There's an old joke -- so old I can't quite remember how it goes, other than the punch line. The story has something to do with a scientific discovery about elephants. When the news comes out, the Brits promptly write a white paper on the policy implications for elephant habitats. The Germans produce an encyclopedia covering all things elephant. And the Poles publish a treatise entitled "The Elephant and the Polish Question."

I've been reminded of the punch line more than once over the past several weeks as I've read endless lectures to the Russians on how they should go about remembering the defeat of Nazi Germany sixty years ago. Anne Applebaum's op-ed in the Washington Post fits the almost-universal pattern.

Try, if you can, to picture the scene. A vast crowd in Red Square: Lenin's tomb and Stalin's memorial in the background. Soldiers march in goose step behind rolling tanks, and the air echoes with martial music, occasionally drowned out by the whine of fighter jets. On the reviewing stand, statesmen are gathered: Kim Jong Il, the dictator of North Korea, Alexander Lukashenko, the dictator of Belarus, Gen. Wojciech Jaruzelski, the former dictator of Poland -- and President George W. Bush.

That description may sound fanciful or improbable. It is neither. On the contrary, that is more or less what will appear on your television screen May 9, when the 60th anniversary of the end of World War II is celebrated in Moscow. I have exaggerated only one detail: Although Kim Jong Il has been invited, his attendance has not yet been confirmed. But Jaruzelski is definitely coming, as are Lukashenko, Bush and several dozen other heads of state. President Vladimir Putin of Russia will preside.

Of course, conveniently airbrushed from this Soviet-esque word-picture are the other leaders gathered in Red Square from the wartime allies of America and the USSR. But left out of this picture is also Red Square itself -- its colorful vitality, its glorious collection of ancient and modern symbols, Lenin's tomb and rock concerts. Standing in Red Square, one has the sense of an ageless, changeless society characterized incongruously by its never-ending arduous struggle to remake itself. This is not a place or a people trapped for eternity in a snapshot of politburo members atop a reviewing stand. That fact is, for me, one of the many reasons to celebrate this May 9 and makes Red Square an appropriate venue, among many, for those remembrances.

I've also found remarkable, in the editorials and media coverage leading up to May 9, that the costs borne by all of the Allies in the defeat of Nazi Germany seem to have been overlooked or even lost altogether. Searching for "Stalingrad" or "Leningrad" or the "Eastern Front" produces hardly a single recent item. For that matter, until President Bush appeared on Saturday at an American battlefield cemetery in the Netherlands, virtually nothing has been heard about those who lost their lives fighting the Nazis on the Western Front. That generation, which has been called the "greatest" in the US, endured horrors and made sacrifices that are simply unimaginable today. The last of that generation will be walking proudly to the "echoes of martial music" in Red Square on May 9. While some of them are still with us, we should remember them and the stories they wrote with their lives.

Certainly, we should never dismiss the real problems at the heart of quarrels over several centuries of Central and Eastern European history, including the Cold War period of Soviet domination. Russia itself is suffering from the failure to fill meaningfully huge lacunae in its historical narrative. A number of thoughtful comments have recently been written on the questions of "facing up to history" and reconciliation, and I'll try to take up those themes in a future post. But today I feel like assembling a few of the pictures -- undoubtedly familiar to most of you -- that are part of my impressionistic mental scrapbook but aren't likely to make much of an appearance in the media this VE Day.
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Awhile back I was reminiscing about how so many of today's most heated debates carry rather strong echoes of the past. And now we have further proof that some disputes just can't seem to ever die. The principal of McCord Middle School in Benton Harbor, Michigan has ordered the school band not to perform "Louie, Louie" in Saturday's Grand Floral Parade, held as part of the Blossomtime Festival.

