3 Problems With the Biggest Bubble in History

02/04/10 Stockholm, Sweden – So much speculation is being focused on asset bubbles – where they are, how large they may be, and how much time they have left – while a much bigger bubble looms. That bubble is China’s $2.4 trillion in foreign currency reserves. According to William Pesek, we are witnessing “China’s currency reserves grew by more than the gross domestic product of Norway in 2009.”

The bubble is inflating at a rapid pace and on a massive scale. Although there’s abundant concern about the trillions held by China, few have viewed the problem as another bubble, nor have they considered what that similarity may mean.

Pesek outlines three reasons why this is a problem:

“One, it’s a massive and growing pyramid scheme… China aims to diversify out of U.S. Treasuries into other assets and commodities. The question that governments are grappling with is which markets are deep enough to absorb China’s riches? Gold? Oil? Euro-area debt? The Madoff family’s next Ponzi scheme?

“…Two, reserves are dead money…These huge sums of money could be used to improve infrastructure, education, health care and reducing carbon emissions. Never before have we seen such a misallocation of such vast resources…

“Three, reserves add to overheating risks. When policy makers buy dollars, they need to sell local currency, increasing its availability and boosting the money supply. Next they sell bonds to mop up excess money in economies. It’s an imprecise science that often leads to accelerating inflation.”

The trillions burning a hole in China’s pocket is not exactly chump change, and it’s interesting to consider how its growth has become like an overheated pyramid scheme of dead, fiat money. Eventually, and no one knows when, that money is going to start chasing something, and again, no one knows exactly what it may chase. Those unanswered questions leave a great deal of room for uncertain and profound outcomes.

You can read William Pesek’s opinion on the matter in his Bloomberg article on how the biggest bubble in history is growing every day.

Rocky Vega

Rocky Vega is a regular contributor to The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.

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