Comment of the Day: Monday Smackdown: Hoisted from Archives: Economists Clueless About the Economy Weblogging: "No need to ask Kevin Hassett (is there ever?)...:
Comment of the Day: Phil Koop: Monday Smackdown: Hoisted from Archives: Economists Clueless About the Economy Weblogging: "No need to ask Kevin Hassett (is there ever?)...
Justin Wolfers asked if any of the signers to this took their much-deserved reputational hit for signing it, or whether any of them have provided any sort of apologia.
The answer is "No: reporters somehow quote them, but do not ask them why they got it so wrong in late 2010. Reporters do not ask them how they have revised their visions of the Cosmic All as a result of getting it wrong. Reporters remain eager to take their quotes down and publish them as if they were the informed views of experts."
And the other real shame--besides the journalistic one of pretending that this embarrassment never happened and continuing to burnish the reputation and media presence of the signers--is that, to my knowledge at least, not a single one of the signatories has gone back and explained (a) why they were so certain that QE was a disaster, (b) why they were wrong, (c ) how they have changed their working model of the economy according to Bayes's Rule, and (d) how their policy recommendations will be different in the future. Marking their beliefs about the world to market is just not something that any of these people ever do...
J. Bradford DeLong on November 23, 2015 at 04:09 AM in Economics: Finance, Economics: Macro, Moral Responsibility, Obama Administration, Political Economy, Politics, Science: Cognitive, Streams: (Monday) Smackdown Watch, Streams: (Tuesday) Hoisted from Archives, Streams: Cycle, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (17)
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Ann Pettifor: What Are the Economic Possibilities for Our Grandchildren?:
It is a great honour to speak at this celebration of Kings and Keynes. The greatest honour I can do to both Keynes and Kings College is to get down to business and speak frankly.
The world desperately needs to recover Keynes, but to do so it also needs to confront some deeply uncomfortable truths about the nature of power and the acceptance or otherwise of ideas.
J. Bradford DeLong on November 21, 2015 at 06:31 AM in Economics: Finance, Economics: Growth, Economics: History, Economics: Macro, Philosophy: Moral, Political Economy, Politics, Streams: (Weekend) Reading, Streams: Cycle, Streams: Economics, Streams: Equitable Growth | Permalink | Comments (2)
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Well, this is certainly surprising; this is certainly a black swan!:
And it collides on my desk with (a) Shakespeare's Macbeth, and (b) my own grappling with how I have been very surprised by what did and did not happen to our policies and our economies since 2005...
So let's raise the curtain:
J. Bradford DeLong on November 20, 2015 at 12:39 PM in Economics: Finance, Economics: Macro, Moral Responsibility, Obama Administration, Philosophy: Moral, Political Economy, Politics, Science: Cognitive, Streams: Across the Wide Missouri, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (15)
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Comment of the DayRobert Waldmann: Gramm-Leach-Bliley: "I think a major defect of Gramm-Leach-Bliley (Glass-Steagal repeal)...
The five-year anniversary of the right-wing anti-Bernanke QE letter coincides with the choice for President of the Minneapolis Fed of Neel Kashkari, with his apparent belief that expansionary monetary policy are destructive:
Sorry Japan, printing money is morphine. makes u feel better but doesn't cure. BOJ Unveils Bold Bid to End Deflation http://t.co/9G9mnAOdOq— Neel Kashkari (@neelkashkari) April 5, 2013
Market's response to the jobs report shows the tough spot the Fed is in. Patients get upset when the morphine ends. http://t.co/hokDzP1jbQ— Neel Kashkari (@neelkashkari) July 5, 2013
Fifth anniversary: Open Letter to Ben Bernanke:
J. Bradford DeLong on November 15, 2015 at 03:47 AM in Economics: Finance, Economics: Macro, Moral Responsibility, Obama Administration, Political Economy, Politics, Science: Cognitive, Streams: (Weekend) Reading, Streams: Cycle, Streams: Economics, Streams: Equitable Growth | Permalink | Comments (9)
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Can somebody remind me: where was Neel Kashkari in September 2008 on letting Lehman go into uncontrolled bankruptcy?
