I normally avoid the diplomatic circuit, as the few non-committal comments and soggy appetizers I get aren?t worth the investment of time. But I jumped at the chance to celebrate the 62nd anniversary of the founding of the People?s Republic of China with San Francisco consul general Gao Zhansheng.

Happy Birthday China!

When I casually mention that I survived the Cultural Revolution and interviewed major political figures like Premier Deng Xiaoping, who launched the Middle Kingdom into the modern era, and his predecessor, Zhou Enlai, modern day Chinese are enthralled. It?s like going to a Fourth of July party and letting drop that I palled around with Thomas Jefferson and Benjamin Franklin.

Five minutes into the great hall, and I ran into my old friend Wen. She started out her career with the Chinese Intelligence Service, and had made the jump to the Foreign Ministry, as all their best people did. Wen was passing through town with a visiting trade mission.

When I was touring China in the seventies as the guest of the Bank of China, Wen was assigned as my guide and translator, and we kept in touch over the years. I was assigned a bodyguard who doubled as the driver of a tank like Russian sedan, a Volga. The Cultural Revolution was on, and while the major cities were safe, we ran the risk of running into a renegade band of xenophobic Red Guards, with potentially fatal consequences.

I asked Wen when China was going to float the Yuan? She explained that this is something China knew it had to do, but it wasn?t going to be rushed into by some opportunistic foreign politicians. If it moves too soon, millions will lose jobs, creating political instability, something the central government wants to avoid at all costs. Many of the large-scale employers were only marginally profitable, and a hike in the renminbi of only a few percent would force them out of business. I pointed out that that was exactly what was happening in the US.

Worth More Than Meets the Eye

I warned that if the Middle Kingdom waited too long, Washington would force them into an appreciation through punitive import duties and anti-dumping actions, as we did with Japan 40 years ago. It was Nixon?s surprise ban on textile imports in 1971 that finally persuaded Japan to float the yen, then at ?360. If that didn?t convince the Chinese, then imported inflation would. The longer China delays, the bigger the pop when their currency is finally set free.

Wen then went on the offensive, claiming that Chinese workers were being exploited by American companies keeping wages low. The product that China made for $1, and sold to the US for $2, was then sold by Wal-Mart (WMT) for $20 to the end American consumer, which kept all the profits. She pointed out that the Walton family had a combined net worth of $100 billion, more than the total worth of the lower 40% of the US population. This could never happen in China. I told her that by selling the product at $20, Wal-Mart wiped out another US company that used to make that product domestically and sold it for $40, throwing those people out of work.

Modern Times in China

I then asked Wen what were her country?s plans for its massive foreign exchange reserves, now at $3.7 trillion? She agreed that this was a problem because the reserves were pouring in so fast, at an embarrassingly high rate of $10 billion a month, and that it was the most rapid accumulation of wealth in history.

While it had more than enough Treasury bonds, any attempt to sell might cause their value to collapse and freeze relations with the US. I suggested China should start hedging its gigantic holdings without selling them, or some managers would be facing a firing squad in the future.

China has therefore begun directing new reserve inflows into other instruments, like gold, Japanese government bonds, and ultra-high yield PIIGS bonds in Europe.

China tried to recycle its surpluses by buying foreign companies that produce the natural resources it desperately needs. But takeover attempts were fought tooth and nail as a foreign invasion, or on national security grounds, such as the attempt to buy California?s Unocal in 2005 and Australia?s Oz Minerals in 2010. It was now using a strategy of buying low profile minority stakes in foreign resource companies. China took a big stake in the Petrobras (PBR) secondary equity offering.

Check Out This tasty Little Morsel

I asked her about the real estate bubble in China that was causing so many foreign investors to lose sleep. She said it was true that sales were slow at some luxury buildings in Beijing and Shanghai, but the great majority of developments were aimed at working people, and were filling up as soon as they came on the market. The 40% down payment demanded by the People?s Bank of China headed off the rampant speculation that brought the American financial system down. Buyers of second homes were required to pay entirely in cash.

Rooms with Views

Wen then complained about the aggressive military stance the US was taking towards China, ringing it in with the Seventh Fleet. Holding a knife so close to the country?s foreign supply line jugular vein made them nervous. China was basically indefensible. All it would take was the sinking of a few grain ships, causing insurance rates to rocket, and 100 million would starve within a year. President Bush was rattling his saber as soon as he moved into office, until 9/11 diverted his attention to Afghanistan and Iraq.