Most readers will be familiar with this staple of raunchy dancing that's part of the repertoire of every band that plays at an American sporting event. What would generations of that soon-to-be-endangered species, "sexy cheerleaders," have done without a bit of bump-and-grind to "Louie, Louie." And Animal House afficianados will recall John Belushi's thoughtful explication of the significance of the lyrics. The website LouieLouie.net -- devoted to the production of a documentary on the history of the song, its composer/lyricist Richard Berry, and many of its performers -- has inventoried more than 1,600 recordings. Wikipedia reports that what is believed to be the world's largest jam session was held in 2003 in Tacoma, Washington, where 754 guitarists played a ten-minute rendition of "Louie, Louie."

For me, however, "Louie, Louie" is simply one of the great urban myths. So where else to look than that cornucopia of cultural artifacts, Urban Legends.

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For some time, praktike and I have been observing a change in the way the Bush Administration is approaching the Global War on Terrorism, and I promised him I'd try to put some thoughts down in writing. Last week, Jim Hoagland confirmed our observations, flagging a shift underway to a Global War on Extremism, with some reassignment of bureaucratic roles. Then yesterday, Ivo Daalder of Brookings (with whom I am in agreement far more often than not) posted some observations about the changes in Bush's second term foreign policy. He basically concluded that Bush has lost interest in the war on terrorism and has reverted to his pre-9/11 policy priorities and worldview.

Praktike's reaction to Daalder's post was mixed. Among the points prak raises, he hits on the topic I promised to write about:

I also think Daalder is missing the Bush administration's shift away from a "global war on terrorism" to a "global war on extremism," which we've been tracking here. In truth, this change in emphasis from a primarily military to a primarily ideological struggle is what Democrats and counterterrorism experts have been talking about for some time. If done properly (always iffy with the Bush administration), it will be a good thing,..

I agree wholeheartedly. Here's a lengthy very-sketchy-first-draft-essay on why I agree with prak, together with some implications from the view of strategic doctrine.

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Like praktike, I am somewhat disappointed with Ivo Daalder's opening contribution to Josh Marshall's new policy blogging venture. Criticism of the Bush Administration's specific moves on dealing with terrorism are certainly merited. Where Bush's actions (or non-actions) notably diverge from his political rhetoric, he should be especially fair game for his electoral cynicism and fear-mongering.

But Daalder's critique of Bush as "all hat" on terror is pushing us in a direction we don't really want to go. Or rather, it's inadvertently hanging on to a set of Bush-defined narrow policies when Bush has himself begun to shift towards a strategic approach far more in keeping with policies liberals have long advocated. We should get out in front of that process.

The "Global War on Terrorism" as a flawed strategy

From the outset, the "Global War on Terrorism" was widely derided as a strategic concept by scholars and experienced policymakers both in the US and internationally, and within both the foreign policy and military establishments. As emphasized in the report of the 9/11 Commission and the Defense Advisory Board's recommendations on Public Diplomacy, the GWOT is a distinctly unhelpful way of thinking about the complex phenomena of politico-religious extremism which manifest themselves, in part, through terrorist acts aimed at the US or at US friends and interests. A GWOT provides little strategic guidance for defining objectives or for framing policy options, choosing actions, and assessing the effectiveness of those actions (e.g. Rumsfeld's "metrics" problem).

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With all the ink split and airwaves filled about John Bolton and UN reform, very little in the way of "what exactly do we mean by reform" has been discussed by either proponents or opponents of Bolton's nomination. I admit to a certain sympathy for Tom Friedman's recent takedown of the GOP cries for "UN reform."

"Reforming the U.N." is without question one of the most tired, vacuous conservative mantras ever invented. It is right up there with squeezing "waste, fraud and abuse" out of the Pentagon's budget.

Still, I think Suzanne Nossel does us all a terrific service at Democracy Arsenal in explaining where UN reform really does matter. She outlines a number of key issues, as well as the stands being taken by different players.