Here we see Keynes getting one, I think, very right: denying that the full-employment equilibrium serves as a medium-run sheet anchor sharply damping short-run fluctuations:
John Maynard Keynes (1937): The General Theory of Employment: "Money, it is well known, serves two principal purposes...
...By acting as a money of account it facilitates exchanges without its being necessary that it should ever itself come into the picture as a substantive object. In this respect it is a convenience which is devoid of significance or real influence.
Live from the Sixteenth Jacques Polak Conference: Sixteenth Jacques Polak Annual Research Conference: "Unconventional Monetary and Exchange Rate Policies":
Alexander Hamilton: To Robert Morris, [30 April 1781]:
This calculation supposes the ability of these states for revenue to continue the same as they now are, which is a supposition both false and unfavorable. Speaking within moderate bounds our population will be doubled in thirty years; there will be a confluence of emigrants from all parts of the world; our commerce will have a proportionable progress, and of course our wealth and capacity for revenue.
Over at Equitable Growth: The very-sharp Tyler Cowen gets one, I think, more wrong than right. He writes:
Tyler Cowen: What’s the Natural Rate of Interest?: "I... find all this talk of natural rates of interest...
...historically strange. A few points: (1) David Davidson and Knut Wicksell debated the... concept very early in the twentieth century, in Swedish.... Most people believe Davidson won.... (2) Keynes devoted a great deal of effort to knocking down the natural rate of interest.... There could be multiple natural rates... [or] no rate of interest whatsoever.... (3) In postwar economics, the Keynesians worked to keep natural rates of interest concepts out.... READ MOAR
It has now been seven years since the onset of the global financial crisis. A central question is how the crisis has changed our view on macroeconomic policy. The IMF originally tackled this issue at a 2011 conference and again at a 2013 conference. Both conferences proved very successful, spawning books titled In the Wake of the Crisis and What Have We Learned? published by the MIT Press.
The time seemed right for another assessment. Research has continued, policies have been tried, and the debate has been intense. How much progress has been made? Are we closer to a new framework? To address these questions the IMF organized a follow up conference on "Rethinking Macro Policy III: Progress or Confusion?", which took place at the Jack Morton Auditorium in George Washington University, Washington DC, on April 15–16, 2015.
The conference was co-organized by IMF Economic Counselor Olivier Blanchard, RBI Governor Raghu Rajan, and Harvard Professors Ken Rogoff and Larry Summers. It brought together leading academics and policymakers from around the globe, as well as representatives from civil society, the private sector, and the media. Attendance was by invitation only.
Wrap Up Video:
Session IV: Fiscal Policy in the Future Video:
Vitor Gaspar, Marco Buti, Martin Feldstein, Brad DeLong
J. Bradford DeLong
Olivier Blanchard, when he parachuted me into the panel, asked me to “be provocative.”
So let me provoke:
My assigned focus on “fiscal policy in the medium term” has implications. It requires me to assume that things are or will be true that are not now or may not be true in the future, at least not for the rest of this decade and into the next. It makes sense to distinguish the medium from the short term only if the North Atlantic economies will relatively soon enter a regime in which the economy is not at the zero lower bound on safe nominal interest rates. The medium term is at a horizon at which monetary policy can adequately handle all of the demand-stabilization role.
Over at Equitable Growth: Kevin Warsh and Michael Spence attack Ben Bernanke and his policy of quantitative easing, which they claim "has hurt business investment."
I score this for Bernanke: 6-0, 6-0, 6-0.
In fact, I do not even think that Spence and Warsh understand that one is supposed to have a racket in hand when one tries to play tennis. As I see it, the Fed's open-market operations have produced more spending--hence higher capacity utilization--and lower interest rates--has more advantageous costs of finance--and we are supposed to believe that its policies "have hurt business investment"?!?! READ MOAR
: Matthew O'Brien: Yes, Niall Ferguson Knew He Was Playing Three-Card-Monte with the "Wall Street Journal's" Readers via His Misuse of Budget Baselines. Why Do You Ask?: Noted: Matthew O'Brien: Truth in the Age of Niallism: "Harvard historian Niall Ferguson still thinks bluster can substitute for facts...
