China's Money Man on the US and World Economy

Here's a great piece from The Atlantic about one of China's top money manager and how he feels about the world economy, America's position in it, the Dollar, and lots of other things. Have a seat though, and a chill-pill, because what he says is not pleasant. The excerpt below is a great illustration of how derivatives work and where we lost our way.

So I wondered, How do I explain derivatives?, and I used the model of mirrors.

First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, “I don’t have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!” Okay. That’s a stock certificate. And then someone else says, “I have another mirror—I can sell a mirror image of that mirror.” Derivatives. That’s fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go.

When I told the State Council about the mirrors, they all started laughing. “How can you sell a mirror image! Won’t there be distortion?” But this is what happened with the American economy, and it will be a long and painful process to come down.

I think we should do an overhaul and say, “Let’s get rid of 90 percent of the derivatives.” Of course, that’s going to be very unpopular, because many people will lose jobs.

It's a chilling take on how things might turn out. But all this has been said before, and we came out on top (only to fall a little bit more the next time around)...

Time, of course, will tell.

“Be Nice to the Countries That Lend You Money” - The Atlantic (December 2008)