Wen told me there is a school of thought in Beijing that as the country?s economic power grows- it is passed Japan to become second in GDP last year? that the US will increasingly perceive it as a military threat. This would lead America to mete out the same hostile treatment to China as it did Russia during the cold war.

Walking Softly, But Carrying a Big Stick

I assured her that the Seventh Fleet was there to watch and listen, but to do nothing. It was really in position to provide a security blanket for allies, like Japan and South Korea, but nothing more. China wasn?t engaging in the belligerent behavior that Russia was at the height of the cold war, like blockading Berlin, basing missiles in Cuba, stationing fast attack nuclear submarines off our coasts, and invading Afghanistan.

I argued that if China truly has no expansionary intentions, the more we know about you, the better. It is always prudent for a potential adversary to conclude you are not a threat, and that no action is needed. The more you help the US do that, the better. China is decades behind the US in military technology, and you really have nothing we want. Little more than 200 nuclear weapons without an ICMB or submarine delivery systems were hardly viewed as a major threat.

Wen seemed perturbed that I was aware of her country?s nuclear stockpiles, and asked how I knew this. I said that former CIA director Leon Panetta told me (click here for ?Lunch With the CIA?). She said ?Oh.? I asked what was that test downing of a satellite in space about, anyway? She didn?t answer.

In any case, with our military fully committed fighting two wars in the Middle East, we lacked the resources for an Asian offensive if we were so inclined, even against a piddling, mismanaged, rogue state like North Korea. But looking at the world for the next 30 years, who is the Pentagon going to model and war game against, but China, with its 2.5 million-man army?

Wen countered that the People?s Liberation Army was purely a defensive force. With a 12,000-mile land border, an 11,000-mile coastline, and dubious neighbors like Russia, Iran, and India, they have no other choice. Its ability to project force over great distances, as the US can, is virtually nonexistent. Its 1979 invasion of Vietnam was about reclaiming ten miles of lost territory. China got involved in Korea only after general Douglas MacArthur threatened to rain atomic bombs on the mainland, losing 2 million men, including Chairman Mao?s son. China could have done a lot more in the Vietnam War, but didn?t, limiting its participation to a supply, logistical, and advisory role.

That?s a Lot of Border to Defend

I then warned that if you really are worried about the Pentagon, you should stop hacking into our computers. She replied that the US started this by emptying out Chinese mainframes many times a decade ago, and they were only responding in kind. I said yes, but that China was targeting private companies, like Google (GOOG), Hewlett Packard (HPQ), and Oracle (ORCL) that without military grade software, were unable to defend themselves. The Chinese agencies involved then used the data to their own commercial advantage.

What Did You Say the Password Was Again?

By the time Wen married, China had already adopted its one child policy. As much as she wanted more children, she understood the government?s need to adopt such a drastic policy. Without it, the population today would be 1.6 billion, not 1.2 billion, and all of the money that went into buying capital goods would have been spent on food imports instead. The country would have stagnated at its 1980 per capita income of $100/year. There would have been no Chinese economic miracle. She was very proud of her one son, who was a software engineer at Microsoft (MSFT) in Beijing.

Her husband, a mid level official at the Ministry of Commerce, fared less well, dying of lung cancer at a relatively early age. The US and Europe had exported their worst polluting industries to China to take advantage of lax environmental controls, turning the air in Beijing into a choking haze. Sometimes her son would come home from school coughing and wheezing so badly that he couldn?t play outside. The two packs of cigarettes a day her husband smoked didn?t help either.

Imported From the USA

I asked if she recalled our first trip together and a dark cloud came over her face. We were touring a section of Fuzhou when three policemen marched up. They started shouting at Wen that we were in a restricted section of the city where foreigners were not allowed. They started mercilessly beating her with clubs.

I was about to intercede when my late wife, Kyoko, let go with a blood curdling tirade in Japanese that froze them in their tracks. I saw from the fear in their faces that she had ignited their wartime fear of Japanese authority and the dreaded Kempeitai, or secret police, and they beat a hasty retreat. To this day, I?m not exactly sure what Kyoko said. We took Wen back to our hotel room and bandaged her up, putting ice on the giant goose egg on her head. When I left, I gave her my paperback copy of HG Well?s A Short History of the World, which she treasured, as the book was then banned in China.

Wen mentioned that she was approaching the mandatory retirement age of 60, and soon would be leaving the Foreign Service. I suggested she move to San Francisco, which offered a thriving Chinese community and home prices that had recently dropped by half. She laughed. No matter how much prices had fallen, she could never afford anything here on a Chinese civil servant?s salary.