...Here are three facts about how the 10-year budget outlook has changed in the past year: 1) the fiscal cliff deal raised $600 billion in new revenue; 2) the sequester, if left in place, cut $1.2 trillion; 3) the CBO revised its projection for federal healthcare spending down by $600 billion. Harvard historian Niall Ferguson has a counterfactual take. Here's how he described how our debt trajectory changed the past year:
Comment of the Day: Robert Waldmann: Reaching for Yield: "I have read your Bean excerpt which is very brief...
Khan Academy: Financial Weapons of Mass Destruction: "Why Warren Buffett called...
...Credit Default Swaps 'financial weapons of mass destruction'...
Live from Silicon Valley: Heidi Roizen: How to Build a Unicorn From Scratch--and Walk Away with Nothing: "Liquidation preferences, participation, ratchets...
...even the very term preferred shares (they are called ‘preferred’ for a reason) are things every entrepreneur needs to understand. Most terms are there because venture capitalists have created them, and they have created them because over time they have learned that terms are valuable ways to recover capital in downside outcomes and improve their share of the returns in moderate outcomes--which more than half the deals they do in normal markets will turn out to be. There is nothing inherently evil... standard procedure for high risk investing. But for you the entrepreneur to be surprised after the fact about what the terms entitle the venture firm to is just bad business--on your part. For any private company with different classes of stock, the capitalization table is not-at-all the full picture of who gets what in an outcome...
Comment of the Day: Roger Farmer: Fed?!?!: "There is a third possibility...
...The only way to get out of the trap is to raise rates now and offset the contraction through simultaneous fiscal expansion: either through:
- traditional infrastructure (I'm not a fan),
- Helicopter drops (I'm more of a fan), or
- Fed purchases of stocks.
I think that Miles Kimball's negative interest rates would also work--which would be not a fiscal but a monetary expansion in Roger's taxonomy...
Over at Equitable Growth: A truly excellent economics Nobel Prize--I have learned a lot from Angus Deaton.
And I look at my desk and see my copy of Akerlof and Shiller's Phishing for Phools that I am halfway through on my desk. And I think about the panel I was on with Paul Krugman at New York Comic Con yesterday. There is a subset of economics Nobel Prize winners who are true geniuses, from whom I have learned and continue to learn an immense amount.
But then I turn to my computer to sort through my unread browser tabs.
And the first thing that comes up is: Eugene Fama: http://www.chicagobooth.edu/capideas/magazine/fall-2015/whos-really-in-charge.
And all I can think is: "What a maroon!" READ MOAR
Over at Equitable Growth: A very effective smackdown, I must say:
Kevin Drum: 4%/Year Inflation: "Generally speaking, I'm in DeLong's camp...
...But here's my question: what makes him think that the Fed can engineer 4 percent inflation right now? And what would it take? I ask this because it's conventional wisdom that a central bank can engineer any level of inflation it wants if it's sufficiently committed and credible about it. And that's true. But my sense recently has been that, in practice, it's harder to increase inflation than it sounds. The Bank of Japan has been trying to hit the very modest goal of 2 percent inflation for a while now and has had no success. Lately it's all but given up. 'It's true that the timing for achieving 2 percent inflation has been delayed somewhat,' the BOJ chief admitted a few months ago, in a statement that bears an uncomfortable similarity to the emperor's declaration in 1945 that 'the war situation has developed not necessarily to Japan's advantage.'
So I'm curious. Given the current state of the economy, what open market operations would be required to hit a 4 percent inflation goal? How big would they have to be? How long would they have to last? What other extraordinary measures might be necessary? I've never seen a concrete technical analysis of just how much it would take to get to 4 percent. Does anybody have one? READ MOAR
Live from Lima, Peru: Martin Wolf, can I get you to say something optimistic?
The last four times I have been in the same room with Martin Wolf, he has left me profoundly depressed. He has just done it again--by reminding me how many of the lessons of the 1930s have been lost, and how much the Federal Reserve needs to assume the role of global Kindlebergian hegemon that it is currently refusing. So I had a question to ask that I hoped would elicit an optimistic answer...
