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reachout Donating Member (236 posts) Send PM | Profile | Ignore Tue Oct-14-03 11:06 AM
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5. Great article
I've read a lot of Krugman's work and really enjoyed it. I had only had a flirtation with economic theory in college, but in the last five years I've really dived headfirst into studying everything I can about the subject. I was amazed by two things: How ignorant most of us are about economics, and how thoroughly lied to we are by those we believe to be educated on the subject. The Chicago School of economic theory is really driving this country down the crapper...and aside from a couple of remaining institutions, it is about the only thing being taught in our universites.

Another author I would recommed is Michael Hudson.

It is a really bizzare system that has been set up in relation to the deficit. The Chicago School monetarists work under the assumption that all other economies in the world should adjust to provide the greatest possible benefit to the US economy.

Europe and Asia have financed most of the US Treasury's budget deficits in recent decades (it's up to something like 60% annually now). The theory being that America's federal budget deficits can go on without limit, because of what's known as the "balance of payment deficit." It started when Nixon took the dollar off the gold standard. By going off the gold standard ,the United States obliged the world's central banks to finance the U.S. balance of payments deficit by using their surplus dollars to buy US Treasury bonds, whose volume quickly exceeded America's ability or intention to pay. All the dollars that end up in European and Asian central banks as result of American's excessive import-imbalance, have no place to go but the U.S. Treasury. Because of the restrictions placed on the central banks these countries were forced to buy US treasuries or else accept the worthlessness of the dollars received through trade.

The US has said it can't pay back its dollar debts and doesn't intend to. As an alternative, it has proposed "funding the US dollar overhang". Other countries would get IMF credit equal to their dollar holdings, but these holdings no longer would be US Treasury obligations. The US would wipe its debt to foreign central banks off the hook. This would mean that it would have got all the balance of payments deficits for the past 32 years for free.

The fly in the ointment is that Europe and Asia are starting to stand up for themselves. They see the downward spiral of their own economies and are increasingly of a mind to let go of the Central Bank strategy, which places them in the thrall of America, and return to a more Keynesian model via their national treasuries. If that happens, this whole house of cards is going to come crashing down and we will see economic chaos.

From a personal financial standpoint, I don't know that I've read anyone who seems to have a good idea of what to do (other than avoiding high-risk investments). Some problems that may well arise include a sudden, sharp jump in interest rates. This will hit both individuals and businesses who have used low interest rates to float more debt. There are many who may actually see their home go into a negative equity situation. It is probably best to clear off as much debt as possible.

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