in for the same rough treatment, it is becoming a global pariah, and its excuses and delays are increasingly falling on deaf ears.

What can its trading partners do to help bring China into compliance with global economic practice? Insist on actions, not words. Use tariffs when dumping, subsidies, or internal structural market blocs are the issues. Insist on justice where IP is involved. Do not disclose IP to China, under any circumstances. Stand up for your own rights and property; refuse to be bullied. If you can’t trade there, trade elsewhere. Make sure that goods made in China do not use slave labor, in one form or another. Make your goods somewhere else.

Instead of rewarding outrageous behavior, condemn it, in public.

Ask politicians and leaders espousing free-trade bills whether they have thought through the result of free trade in a rigged game, in which all of the cheapest goods and services are made by China? Stop shopping at Wal-Mart, a wholly-supplied Chinese distribution system.

Do not be shy about tariffs: it is the one thing that can go wrong for the Chinese economic model described here. If China stops buying our goods, what happens? Boeing takes a hit. (This was coming anyway.) If we stop buying Chinese goods, what happens? It would be the end of the Chinese model, and the Communist Party knows it.

Require fair trade; refuse extortion. Tell the truth about China’s tactics. Become an economic locovore, not just eating local food, but buying local goods and services.

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