Wen told me that China was grateful for the billions of dollars that foreigners had poured into her country as a result of my writings. I replied that I was simply trying to show my readers where to make some money, nothing more. It was the pure opportunistic self-interest that she might expect from any capitalist.

One of my recommendations, for Chinese search engine Baidu (BIDU), was up more than tenfold in less than two years, (click here for the article). Did she happen to know about any more future Baidus? Wen said that she wasn?t that close to the stock market, but that she would get back to me.

I asked Wen if she still had the book I gave her nearly four decades ago. She said it had become a treasured family heirloom, and was being passed down through the generations. As she smiled, I notice the faint scar on her eyebrow from that unpleasantness so long ago.

I am sitting at my MacBook Pro typing this piece in the corner Suite on the sixth floor of the Hotel Adlon in Berlin.

A half finished bottle of 2001 Chateau Pech sits on my desk, a product of the French Mediterranean coast. Out the window hundreds of tourists are milling about the imposing Brandenburg Gate, taking pictures, posing with costumed cartoon characters, or texting their friends.

It is a scene of no small emotional importance for myself. I came here as a teenager to study German in the 1960?s. The Berlin wall had just gone up dividing the city in half, threatening the world with the prospect of global thermonuclear war.

I lived in the American Sector in Tiergarten, a mile from the hated wall, and recall with some dread, being kept awake at night by the angry growl of machine guns cutting down desperate, but helpless families as they attempted to flee to the West. That makes quite an impression on a young kid.

To make extra money, I used to escort small groups of nervous Americans through Checkpoint Charlie into East Berlin for a day of lunch, a visit to Queen Nefertiti at the spectacular Pergamum Museum, and the opera. I paid for it all with East German Marks that I purchased at a 75% discount on the black market, and that I smuggled into the communist territory in my boots.

You see, I?ve been in this currency game for quite a long time now. That was my first currency arbitrage, and it led to a pattern of ever-greater risk taking that could eventually lead nowhere else but the hedge fund industry.

About one third of East Berlin still awaited reconstruction from the Allied bombing and the 1945 Russian invasion that laid waste to the city, with every East facing wall still standing absolutely pock marked with bullet holes. As up to 10% of the bombs failed to explode, construction companies were still digging them up at the rate of three a week. Occasionally, they exploded and killed the workers.

My dalliance with the cold war was brought to an abrupt end when the Stasi caught me trying to sneak in a copy of the banned Berliner Zeitung newspaper, which landed me in an East German prison for a day. The hapless people I met there! Thank goodness they let me out, because I was only 16!

Some 21 years later, tears streamed down my cheeks as I watched the wall fall on a TV screen at a Swiss Bank Corp trading desk in London. I immediately flew over to Templehof to join the party, taking my turn with a sledgehammer at the crumbling reinforced concrete barrier with great pleasure.

The dominoes then fell. The Soviet Union collapsed shortly thereafter, and China quietly turned capitalist, enabling two thirds of the world's population to join the international economy. Globalization was born, followed by the Internet and the World Wide Web.

That led to the peace dividend, which helped finance the nineties dotcom bubble, and opened up new international trading opportunities on which the early hedge funds feasted to the point of gluttony. Ahhh, those where the days!

Only eight years later, Europe moved to establish a single currency bloc, creating the Euro, and confining the mark, the francs, the lira, peseta, drachma, guilder, and escuedo to the dustbin of history. Only the British pound, the Swiss franc, and the Scandinavian kroner were left standing. That demolished the intra European currency trade, said to be worth about $5 billion a year, and realigned the world into the big currency blocks of the dollar, euro, and yen.

Some 45 years later, I rode my rented bicycle over the site of the old wall, through the Brandenberg Gate, across the area once known as the ?death strip? and into ?no man?s land?, putting me at the front door of my hotel. The guard towers and searchlights were gone. The statue of Vicktoria, the goddess of triumph riding a chariot with four horses, on top of the gate, now faced west instead of east. It was all very satisfying and humbling, if not invigorating.

Checkpoint Charlie, where American and Soviet tanks faced off and almost started WWIII three times, is now a tourist attraction. The building where I was imprisoned, wondering if I would live another day, is now a McDonalds hamburger stand.

That?s the way it works. You lose the cold war and have to eat our crappy cheeseburgers and sell the tourists pieces of your old wall.

