Lenin predicted that capitalists will sell the rope with which Communists will hang them. At the moment, one must wonder if debt is not the rope with which the slave world will hang the free one. Alan Greenspan warns that we will soon begin to feel the noose. But Krugman worries that if we stop spending we will end up in a 1930s type depression. Reading a review of Raghuram Rajan book on Fault Lines: How Hidden Fractures Still Threaten the World Economy it struck me yet again that US problem lies not merely in borrowing too much but in borrowing too much to keep up consumption.
Keeping up consumption leads to further deterioration of our comparative economic well being. In other words, the US gets sicker while the rest of the world in getting healthier or engages in beggar America policy (according to Martin Wolf of the FT). Rajan identifies three major reasons for the financial crash:
He arranges his analysis around three fundamental stresses or “fault lines”. The first, improbably, is widening income inequality in the US. The second, more familiar, is trade imbalances - though with the twist that these should be understood as the outcome of slow historical forces not momentary policy mistakes. The third is the clash between the “transparent, contractually based, arm’s length financial systems” of the US and Britain, and the directed or relationship-based financial systems of countries such as China and Japan. Here his point is not that one model of finance is better than the other, but that things can go wrong when they come into contact.
The widening of income in equality is caused mainly by technological changes leading to closer ties between education and employment. The crash happened because the attempt to turn America into an ownership society failed. Americans will own a house and in turn use the house as collateral to borrow money to invest. It was a scheme forwarded by De Soto.
Why did it fail?
I (not Rajan) would argue it did so because instead of using credit for investment, Americans used it to buy stuff non American made.
This is the real cause of the second famous trade imbalance between producing countries such as China and consuming one such as the US.
The third cause made matters worse as it enabled China and other command economies to increase their advantage by excluding American goods without incurring any punishment.
Since the crash began matter got merely worse as the world and the Obama administration united in preventing the US from taking any steps that may improve America’s economic health. By flocking to the dollar, the world made it ever easier for America to borrow more. The administration printed money and encouraged banks to spend it. Discouraged Americans from saving by trying to protect them from the consequences of their over spending habits by thickening the safety net and subsidizing the purchase of large items. Oh, yes, tax refunds also came in small enough amounts to insure that they will be immediately spent.
To make matters worse, the Obama administration myriad of legislative initiatives has created such an atmosphere of uncertainty that big businesses are less inclined than ever to invest in the US and small businesses are just sitting tight waiting for the Obama storm to pass. Yes, I know Obama waxed lyrical about the need to double US manufacturing but that is all talk. The costly moratorium on oil drilling, i.e., domestic oil production is the true representative of his continued determination to punish America for discovering and consuming oil. He talks of improving American education but only for the purpose of creating more non profit workers.
Not surprisingly, two years after the crash finds America poorer and more indebted than ever and Communist China and Theocratic Saudi Arabia richer than ever. But that is fine with the Obama administration. What is bothering it? The fact that Europe decided to change its spendthrift habits by thinning out its safety net and following the German focus on production. In other words, diminishing the ongoing transfer of wealth from the democratic to the authoritarian world. Worried by the American pressure on Obama via Congress to follow suit, the Chinese came to Obama’s aid by permitting a minor reevaluation of the Renminbi.
If the past is any indication, it should buy Beijing a few years of peaceful continued wealth transfer. In the meantime, Bill Gates organized philanthropic billionaires will accelerate the process of placing ever larger amounts of capital in the hands of unelected and unaccountable self appointed social engineers.