Must-Read: I see three things going on in Federal Reserve desire to raise interest rates once there is even half an excuse to do so:
My suggestion: the Federal Reserve should invite Lars E.O. Svennson to come to every FOMC meeting and speak first. And the Federal Reserve should listen to him:
Bruce Bartlett: The Fed: Being Goaded into Raising too Soon?: "All year... markets have been expecting the... Federal Reserve to begin... normalising interest rates...
Must-Read: Looking back at my archives, I find that my own ratio of "Paul Krugman is right" to "Paul Krugman is wrong" posts is not in the rational range between 10-1 and 5-1, but is 15-1. So I am looking for an opportunity to rebalance. And I find one this morning: Here I think Paul Krugman is wrong. Why? Because of this:
...should raise rates vs people who think Fed should hold tight.... People who think Fed should raise rates think Fed is only making things worse by encouraging misallocation of capital. People who think Fed should hold tight are obsessed with inflation measures, pressures from global economy. So Fed is caught between narratives of two groups that are essentially always going to be talking past each other.
That was the keen-eyed observer Kristi Culpepper tweeting a few days ago. It struck me as incisive and insightful both about those who do and about those who do not want the Federal Reserve to raise interest rates. READ MOAR
Today's Economic History: Don Morgan and James Narron: Crisis Chronicles: The Panic of 1825 and the Most Fantastic Financial Swindle of All Time: "The banking panic of 1825 has been called the first modern financial crisis, the first Latin American crisis, and the first emerging market crisis...
...The panic displayed many of the key elements... we have covered--fluctuations in money growth, an investment bubble, a stock market crash, and bank runs--[but] this crisis had its own twists, including a Bank of England that hesitated before stepping in....
Live from Strada: Don't believe The Hill, or its reporter Kevin Cirilli:
Kevin Cirilli: Top Brookings economist forced out over biz-backed study: "The left-leaning Brookings Institution is forcing one of its top economists to resign...
J. Bradford DeLong and Michael M. DeLong
Over at Project Syndicate: Pay attention to U.C. Berkeley's newly-hired Gabriel Zucman, author of the just-released The Hidden Wealth of Nations: The Scourge of Tax Havens (Chicago: University of Chicago Press) http://amzn.to/1KziL29.
His figures are the hardest figures about tax havens--Switzerland, Bermuda, the Cayman Islands, Singapore, Luxembourg, and so forth--and about the quantity of money stored in them that we are likely to get. His estimate? 8% of the world's financial wealth. $7.6 trillion. That is more wealth than is owned by the poorer half of the world. And this is money that is not in the tax base, but should be in the tax base--and would be if we had sufficient international tax harmonization to close off loopholes that allow for (legal) tax avoidance and sufficient cooperation and enforcement to make (illegal) tax evasion not worth the risk. READ MOAR
Comment of the Day: Robert Waldmann: Puzzling That the Phrase "Employment-to-Population Ratio" Does Not Appear: "The other odd thing is that Bullard's argument amounts to...
Must-Read: The fact that the sources of win-win value in finance are subtle and second-order--having to do with liquidity, patience, diversification, and incentive alignment--makes phishing for phools much more profitable relative to building relationships with customers and suppliers than in "normal" industries. I am pleased that the... I was going to say Nobel Prize-caliber minds, but looking again at the Economics prize recipients I realize that is not a compliment... extremely-sharp minds of Shiller and Akerlof are thinking of this:
Robert J. Shiller: Fraud, Fools, and Financial Markets: "Because we can be manipulated or deceived or even just passively tempted...
Must-Read: it is, I think, worth stepping back to recognize how very little is left of the original efficient market hypothesis project, and how far the finance community has drifted--nay, galloped--away from it, all the while claiming that it has not done so.
The original EMH claim was this: You--if your von Neumann-Morgenstern psychological rate of time preference and your von Neumann-Morgenstern psychological rate of declining marginal utility of wealth are close to that of the average--cannot expect to beat the market. The best you can do is diversify, hold the market portfolio, and hunker down. You can expect to earn higher average returns, but only by taking on unwarranted systematic risks that place you at a lower expected utility.
