U.S-China: Deal with Devil

Yes, many factors led to the global financial crisis, but a major element was the U.S. and China striking "a deal with the devil." In the 1990s and the current century, the two countries cane up with this agreement: The U.S. would buy massive amounts of goods from China . . . in exchange for China buying massive amounts of U.S. debt. In a sense, China, a large net exporter, would provide much of the money for the U.S., a large net importer, to buy the Asian products. Great deal, right? Nope.

Unlike Bernie Madoff's activities, the U.S.-China deal was not a pure "Ponzi Scheme," one where old investors are paid off by new investors' cash. However, there is a major similarity: in both cases, the assumption was that market values -- of stocks, bonds, and other properties -- would continue rising. In a rosy economy, Madoff could "cover" his obligations -- and so could the U.S. and China.

But what if the global economy went into a downturn? In the case of the U.S., we would no longer be able to purchase goods at anything like former levels. (In the case of Japan, another important buyer of U.S. debt, their exports have gone down by half.) In the case of China, it would be increasingly less likely to want to buy large quantities of U.S. debt.

"Those were the days, my friend, we thought they'd never end." Well, they did end. The assumption that good times would remain forever was exposed as a fantasy.

As you'll see on my other blog, the Obama Administration's answer to financial problems caused by over-borrowing, over-spending, and over-lending is to encourage . . . (much) more borrowing, (a great deal) more spending, and (massively) more lending. In other words, if you swallow some arsenic, the solution is to swallow a jug-full of the same poison.

On the other blog, I note that Gov. Palin understands exactly the folly of Obama's economic policies. Obama is behaving a great deal like Bernie Madoff. If he can hold off the calamity long enough to get re-elected, then he has succeeded.

But his success will the nation's -- and the world's -- failure. He's taking us out of recession and leading us into a full-fledged Depression.

Financial Collapse was No Surprise

Friends, you may already have heard, but they just informed me that I won't be on BBC Radio today. It will be next week (time to be determined). Thanks for your interest. I sent out the following. [Note: Later today I'll write on my other blog about Hillary Clinton supporters who have moved to support Sarah Palin as America's first female President.]

Oops, the BBC just called, and I will be on NEXT WEEK (and not today). I gave them the name of a British contact, Brad Setser, who is the man, along with American expert Nouriel Roubini, predicted exactly what would happen in the financial crisis.

That prediction was made (in a beautifully written article) in 2005 in the magazine Foreign Affairs. I really urge everyone to read the piece, which you can find at: http://www.foreignaffairs.com/articles/60840/brad-setser-et-al/how-scary-is-the-deficitIf you don't have the time, here's the Wikipedia short form of the Setser-Roubini piece. They are brilliant, but not obnoxiously so, and their prediction outlines everything that came to pass:

"If the US does not take policy steps [in 2005] to reduce its need for external financing [i.e., from foreign central banks, particularly China's] before it exhausts the world's central banks willingness to keep adding to their dollar reserves - and if the rest of the world does not take steps to reduce its dependence on an unsustainable expansion in US domestic demand to support its own growth - the risk of a hard landing for the US and global economy will grow. The basic outlines of a hard landing are easy to envision: a sharp fall in the value of the US dollar, a rapid increase in US long-term interest rates and a sharp fall in the price of a range of risk assets including equities and housing. The asset price adjustment would lead to a severe slowdown in the US, and the fall in US imports associated with the US slowdown and the dollar's fall would lead to a global severe economic slowdown, if not an outright recession." [summarized from Messrs. Setser and Roubini, Foreign Affairs, 2005, Wikipedia summary]

The financial problem the world faces was caused by over-borrowing, over-lending, and over-spending. The Obama/Geithner solution is to borrow more, to have foreign central banks increase their lending, and for government to accelerate its own spending. If that sounds as if we're trying to solve the problem by doing more of what caused it, well, you've hit the nail on the head.

Additionally, we're bailing out failure and submerging success. Just call it "The Obama Depression." He's repeating Roosevelt's mistakes, while remaining blind to FDR's successes.