Suzanne presents her piece as "on the margin of the Bolton debate." If, however, as has been speculated, the White House is considering pushing Bolton to the Senate floor even if the Committee sends his nomination with a negative recommendation, the sole reason -- other than an assertion of presidential power -- will be to tar the Democrats as "UN-huggers" who don't want an "effective UN." Such a circus will do neither the Democrats nor US foreign policy any good.

For that reason, I think it's extremely healthy for the policy blogs like Democracy Arsenal to expand beyond Bolton himself to the specifics of UN reform. The point is not that the Bush position on reform (at least as it's likely to be pursued by Rice) is either necessarily disingenuous or bad per se. Nor is it that the Bolton opponents are opposing Bolton as a way of undermining Bush's position on the UN. Rather, it's that Bolton is the wrong guy to pursue a reform agenda that is broadly shared on both sides of the aisle.

To make that case effectively requires Bolton's opponents to do more than simply saying "me too." It's not enough to say vaguely that the UN needs reform. That isn't very persuasive, and it has the added negative effect of being just general UN-bashing, rather than focusing on expanding on what the UN does well and changing it where it needs to change.

Suzanne also makes the point that it's important to identify where specific reform priorities overlap with Kofi Annan's proposals, and where the sticking points are. As she illustrates, a lot of those sticking points will be found in disagreements between the US and either Annan or other groups of countries, NOT between a majority of Republicans and Democrats.

Suzanne points us to a recent speech at the UN by Shirin Tahir-Kheli, the person Condi Rice has put in charge of the reform effort and the response to Annan's proposals. There are lots of tricky issues that are finessed in the speech. But I think most of us will find there's much to like in the Rice agenda so far. Which just makes the Bolton appointment all the more maddening and inexplicable!

{cross-posted at Liberals Against Terrorism}

As he's graphically displayed on a "where you've been" map, Matt Yglesias is not embarrassed to admit he's led a sheltered life when it comes to exploring the geography of America beyond narrow strips of the blue coasts. He's mightily well-read and certainly keeps up with the national media cultures of music, entertainment, sports and the internets. But sometimes a limited exposure to the highways and byways of American culture reaches out to bite him. There's more continuity in both high politics and l'Amerique profonde than perhaps Matt realizes.

In a post commending the bracing honesty of the old-fashioned, god-fearing, anti-papists of Northern Ireland's Ian Paisley troops, Matt seems to suggest that either anti-Catholicism is waning among US Protestants or that their leaders have recently allowed political ambitions to overcome moral and theological clarity. Yes, it's easy to see why the Paisley-types would find the well-trained telegenic smiles of America's fundamentalist leaders more than a little off-putting. But no one should think that the combination of sectarian hatred and political correctness is a recent invention of the American religious right. It has a long tradition, as I am often reminded when I catch myself humming one of my favorite Tom Lehr tunes. From "That Was the Year That Was" (release 1965) comes "National Brotherhood Week." It's put to a catchy, upbeat, clap-along sort of jingle. Here's how it closes -- tap your feet in time to get the sense of how it goes:

Oh, the Protestants hate the Catholics,
And the Catholics hate the Protestants,
And the Hindus hate the Moslems,
And everybody hates the Jews.

But during National Brotherhood Week, National Brotherhood Week,
It's National Everyone-smile-at-one-another-hood Week.
Be nice to people who
Are inferior to you.
It's only for a week, so have no fear.
Be grateful that it doesn't last all year!

Now I was pretty sure of the lyrics, but I Goggled to be on the safe side. While I was searching, I naturally skimmed over the other titles on the album. I was not only reminded of the number of "greats" on that particular Lehr performance but also of the timelessness of his topical oeuvre.

Lehr gives us "The Vatican Rag" to commemorate the brouhaha over the liberal Vatican II and the decision to introduce the vernacular into the liturgy. Then there's "Smut," still fresh as a daisy in its current incarnation as porn. You want raging curriculum debates -- he's got "New Math." Or there's "Pollution," one of my all-time favorites, set to a catchy Latin beat a la "America" from West Side Story, that gives a mild flavor of suspicion of things and people urban.