But finance today has given up any pretense of a claim that the--widely fluctuating over time--risk-free rate at any horizon has anything to do with von-Neumann Morgenstern patience-or-impatience psychology. It is very possible for the average person to beat the market in a utility sense by trading on the difference between the average rate of time preference and that priced in by the market. Finance today has given up any preference that the--widely fluctuating over time--expected systematic risk premium has anything to do with von Neumann-Morgenstern declining marginal utility of wealth. It is very, very possible for the average person to beat the market in a utility sense and quite probably in a money sense by trading in systematic risk on the difference between their risk tolerance and the (usually abnormally low) risk tolerance priced in by the market. And now, in addition to the--mispriced from a von Neumann-Morgenstern psychological perspective--wrong risk-free rates and wrong systematic risk premium are joined by two additional "misplacing" factors that the market has not managed to arbitrage away.
So what is left? All that is left of the EMH project is the American question: If this deal is good for you, why is it good for me? All that is left is the insight that if you there is neither a difference-in-patience, a difference-in-risk-tolerance, a diversification, mor an alignment-of-incentives-for-agents reason for a trade to be win-win, at least one of the parties in it is making a mistake. That is a powerful insight--but a very limited one. And it is not what the EMH is--or, rather, it is not what the EMH was back before it was redefined to "save the hypothesis":
Robert F. Stambaugh and Yu Yuan: Mispricing Factors: "A four-factor model with two 'mispricing' factors...
Four times in the past 40 years, the Federal Reserve has begun what it expected at the start to be a substantial tightening of monetary policy: one that would leave interest rates markedly higher and asset prices significantly lower than when it started.
All four of these times--every single one--the tightening has triggered processes that reduced employment and production, and impoverished nations, by amounts significant larger than the Federal Reserve had anticipated when it began the tightening cycle.
Live from Strada: Michael Woodford: Risk Attitude as a Perceptual Bias:
Wednesday September 16: the Departmental Seminar jointly organized with Macroeconomics...
Over at Equitable Growth: The arguments for raising interest rates right now are of appallingly low-quality.
Consider, for example, Bloomberg View:
Brad Brooks: Why the Fed Should Raise Rates Now: "Although the Fed hasn't raised interest rates in almost 10 years...
...sympathetic pundits say it's still too soon to raise them.... How did our financial system weaken to the point where a quarter of a percent increase in rates is more than it can handle?
Stop right there: it is not that "our financial system [is] weaken[ed] to the point where a quarter of a percent increase in rates is more than it can handle". No interest-rate dove says it is. The reason interest-rate doves oppose rate increases right now is not that the financial system cannot handle them, but that they come with a cost--lower employment and slower growth--and no compensating gain in the form of an appropriate curbing of excess inflationary pressures, since there are no excess inflationary pressures visible either her and now or as far out as the horizon we can see. READ MOAR
Live from Strada Barry Eichengreen: Chinese Renminbi: Regional or Global Currency?:
Colloquium: Center for Chinese Studies: Institute of East Asian Studies | September 16 | 12-1 p.m. | 180 Doe Library
Speaker: Barry Eichengreen, Economics, UC Berkeley
Moderator: Lowell Dittmer, Political Science, UC Berkeley
Sponsors: Institute of East Asian Studies (IEAS), Center for Chinese Studies (CCS)
This talk will contrast two views of the process and ultimate result of renminbi internationalization, one in which the renminbi becomes a consequential international currency used throughout the world, and a second in which the renminbi is used for cross-border transactions mainly in Asia.
Over at Equitable Growth: Commercial bankers, you see, are not rentiers. Rather, they are intermediaries. And they are intermediaries who find an economy in which interest rates are likely to kiss the zero lower bound a very difficult environment in which to operate.
Thus if I were a commercial banker working for or advising the Federal Reserve, I would think like this: READ MOAR
As we all know, in the absence of the Maastricht Treaty a financial crisis like that of Portugal 2010 would have been dealt with by depreciation and an IMF program--both to provide funding to cushion the effect of the sudden stop on capital inflows and to take the blame for the policy changes inevitable to create external balance at whatever capital account conformed to the post-crisis tolerance of both foreigners and Portuguese for Portugal risk. READ MOAR
Over at Equitable Growth: Fall 2015 BPEA Th 4:30 PM: Ioannides and Pissarides seem to me to provide yet one more argument that the right policy in 2010 was Grexit so that external balance could be achieved via depreciation--that given structural impediments to productivity growth and the predictable consequences of austerity and internal deflation, nothing else had a chance of working.
