[kevin]

AB, don't worry about your campaign. China vs. US and Taiwan will always be interesting to explore

I agree with Narwan about China's superpower forecast. The Chinese economy has been built by American Consumer's need to buy crappy little trinkets like the piggie figurines that my girlfriend has placed all over my house. Dear lord woman! I don't care if you got it on sale, you didn't need it in the first...... woops wrong forum.

Oh Plasma.... Plasma, Plasma Plasma, let me put my Finance cap on and figure out where to begin. The Chinese currency (the Yuan) is pegged to the dollar. This means that there is a fixed exchange rate instead of a floating rate like the $ to the Euro. This was true of the Asian Tigers before the crash in 1997.

This crash was not the result of "some crazed NY traders." Currency fluctuation is a natural part of the economic cycle. Cash cannot continue to flow in one direction forever. The more the $ goes out of the US, the more its value goes down. If no one buys the things the US has, then US workers loose their jobs, then they cannot buy as many Asian products.

As the value of the $ falls, deflation becomes a problem. Deflation happens when there are too many products and not enough $ to buy them, so prices need to be lowered. Deflation is much worse than Inflation because it is harder to get out of. Deflation is a downward spiral where a company is building too many products and charging too much money for them. So they lower prices and lay-off workers they can't afford to pay. But then, with more workers laid-off, there are even less people to buy products.

Now the Asian Tigers are in trouble. Since their currency is pegged to the $, its drops in value too. A country pegs its currency to the $ so that their currency remains weaker. Having a weaker currency makes your goods more competitive in foreign markets, and imports less competitve at home. For example: China makes a widget for 4 Yuan. They have the Yuan pegged 4 to 1 to the $. You get 4 Yuan for every $. China ships the widget to the US and sells it for $4. They then take those $ back to China and exhange and get 16 Yuan.

The value of the Asian Tigers are falling, pegged to a $ that is sinking. They have no choice, they must float their currency, which allows it to be traded on the open Market. The results are predictable, painful, but neccessary. The Asian Tiger's value shoots up, way up. Their economy and currency offers the best return at the moment. But.... what comes up, must come down. The Asian Tiger's currency is rising, the $ is falling. All of the sudden: Asia's exports become more expensive in America, and America's exports become cheaper. To prevent this, the Asian Tigers started printing money, lot's of it in an attempt to flood the market and lower the value. This happens, but guess what? Inflation skyrockets.

Inflation is the great big brake to economic development (although not as bad as deflation) You have more and more money that is worth less and less. In addition, sales are plummeting so you're taking in less money. And that money is loosing value. Before you know it, you can't afford to pay back your bank loan. Not that this matters too much to the bank because it is already loosing money. The fixed amount of money it collects cannot cover things like bank employee salaries, that have to rise with inflation, so that people can afford to eat.

This is called the bubble bursting.

In regards to China, I have to disagree with Narwan about it being worse than the Asian Tigers in 1997.
1st: China has invested heavily in US bonds, guareenteeing a steady cash flow no matter what.
2nd: In 1997, China was able to take advantage of price hikes on Asian Tiger goods. They managed to establish a foothold in US markets because they could still supply goods cheaply. There is no such entity who can "slip-in" and take advantage of China's misfortunes
3rd: Having wittnessed the Asian Tigers in 1997, the world will approach the situation in a more sytematic way. For example, China will gradually loosen the controls on the Yuan. It will not free float overnight, instead changing the peg slowly to better reflect actual conditions. The bubble will not burst, but gently get smaller.