If you visit American city,
You will find it very pretty.
Just two things of which you must beware:
Don't drink the water and don't breathe the air.
[snip]
Just go out for a breath of air,
And you'll be ready for Medicare.
The city streets are really quite a thrill.
If the hoods don't get you, the monoxide will.
[snip]
So go to the city, see the crazy people there.
Like lambs to the slaughter,
They're drinking the water
And breathing the air.

We were already promoting democracy in "Send the Marines." The Dominican Republic had another crisis that year, and we had a bit of an attitude where the UN-must-be-reformed-to-be-effective was concerned -- but hey, the French Soviets had a veto remember.

When someone makes a move
Of which we don't approve,
Who is it that always intervenes?
U.N. and O.A.S.,
They have their place, I guess,
But first send the Marines!

There was a sense that liberal intellectuals might be slightly, shall we say, out of touch -- captured in "The Folk Song Army."

And forty years ago, we had a few concerns about nuclear proliferation. How time flies, plus ca change, and all of that. But at least today we've got a pretty good idea "Who's Next."

First we got the bomb, and that was good,
'Cause we love peace and motherhood.
Then Russia got the bomb, but that's okay,
'Cause the balance of power's maintained that way.
Who's next?

France got the bomb, but don't you grieve,
'Cause they're on our side (I believe).
China got the bomb, but have no fears,
They can't wipe us out for at least five years.
Who's next?

Then Indonesia claimed that they
Were gonna get one any day.
South Africa wants two, that's right:
One for the black and one for the white.
Who's next?

Egypt's gonna get one too,
Just to use on you know who.
So Israel's getting tense.
Wants one in self defense.
"The Lord's our shepherd," says the psalm,
But just in case, we better get a bomb.
Who's next?

Luxembourg is next to go,
And (who knows?) maybe Monaco.
We'll try to stay serene and calm
When Alabama gets the bomb.
Who's next?
Who's next?
Who's next?
Who's next?

I am an enormous fan of The Decembrist's commentary on the intersection of policy and process. He has few competitors -- in or out of the blogosphere -- when it comes to insights on political strategy. But those of us who are political junkies love tactics as well. And Mark Schmitt's most recent contribution is a delicious item on how Harry Reid is, at least so far, running tactical rings around Senator Frist.

Much of Frist's problems may stem from a single personal weakness -- or perhaps more accurately, the lack of a strength shared by those Senate leaders who have been most formidable, such as LBJ. Frist isn't a one-on-one "listener," with the result that he is guilty of the cardinal sin for a Senate leader -- he doesn't know where his votes are or where they may be a week from now if the scene shifts slightly.

When combined with the fact that Frist is being pulled every which way by the various constituencies he needs to mount a presidential campaign, the picture is not a pretty one.

Ezra Klein proposes that Senate leadership positions should be reserved for those who forswear any immediate presidential ambitions.

So if future Senates want themselves to function, they should pass a new rule: no majority leader or minority leader is allowed to run for president in the next presidential election. If you hold the position in 2005 and resign in 2006, no go until 2012. If you become majority leader in 2009, you got to bracket your hopes until 2016. You've got to be out of the leadership for four whole years before you can run for president. Hopefully, that'd keep the opportunists from running and help install those who care about, and like, the Senate as an institution.

Someone who lives and breathes legislating, and loves nothing better than to talk with his colleagues about it. Sounds old-fashioned, but it just might work. Harry Reid, anyone?

This is one of those inside-baseball posts, but it's very good news for the development community.

