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What's in Your Wallet?

If you were paying any attention to the stock market yesterday, you realize by now that your wallet has shrunk. Some are calling it “Black Monday.” While it can’t all be blamed on the Chinese, we’d like to thank them anyway for “Unlocking the Gates of Hell” – a reference actually to a segment of The Hungry Ghost Festival (Yu Lan) during which many Chinese make efforts to appease their ancestors by ‘feeding’ them at roadside fires where they burn faux money and other offerings for use in the afterlife. The US will likely hit 18.1 trillion in debt by mid-November, according to the Congressional Budget Office. We’d like to be appeased in this life.

We checked in with our economist friend Andrea Sommariva (formerly of the IMF in Washington) who has spent many years in China. He explained it this way: “There are several reasons why China has devalued the Yuan in recent weeks, ranging from falling exports to a declining growth rate. But there are some doubts whether devaluation of the Yuan and expanding public works will jolt the economy back into action. This is due to what is happening to China’s labour market. For many years, China’s labour market has been tight as people moved from rural areas to cities in search for work. From 2010, many people have aged out of the labour market, pushing the ratio of job offers to seekers upwards. This indicates that the China economy has reached a limit of its supply capacity. Economic stimulus, such as devaluations and public works, may have limited impacts on economic growth. The only way to revive economic growth is through increase productivity per worker, which requires a more efficient allocation of resources. But it will take some years to make workers more productive and, in China’s case, to liberalize the economy to achieve a more efficient allocation of resources.”