So what was the plan and expectation back in 2010?
external creditors fared rather benignly in Greece, despite the many years of default. The real ex-post returns on the defaulted bonds were in the range of +1% to +5%, despite the losses due to haircuts and arrears... partly the result of the high yields... but also because partial debt service continued even in severe crisis years...
That seems to explain why people lend to Greece--that when the crisis comes, they have enough control to squeeze the lemon hard, whatever the excess burden of the taxes imposed and its cost for the Greeks. READ MOAR
Over at Equitable Growth: Fall 2015 BPEA 1:00 PM Th: I read House and Tesar. They say that attempting a 4%-point increase in government revenue as a share of GDP in Greece may well push you over the top of the Laffer curve:
We consider spending reductions or tax increases sufficient to generate an average flow increase in the primary balance of one percent of 2014 GDP... a quarter of the repayment required to fully meet the stream of debt payments.... We do not push the model to generate the full 4 percent increase in the primary balance as a share of 2014 GDP.... Policy shifts that satisfy (or attempt to satisfy) the full 4 percent increase could push capital and labor taxes into the downward sloping portions of the Laffer curve...
Does it not follow immediately that the excess burdens of a 1%-point increase are overwhelmingly large? READ MOAR
Over at Equitable Growth: Fall 2015 BPEA Th 1:00 PM: Schumacher and Weder di Mauro's paper, "Diagnosing Greek Debt Sustainability: Why Is It so Hard?", confuses me. It is not at all clear to me what "sustainable" or "less than 20% chance of debt-distress" really mean--as, indeed, it has become a term a political art rather than one of economic analysis. READ MOAR
I am now swinging into the camp of thinking that the only way to understand this--and by "this" I mean everything from Peter Schiff to Robert Lucas--is as a form of affinity fraud:
Over at Equitable Growth: Let me pile on to something Paul Krugman published last week, and make fun of William Cohan for writing and the New York Times for publishing hopelessly confused austerity pseudonomics:
Paul Krugman: Artificial Unintelligence: "In the early stages of the Lesser Depression...
everywhere you looked, people who imagined themselves sophisticated and possessed of deep understanding were resurrecting 75-year-old fallacies and presenting them as deep insights.... [Now] I feel an even deeper sense of despair--because people are still rolling out those same fallacies... So here’s William Cohan in the Times, declaring that the Fed should ‘show some spine’ and raise rates.... READ MOAR
This is Ken Rogoff's "debt supercycle" view, by and large:
Matthew Klein: Some Fed thoughts: QE4 and all that: For months, the mid-September meeting of the Federal Open Market Committee...
was being telegraphed as the most likely start date of the ‘normalisation’ process. Or, to use another bit of central banker-ese, the day when short-term interest rates would begin ‘liftoff’ from the current range of zero to 25 basis points. There is still time before any decision is made, but the latest utterances from America’s central bankers — corroborated by interest rate futures and options — suggest that a September rate increase is becoming less likely. Bill Dudley, the boss of the New York Fed, said on Wednesday that the argument for moving in a few weeks was ‘less compelling’ than it was just ‘several weeks ago’.
Over at Project Syndicate: A Cautionary History of US Monetary Tightening:
BERKELEY JACKSON HOLE – The US Federal Reserve has embarked on an effort to tighten monetary policy four times in the past four decades. On every one of these occasions, the effort triggered processes that reduced employment and output far more than the Fed’s staff had anticipated. As the Fed prepares to tighten monetary policy once again, an examination of this history – and of the current state of the economy – suggests that the United States is about to enter dangerous territory. READ MOAR
Over at WorldPost: China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run: Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said -- always -- that at most, Chinese supergrowth likely has five more years to run.
Then there will come a crash.... After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic... convergence to the North Atlantic growth-path norm will be slow... and political risks... [cause] the most likely surprises. I have been wrong for 25 years straight -- and the jury is still out on the period since 2005. Thus, I'm very hesitant to count out China and its supergrowth miracle. But now 'a' crash -- even if, perhaps, not 'the' crash I was predicting -- is at hand. [READ MOAR]