Reply #11: Holy Crap Batman!

[doodadem]

I've been reading a number of things lately from PhD level economists that say we are teetering on the brink of HUGE economic crisis in this country. Here's just one that scares the crap out of me, copied below.
I am very glad I have a farm (that we can hopefully hang onto in crisis) where we can raise our own vegetables, and if necessary, chickens/eggs. I refuse to eat my pet steer or my goat though!

The China Syndrome
Friday 28 January 2005 @ 11:34
The fragility of the American economy is not found in esoteric indicators like consumer spending, though that is important, but in the kindness of our so-called enemies.

Take China, for example, the big Red menace looming beyond the California tide. Most see China as our next big economic and military competitor, some sort of Soviet Union Mark II just waiting to explode onto the scene.

Yet few people really understand that China, right now, has the power to cripple this country without firing a shot. Why? Because they buy our debt. No, strike that. Because they buy our staggering debt, and if they decide to stop doing that, our economy will be mortally wounded.

Robert Kuttner explains it in his recent article from the American Prospect:

Countries go broke gradually, by borrowing so much money that creditors lose confidence in their ability to pay the debt back. Then, they go broke suddenly as creditors stop lending.

This has happened to more than a dozen third-world nations, who had the additional misfortune of having to borrow in dollars. As their own currency lost the confidence of world markets, they lost value against the dollar. This only increased their real debt burden. The optimists say, ''It can't happen here."

First, we're the people who print dollars. So if the dollar is losing value, it just means the money that we owe the rest of the world is getting cheaper. Lucky us.

Second, we enjoy a codependency with our creditors. For instance, China, which keeps lending us money to finance our deficits, may be accumulating dollar credits that are losing their real worth. But China needs us to keep absorbing their products, so China will go right on lending.

Kuttner goes on to explain the nightmare scenario:

Yesterday, the bipartisan Congressional Budget Office (CBO), possibly the last intellectually honest government agency in George W. Bush's Washington, reported that our fiscal situation is even worse than expected.

According to the CBO's latest ''Budget and Economic Outlook," the projected deficit for 2005 will be about $400 billion. The CBO declares, politely but unmistakably, that it doesn't buy the Bush administration's budgetary gimmickry of trying to keep anticipated military outlays out of the official budget.

''The absence of further appropriations for activities in Iraq and Afghanistan," CBO states, ''masks a further deterioration in budget projections over the ten years."

Specifically, the deficit for the next decade is $504 billion worse than anticipated in CBO's previous estimate last September.

Finally, from Kuttner, comes the fear:

As for the Chinese, Clyde Prestowitz of the Economic Strategy Institute, formerly a senior trade negotiator in the Reagan administration, offers the following scenario: In a future crisis involving the tense China-Taiwan relationship, the Chinese ambassador suggests to Secretary of State Condoleezza Rice that maybe the United States would like to move its warships 500 miles away from Taiwan. Rice demurs. The next day, the Bank of China sells a few -- just a very few to get our attention -- U.S. Treasury securities. Money markets reel.

Would the Chinese play such a risky game? They have their own interests, geopolitical as well as economic. They are certainly not an American pawn, less so with every passing year. Miscalculations have happened in world economic relations before, and with calamitous results.

Would the Chinese play such a risky game? Take a close look at this article from Wednesday's Associated Press wire:

China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum.

At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."

"The U.S. dollar is no longer — in our opinion is no longer — (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English. "So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable...reference...say Euros, yen, dollars — those kind of more diversified systems," he said.

Journalist Seymour Hersh buttressed this assessment in a recent interview with Democracy Now:

"Another salvation may be the economy. It's going to go very bad, folks. You know, if you have not sold your stocks and bought property in Italy, you better do it quick. And the third thing is Europe -- Europe is not going to tolerate us much longer. The rage there is enormous. I'm talking about our old-fashioned allies. We could see something there, collective action against us. Certainly, nobody -- it's going to be an awful lot of dancing on our graves as the dollar goes bad and everybody stops buying our bonds, our credit -- our -- we're spending $2 billion a day to float the debt, and one of these days, the Japanese and the Russians, everybody is going to start buying oil in Euros instead of dollars. We're going to see enormous panic here. But he could get through that. That will be another year, and the damage he’s going to do between then and now is enormous. We’re going to have some very bad months ahead."

Anyone who buys into the Bush administration idea that this nation can go it alone without the rest of the world needs a few refresher courses in Economics 101. The minute the rest of the world gets tired of our belligerence, they can turn us off economically as easily as flicking a light switch.