About the financial crisis of 2008, which eliminated hundreds of billions of dollars? worth of savings that the Chinese government had extracted from its people, through deliberately suppressed consumption levels:
We are not quite at the bottom yet. Because we don?t really know what?s going to happen next. Everyone is saying, ?Oh, look, the dollar is getting stronger!? [As it was when we spoke.] I say, that?s really temporary. It?s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I?d like to bet on that!
The overall financial situation in the U.S. is changing, and that?s what we don?t know about. It?s going to be changed fundamentally in many ways.
Think about the way we?ve been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it?s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.
People, especially Americans, started believing that they can live on other people?s money. And more and more so. First other people?s money in your own country. And then the savings rate comes down, and you start living on other people?s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.
We?the Chinese, the Middle Easterners, the Japanese?we can see this too. Okay, we?d love to support you guys?if it?s sustainable. But if it?s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let?s change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the ?real economy,? etc.]
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About stock market derivatives and their role as source of evil:
If you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people.
I was predicting this many years ago. In 1999 or 2000, I gave a talk to the State Council [China?s main ruling body], with Premier Zhu Rongji. They wanted me to explain about capital markets and how they worked. These were all ministers and mostly not from a financial background. So I wondered, How do I explain derivatives?, and I used the model of mirrors.
First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, ?I don?t have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!? Okay. That?s a stock certificate. And then someone else says, ?I have another mirror?I can sell a mirror image of that mirror.? Derivatives. That?s fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go.
When I told the State Council about the mirrors, they all started laughing. ?How can you sell a mirror image! Won?t there be distortion?? But this is what happened with the American economy, and it will be a long and painful process to come down.
I think we should do an overhaul and say, ?Let?s get rid of 90 percent of the derivatives.? Of course, that?s going to be very unpopular, because many people will lose jobs.
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