The nominee for the new head of the United Nations Development Program -- replacing Mark Malloch Brown who has moved to Kofi Annan's chief of staff -- is Kemal Dervis from Turkey. For those of you who have read Sebastian Mallaby's book on Jim Wolfensohn's stint at the World Bank, you'll remember Kemal as one of the most colorful characters in one of Mallaby's most riveting tales. Kemal was the World Bank manager under whom the extraordinarily difficult and innovative Bosnia emergency assistance package was put together in 1994 -- which was crucial to the success of bringing Dayton to a conclusion. And as Mallaby notes [p. 121]:

a few years later, when he returned to Turkey to take up an appointment as his country's finance minister, the stock market jumped as his plane landed in Ankara and he was greeted as a savior.

I'm not going so far as to hail Kemal Dervis as UNDP's "savior," although given UNDP's leading role regarding the Millennium Development Goals and an uncertain mandate with respect to crisis prevention and recovery, this is one challenging job. It's great to see someone who is both a fine mind and a risk-taker in a major leadership role in the international civil service. Kudos to Kofi for selecting him from among 100 candidates.

Here's a snip from the UN press release today:

UNDP is the largest of the independently funded UN agencies and, under its special General Assembly mandate, leads the UN's work on eradicating extreme poverty and promoting good governance in the developing world. Its staff is active in 166 countries.

Mr. Dervis' current activities, such as participation in the Global Progressive Forum and the Progressive Governance Network, have been aimed at "finding ways to make globalization into a more stable and inclusive process and to further international cooperation," UNDP said.

He is the author of a book published last month called "For Better Globalization," speaks fluent English, French and German, besides Turkish, and holds a doctorate in economics from Princeton University and Master's and Bachelor's degrees from the London School of Economics (LSE).

{cross-posted at Liberals Against Terrorism}

Not a combo you see every day of the week, I'll grant you. Yet this unlikely duo is in hearty accord that the top executives at Viacom are sleaze-oids. In fact, Digby is far more charitable -- he just thinks Sumner Redstone's a cheapskate who's delusional about his "genius." For Buckley, Viacom is a particularly egregious example of "capitalism's boil."

WFB is hopping mad, and it's fun to see him get well and truly steamed. The National Review built its success on the amusement value of Buckley in high dudgeon, even if you didn't agree with him. He's especially tasty when the targets of his wrath are so well-deserving.

Buckley's entertaining message is also a serious one, and, unfortunately for us and him, he doesn't have a ready solution to propose to the chronic problem he highlights.

Every ten years I quote the same adage from the late Austrian analyst Willi Schlamm, and I hope that ten years from now someone will remember to quote it in my memory. It goes, "The trouble with socialism is socialism. The trouble with capitalism is capitalists."

Buckley proceeds to detail the "executive plunder" of salaries. bonuses and stock options that are jaw-dropping in their chutzpah -- especially when we consider the compensation was "earned" during a year Viacom's share price dropped 18 percent and losses were in the billions. But wait, there's more!

Consider excruciating, but apparently tolerable, incidentals. Mr. Freston [Viacom co-president] is based in New York. But from time to time, business requires him to be in Los Angeles — where, as it happens, he also has a home. On those nights does he take hotel rooms? Ample hotel rooms, understand. No. He just charges the company what he thinks is appropriate to pay him for using his own home. In 2004, this amounted to $43,000. He is evidently a man with simpler habits than the Los Angeles-based Mr. Moonves's [Viacom's other co-president]. He does the same kind of thing, he has his own home in New York, but what he charged the company for the nights he spent in New York was $105,000.

Viacom is not an outlier in today's world of big-time celebrity executive compensation, as Buckley emphasizes. And as his opening adage reminds us, he's certainly not claiming that in the annals of greed today's captains of industry are somehow unique. Nor is he complaining of a lack of "equity" or "fairness" when the boss takes home so much more than either the employees who work for him or the shareholders for whom he, at least in theory, works.

The sin of which Buckley accuses these executives is, quite simply, that they have no shame. This loss of an ability to see their conduct as shameful is an assault on the very system from which they derive such outsized benefits, a market that appears to have lost its moorings and has no self-corrective mechanisms.

