China Crash?

John Derbyshire of National Review.com has an interesting post (h/t Larwyn) concerning the possibility of a China crash. Derbyshire notes that two previous times in modern history have nations run up large foreign reserve balances:

>"The first time occurred in the late 1920s when, after a decade of record-beating trade and capital account surpluses, the United States had accumulated what John Maynard Keynes worriedly described as "all the bullion in the world." . . . The second time occurred in the late 1980s, when it was Japan’s turn to combine huge trade surpluses, along with more moderate surpluses on the capital account, to accumulate a stockpile of foreign reserves only a little less than the equivalent of 5-6% of global GDP"

In May 2008 I noted that a Chinese tragedy is in the making despite the major strides that the Chinese economy has made. Like the political leadership of all managed economies, the Chinese government is subject to massive errors and missteps that are far worse than would occur under laissez-faire. I wrote then:

"Tragically, the Chinese perceived the spectacular image of large-scale development and have attempted to emulate Robert Moses's approach with large construction projects, continuing to limit the intellectual and economic freedom on which economic development depends. Equally sadly, Americans lost sight of the reason for their success, and passed laws and regulations, and imposed punitive taxes, that have inhibited entrepreneurship, slowing American economic progress, even as they have increasingly provided welfare payments to incompetent bankers, real estate developers, academics and Wall Street stock jobbers who do not produce wealth.

"This country and China have squandered resources in stupid ways. The bubble will burst as all credit bubbles do. America may have enough resources to reassess its errors. The Chinese likely do not, and many there will be hurt."