There will be plenty of books written about this period of economic history, but perhaps the most interesting will be the one that tackles the Porsche-Volkswagen drama. This story does not get much attention in the United States, but that's a shame. It involves a sexy auto manufacturer that operates more like a hedge fund, exotic international financial trickery, the suicide of a German billionaire, and a European industrialist's decades-long quest for world, er, auto-sector domination.

The story really begins in the 1930s, when automotive engineer Ferdinand Porsche founded the Porsche AG company and--at the request of Adolf Hitler, who wanted to motorize Germany and create a "peoples' car"--designed the first Volkswagen model. Today, the Porsche company remains tightly controlled by Ferdinand's descendants, while Volkswagen has gone on to become one of Europe's largest publicly-traded auto companies.

For the past couple years, Porsche has worked to take over Volkswagen. This is strange because, in terms of volume, Volkswagen is about 50 times larger than Porsche. It is, says BusinessWeek, "truly the case of the goldfish swallowing the whale." 

Or at least trying to. Over time, Porsche bought up about 50 percent of Volkswagen's common stock. Because of arcane laws that give corporate veto power to the government of Lower Saxony, where Volkswagen is headquartered, Porsche needs to own at least 75 percent of the company (or perhaps more, depending on whether the company can successfully change the law) before it can force an acquisition. 

By the end of last year, it looked like Porsche wasn't going to succeed in its quest. Hedge funds and other investors began to bet against Volkswagen stock, expecting that once Porsche gave up its quixotic adventure, the price would plummet. Traders sold VW short -- meaning they borrowed shares for a nominal fee, immediately sold them, then hoped to buy them back at a cheaper price after the reckoning.

Then Porsche revealed its dastardly checkmate: It had secretly amassed enough options to control 75 percent of VW shares. Suddenly, it didn't seem as if there were enough shares to go around. Investors scrambled to buy back the shorted shares they had just sold, worrying that when the music stopped, they'd be left without anything to return to their lenders. The furious activity sent the price of VW stock sky-high -- it briefly became the most valuable company in the world, and on the close of Oct. 27 it was the globe's second-largest company, behind Exxon Mobil but ahead of GE, Microsoft and Walmart.

And Porsche briefly became a hedge fund, and a very good one at that. Last year it earned about a billion euros selling autos, but nearly 5.5 billion euros on its VW stock options. And since finance is often a zero-sum game, that meant many others lost a fortune -- including German billionaire Adolf Merckle, who "lost hundreds of millions of euros when he was caught in a brief but ferocious speculative riptide linked to a campaign by Porsche, the sports car manufacturer, to seize control of Volkswagen," according to the New York Times. Merckle threw himself in front of a train the following week. 

The story gets more byzantine the more you probe its depths. It now looks as if Porsche won't be able to take over Volkswagen, in part because the government of Lower Saxony has succeeded in blocking it, and in part because Porsche's finances aren't quite healthy enough for it to exercise all its options on VW stock. Meanwhile the global auto market has driven off a cliff, Opel and Fiat are trying to become Europe's largest automaker, and Ferdinand Porsche's heirs are sniping at each others' heels.

There are a lot of parallels with the broader global economic woes -- the over-reliance on complicated derivatives, the swift reversal of investor fortunes, the collapse in consumer demand. It could be kindling for the Bonfire of the Vanities of our times. 

Down in southern China, in the Pearl River Delta, the world’s biggest manufacturing hub, everyone is trying to figure out how to move beyond manufacturing (at least, the dirty low-end kind). This region is more dependent on foreign trade than any other; a quarter of Chinese exports come from here, and the majority of them go to the U.S. But those exports have fallen off a cliff in the last year. In some areas, one out of every ten factories has closed. Most of the officials I’ve spoken to are betting that it will take 3 to 5 years for their exports to the US to get back to where they were in 2007. In the meantime, folks are hurting. Pretty bleak stuff.

So the race is now on to come up with a new way to grow. “Growth is China’s religion,” as a Beijing official once told me, and with good reason. In order to keep people from rioting in the streets or overthrowing the autocratic government, they need to maintain between 6-8 percent a year GDP growth – no mean feat in this environment.

One way they are trying to keep that up is by selling to each other. A number of high level government officials were unable to meet up with me this week because they were off hawking their wares in neighboring provinces like Hunan and Sichuan. The vice mayor of Shenzhen, the richest town in this region, told me he’d recently been able to sell nearly $2 billion worth of jewelry, electronics, and other locally made products to other Chinese buyers out West. But the truth is, no matter how buoyant the domestic sales, they can’t make up for the U.S. market anytime soon. The average income in China is about 1/10^th of what it is in America.

The other strategy is to go up-market, trying to do back office call center stuff – the sort of thing India already does – or logistics and higher end manufacturing (producing finished goods rather than just assembling cheap goods). Again, Shenzhen, the slickest of the area cities, has made some progress here, and even has a few budding internet companies. The city is trying to attract more educated workers necessary for this sort of scene. They’re building up-market housing and planned communities designed to look like Portofino, complete with clanging bell tower and terracotta tiled condos (which retail for $30-50K, a small fortune over here).

That also has some gaps. The vice mayor of Shenzhen today told me that his economy was now 60 percent services. But when I drilled down into what services really meant, it included things like printing magazines for Hong Kong publishers – not exactly knowledge work. Craig Simons, an old China hand here reporting a story with me, says he thinks it’s more likely that Shenzhen is still 60 percent manufacturing. The fact that its trade to GDP ratio is a whopping 280 percent would seem to back that up.

Where does that leave the Pearl River – and China? Still dependant on exports, for sure, but also in a much better position to handle the global downturn than during the Asia crisis over ten years ago. Back then, China was a lot poorer. Now, government coffers are full from a decade of rich trade, and officials say the province will continue to grow 8.5 percent this year. It’s a believable story, but only because they’ll be able to pump investment into the area, even if Americans keep their wallets zipped tight. What happens if and when those coffers run dry is another story.

Wake Up, Americans!: That's what John Taylor wants to shout from the rooftops, or at least the op-ed page of the Financial Times, in order to get us to pay attention to our soaring national debt. Taylor was an influential economist at the Federal Reserve for many years, and also wrote one of the most widely used macroeconomic textbooks. So when he shouts, we should listen. Unless, of course, he forgets what compound interest is.

GM Bondholders Are People Like You and Me: The publicity people for the GM bondholders found the one bondholder who is not a major bank, hedge fund or institutional investor and got him to pen an op-ed in the Wall Street Journal. 

Born to Regulate: The Washington Post profiles Brooksley Born, the now-famous lawyer who urged the Clinton Administration to regulate over-the-counter derivatives like credit-default swaps.

Board Stiff: Isn't it a little odd that Citigroup and Bank of America shareholders have seen their stock value plunge, but they nonetheless reelected the board of directors at last month's shareholder meetings?