Harvard's Rogoff gives legs to talk on China crash

That reportedly happened in 2002 as Japanese deflation threatened to spread around the globe. If I were a Central Intelligence Agency bigwig, I would now be setting up task forces on risks coming from China.

Let's not stop there. Add the U.S. into the mix and study what a crackup within the so-called Group of Two would mean for the world economy. It wouldn't be pretty.

Pessimistic stuff, yes. Yet when the U.S. secretary of state says the record U.S. budget deficit and debt are stoking national-security concerns, you know the world is off kilter. Meanwhile, short-seller Jim Chanos is finding more and more company as he bets on a Chinese crash.

It's time to consider the systemic fallout from a Chinese crisis. It could cause recessions around the world.

As 2010 unfolds, such views are developing legs. It's one thing when Chanos, of New York-based Kynikos Associates Ltd., speaks of a bust. Ditto for Marc Faber, publisher of the Gloom, Boom & Doom in Hong Kong. It's quite another when the likes of Harvard University's Kenneth Rogoff warn of a collapse of China's debt-fueled bubble within 10 years.

The former chief economist at the International Monetary Fund can't be dismissed as talking his investment position. What's more, Rogoff offers perhaps the simplest reason why China may falter: It's due.

Remember that five of the most frightening words in economics are: “This time things are different.” Well, can you see where this story is going?

“If there's a this-time-is-different story in the world right now, it's China,” Rogoff said at a conference in Tokyo last week. People, he added, say China “won't have a financial crisis because there's central planning, because there's a high savings rate, because there's a large pool of labor. I say, of course China will have a financial crisis one day.”

It's a point that few China bulls allow. For all the merits of China's model — massive public spending, export-driven growth, cheap labor costs — it's doubtful it can beat the system, so to speak. No emerging nation has avoided a crisis that sent growth reeling and markets plunging. Not one.

If a Chinese crisis occurs, it won't be an entirely unexpected event. Vitaliy Katsenelson of Investment Management Associates Inc. in Denver, for example, raised eyebrows with a Feb. 12 report titled “China: The Mother of All Black Swans.”

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