What dismays is the utter lack of class in such businesses and businessmen here parading their skills in distortion. Michael Eisner appears twice in the table of the 25 largest compensation packages paid in a single year. In 1993 he took home $203 million. In 1998, $575.6 million.

That money was taken, directly, from company shareholders. But the loss, viewed on a larger scale, is a loss to the community of people who believe in the capitalist free-market system. Because extortions of that size tell us, really, that the market system is not working — in respect of executive remuneration. What is going on is phony. It is shoddy, it is contemptible, and it is philosophically blasphemous [em added].

Unlike some of the youngsters who now appear under WFB's old masthead, Bill Buckley is willing to acknowledge that the system which he believes is humanity's best hope isn't a utopian self-equilibrating machine. Like all institutions humans have ever invented, the free market is still subject to the broader moral vision and self-discipline of those with power. Buckley's tone may be more acerbic than John Danforth's mournful critique [$ archive] of today's Republican party leadership, but both share a dismay with what is essentially a lack of moral bearings that threatens the healthy functioning of both our economic and political systems. This is a danger implicit in our political economy, and both gentlemen believe its best corrective is a regular dose of sunshine that brings the abusers of power to the court of public opinion. Hear, hear!

Billmon has sussed it out. And unfortunately, I don't think there's a bit of tinfoil in his narrative -- just the natural logic of power and and an example of the dynamics of competition when interest groups obtain political controls over markets. A cautionary reminder for Democrats as well, I should add, even when they rationalize their own interventions as being on the side of angels.

[Cross-posted at Liberals Against Terrorism]

Praktike points us to some China-related comments from Chairman Greenspan today. The China remarks appear in a column by Greg Ip (WSJ) -- see prak's post -- who reported on comments that weren't in the Greenspan statement (which was all budget process), Ip characterizes Greenspan as "the latest U.S. official to turn up the volume on China."

Ip is far more experienced at Greenspan-ology that I, but I have a decidedly different take on today's comments. Seems to me Greenspan's telling folks to cool their jets. That a revaluation of the yuan is going to happen when it's in China's interest and they're not going to be pressured into it. Pressure is, if anything, counter-productive because it produces cross-the-board tensions that are really quite unncessary.

Greenspan indicated, and I agree, that the Chinese know full well that it's -- sooner or later (and increasingly sooner) -- going to be necessary to revalue. They've been openly trying to prepare for it for some time -- especially in their financial system (which as we all know isn't the strongest, to put it politely). In fact, as Greenspan seems to have noted according to Ip, one of the main pressures for revaluing is increasingly the strains on their financial system from the hot money they can't sterilize and the asset bubbles and over-investment in some regions and sectors. All that is undermining many of the benefits they're trying to extract from the current exchange rate as well as their ability to manage macro policy.

I'd expect that Greenspan's real audience for the comment about the revaluation sooner rather than later is the markets -- there are a lot of concerns about too rapid a readjustment, the impact on global growth, and a hard landing. For the masochists among us, Brad DeLong has been keeping a running inventory of "hard landing" fretting and commentary over the past few days (from David Altig, Bruce Barlett, and Krugman & Setser).

I read Greenspan's China remark as similar to his comment about oil prices a couple of weeks ago -- that they'll work their way through the global economy in a fairly orderly adjustment of supply and demand. So Greenspan's trying to keep everybody calm.

I think he's also signaling to Congress that their impatience is both unnecessary and not doing the markets any good. American business is concerned about all the trade war noises. A big tariff increase may make "good politics" domestically, and it may seem to some not materially different from an exchange rate adjustment in macroeconomic theory. But in practical terms, it sure doesn't make American businesses who actually have to produce and sell stuff happy to hear about big unilateral tariffs against a key trading partner, and it shouldn't make their employees happy either.