Talk about life going full circle.

Up Goes the Wall

Down Goes the Wall

I was greatly saddened when I had learned of the passing of Senator Daniel Inoue of Hawaii, the Senate?s longest serving member, and a close friend. After 50 years last August the legislative body had come to dominate the all powerful Ways and Means Committee, eventually becoming the President Pro Tem. He was 88 when he died.

As a young correspondent for The Economist magazine, I was sent to New York to cover the 1980 Democratic convention, where Senator Ted Kennedy was attempting to wrest the nomination from President Jimmy Carter. It was there that I met the young, up and coming Governor of Arkansas, Bill Clinton, and his assertive wife, Hillary, for the first time. As a bonus, I snared an exclusive interview with Treasury Secretary G. William Miller, who graciously signed one of his dollar bills for me.

As I had spent the past decade in Tokyo, the organizers didn?t know what to do with me, so they seated me next to the only Japanese-American member of the Senate, Daniel Inoue. As the long speeches droned on, we talked about every topic under the sun. As a second generation Nissei, his Japanese was still passable, but dated, so we used that tongue when ever covering sensitive subjects. An endless procession of admirers passed by awkwardly shaking his left hand, the right having been lost in battle in WWII.

Inoue was working at Pearl Harbor when the Japanese Navy carried out their infamous December 7 attack. As a Hawaiian resident, he avoided internment suffered by mainland Japanese Americans. He later joined the 442 Regimental Combat Team made of Japanese Americans to fight in Europe.

While assaulting the impenetrable German Gothic Line in Northern Italy, an enemy rifle grenade severed his right arm. He pried a live grenade out of the useless hand with his remaining good one and threw it at a machine gun nest, destroying the position, despite having been shot in the stomach. What guts! He was later awarded the Medal of Honor for this action, and I often saw him at reunions while accompanying my Uncle Mitch, a Medal winner himself (click here for ?Tribute to a True Veteran?).

After the convention, Daniel was always my first stop during my frequent visits to Washington DC. Through him, I learned of the intricate inner workings and machinations that regularly occur on the Hill. While most in the financial community are confused and befuddled by what is going on there now, for me, it is all clear as day, thanks to the breadth of knowledge and understanding I gained from Inoue.

Daniel was a young Honolulu boy who eventually became third in line to succeed the President of the United Sates. Modest, yet outgoing, he hung on every word you said, as if you were the most important person in the world. An ?old style? politician, a true gentleman, a hero, and a patriot. He is sorely missed.

Travel guru, Arthur Frommer, says that now is the best time to travel in 20 years, thanks to a combination of a strong dollar and desperate price-cutting forced by the recession.

Five years after oil hit an historic peak at $148/barrel, when $500 fuel surcharges abounded, and the demise of the travel industry was widely predicted, costs in some countries, like Mexico and Costa Rica are 50% lower than a year ago. Talk about price elasticity with a turbocharger!

Frommer believes there are three sea change trends going on today. Business is moving away from the big three travel websites, Travelocity, Orbitz, and Priceline, who have more preferential side deals with airlines than can be counted, towards pure aggregator sites that almost always offer cheaper fares, like Kayak.com, Momondo.com, and travel.yahoo.com.

There is a move away from traditional 48 person escorted bus tours towards small group adventures, like those offered by Gap Adventures, Intrepid Tours, and Adventure Center, that take parties of 12 or less on eye opening public transportation.

There has also been a huge surge in programs offered by universities that turn travelers into students for a week to study the liberal arts at Oxford, Cambridge, and UC Berkeley. His favorite was the Great Books programs offered by St. Johns University in Santa Fe, New Mexico. He says that the Internet has given a huge boost to international travel, but warns against user-generated content, 70% of which is bogus and posted by the hotels and restaurants themselves.

The 82-year-old Frommer turned an army posting in Berlin in 1952 into a travel empire that publishes 340 books a year, or one out of every four travel books on the market. I met him on a swing through the San Francisco Bay Area (his ticket from New York was only $150), and he graciously signed my original 1968 copy of Europe on $5 a Day, which was crammed in my backpack for two years.

Which country has changed the most in his 60 years of travel writing? France, where the citizenry have become noticeably more civil since losing WWII. Bali is the only place where you can still travel for $5/day, although you can see Honduras for $10. Always looking for a deal, Arthur?s next trip is to Chile, the only country he has never visited, because the currency there has crashed. Sounds like a man after my own heart.