November 8, 2007

Recycled Imbalances, Imbalanced Recycling

Dinocrat warns:
The massive build-up of unrecycled liquidity in a few exporting nations is one of the preeminent financial dangers of our time, and so far almost no one seems to be talking about it.
A scenario: You notice that public- and private-sector mismanagement has made the US economy wobbly, so you convert your large trove of dollars into a currency that you expect to hold its value against the dollar. You use that currency as collateral for sustained cumulative shorting of the US stock market, converting the proceeds of the short sales into the robust currency. When your selling precipitates a market break, US equities and the dollar crash together and your short-covering yields a dual profit.

IMO this kind of financial warfare is not in China's interest at present, but perhaps some oil producers would find it to their advantage and maybe there are hedge funds that bet on such a double-crash scenario.

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