As The Economist notes today in a piece on Congress' new-found love-affair with protectionist noisemaking, even the National Association of Manufacturers isn't keen on the tariff games.

Nobody in Congress, alas, seems to care about breaking WTO rules. The aim is to be seen to be bashing China loudly. Mr Bayh is holding up the confirmation of Rob Portman, the new trade representative, until his bill is voted on. Meanwhile, in the House of Representatives, Duncan Hunter, a conservative Republican, and Tim Ryan, a Democrat, have cooked up a law that allows American companies to use “exchange-rate manipulation” as a reason for demanding protection under America's trade laws. And the Congressional China Currency Action Coalition has filed a Section 301 petition asking the Bush administration to file a formal case to the WTO complaining about the yuan.

In the 1980s, a rising trade deficit—at that time with Japan—fueled protectionist pressure in Congress. Ronald Reagan introduced the notorious “voluntary export restraints” on Japanese steel and cars. The Reagan team also abandoned its laisser-faire attitude to currency markets and, through the Plaza Agreement, engineered a sharp drop in the dollar.

The current bout of China-bashing is not a replay of the 1980s. Back then, large American firms, particularly the Detroit car giants, led the clamour for protection. Now big business, which relies heavily on Chinese inputs, is quieter. The shouting comes from smaller American suppliers. And even the noisier business groups, such as the National Association of Manufacturers, are relatively nuanced. Though the NAM wants Beijing to revalue the yuan, it does not support the Schumer bill.

I just love how every time the chickens start coming home to roost from the pursuit of bad (or non-existent) US policy, the US politicians (of both parties I might add) all run to blame somebody else. Doesn't strike me that Greenspan is falling into that old bad habit. But it's pretty disgusting when it comes from the profligates who have been at least titularly in charge of conducting US economic policy like Snow, and I don't have much more patience for grandstanding from folks who should know better like Schumer and Bayh.

If Democrats want to turn up the volume, let's start with making noise about the ridiculous energy bill that's actually being voted on in the House but that could, if enough Senators got behind some of the more sensible proposals out there, be changed in the Senate with, I might add, some White House support. (The House bill's so bad even Bush bashed it this week.) Hey, and where was the volume on the estate tax or bankruptcy bills that really mean something directly to people? Nah, it's easier to blame somebody else for the consequences of the consumer-spending and debt binge we've enjoyed for years. Sheesh!

BTW -- Just to respond to Roubini's remark that prak quotes in his post on Greenspan. I disagree with the emphasis by Roubini and many others on the loss of value of foreign reserves as one of the major pressures on the Chinese to revalue early. Hey, it's only money. The Chinese have humongous problems they're trying to grow their way out of -- e.g. SOEs, banking system, labor mobility, development in inland regions. 16% of one year's GDP doesn't look like all that outrageous a price tag when you look at things from their perspective.

UPDATE re the reserves losses discussion: For more on the impact of losses on reserves held by the PBoC (Peoples Bank of China), see this post from Brad Setser yesterday. He concludes:

The PBoC may still have a positive cash flow, but it is sitting on a large expected valuation loss on both its dollar and its euro reserves. Diversifying out of dollars does not help much; the best way for the PBoC to reduce its prospective loss is to stop adding to their reserves. And in any case, it might want to start provisioning against that future loss now ...

The real debate here is not whether the losses are "just paper" losses or not -- the losses from a revaluation would be very real, though they could be partially offset by the PBoC's ongoing profits from issuing renminbi cash. The real question is whether these mounting losses are a worthwhile price to pay to sustain China's rapid export growth for a while longer.

And as I suggested, at least until recently when some of the downside of an overvalued currency started undermining the gains, the answer from the Chinese has clearly been "It's worth it." I see them in quite a different position from other Asian central banks who are being forced to digest a lot more dollars than they'd like.

In the comment thread Brad also helps sort out some of the confusions that are common in discussions of the risks of revaluation to China's banking system. Worth a read.