The Unacceptable Behavior of the Market

At this point the only thing that can save the euro is a combination of moves in which the European banks are guaranteed by a credible institution and in which Germany takes steps to stimulate its economy quickly and dramatically. Until Germany is willing to boost domestic spending enough to run a deficit that allows Spain to run a surplus, it is impossible for Spain to repay its debt. This is just basic balance-of-payments arithmetic.
.... Given all the excitement over the speed of the deterioration in European markets, I suppose we are going to see urgent new measures announced and a temporary respite in the crisis, but ultimately I think this will be little more than a blip on the way to sovereign debt restructuring and the break-up of the euro. Nothing has changed fundamentally in Europe in the past few weeks and there is no reason to assume that the crisis is on its way to being resolved.

..... The massive credit expansion in China, with its associated problems of overinvestment and asset price bubbles, is no different than any other credit bubble.
..... In my opinion the next few years are not going to see soaring commodity prices but rather collapsing commodity prices, in large part because it has been China’s unsustainable investment boom that has both driven demand up ferociously (accounting for only 10% of global GDP China nonetheless absorbs roughly 40% of global copper production and nearly 60% of global iron ore and cement production) and driven up investment in extractive industries.
Once China brings down its infrastructure investment rate, the combination of declining demand (in fact China has stockpiled so much that it will soon turn from importing copper, iron ore, and other commodities to exporting them) and expanding supply is likely to have a very deleterious effect on prices. In my opinion China is paying overly high prices in a market in which prices are likely to drop sharply.

BY MICHAEL PETTIS