Command Economies, Deregulated economies…

A good place to start order to follow what is happening is RGMonitor

This site is ahead of the curve. In his latest piece Professor Roubini includes a remark from Yu Yong, director of Chinese Academy of Sciences of Social Sciences and former director of China’s central bank. As I have said before, the Chinese Academy of Sciences plays a pivotal role in directing Chinese economic policy.

“China’s reliance on external demand is tremendous. If there is weakness in the world economy, the impact on the Chinese economy will be very serious so we must do our best to stimulate the domestic market.”

China is not ready to be a consumer society. Its consumption of raw materials for infrastructure is enormous. Its consumption of finished goods–despite its huge population–is very modest compared to that of the U.S.

In allowing FDI to use it as an export platform while not sufficiently protecting its own labor force, China is now at the mercy of a severe economic downturn in the U.S. A more coherent Chinese policy would have been to allow labor to bargain…to bring its labor force up the wage ladder more quickly so that it would have a consumer base.

A command economy can make serious mistakes. But my point, again, is about labor. Everything is connected. There is risk attached to focusing only on infrastructure. There is a risk in relying on a consumer deep in debt. There is a profound risk in relying only exports. All this applies to China.

Equally, there is a profound risk in being just a consumer, going deeper and deeper in debt. And there is a profound risk in not properly overseeing (ahem regulating) your financial system.

Neither a command economy nor a deregulated economy is the answer. Somewhere in between, perhaps?

The U.S. consumer is now tapped out.

I bet the central banks everywhere are in a huddle on what to do next.

We are in for one hell of a ride.