Great Depression Online Archive Issue:

One Billion Communists

Great Depression Online
Long Beach, CA
March 17, 2009

Inside This Issue You Will Discover…

*** Five Talismanic Words
*** Symbiotic Harmony
*** One Billion Communist
*** And More

“The borrower shall be a slave to the lender.” – Proverbs 22:7

Five Talismanic Words

Economics is the dismal science, they say.  Hence economists must be dismal scientists.  Yet even that is misplaced adulation.  For what’s scientific about gawking at human behavior?  Perhaps it’s scientific in a social sense, if you consider that science.  We have our misgivings.

In our estimation, economists are nothing more than dismal hacks…most of them anyway.  This is particularly evident when turning the microscope back on them for a little scrutiny.  For in doing so you observe that under the pretence of scientific method they invent theories justifying things that would otherwise be preposterous.

Several generations ago there was mounting public concern over the enormous national debt that had come with FDR’s New Deal policies.  So FDR’s team put their top economists to the task of coming to their rescue.  And in no time at all, John Maynard Keynes, the grandfather of public spending, came up with a theory of debt so indifferent, and cavalier, it excused the politicians in power and dumbfounded the opposition.

~~~~~~The Money Vault~~~~~~

Former Elitist Wall Street Insider Pulls Back the Curtain…  And Reveals How Average Investors Can Make Quick Profits that Put the Insiders to Shame.  He might be a very successful investor, but you’ll never see him on CNN.  Learn all about it here: The Money Vault.

~~~~~~~~~~~~~~~~~~~~~~~~~

Here we’ll look to a 1958 speech by the late William F. Buckley Jr. for edification…

“Depicting the intoxicating political consequences of Lord Keynes’s discovery, the wry cartoonist of the Washington Times Herald drew a memorable picture.  In the center, sitting on a throne in front of a maypole, was a jubilant FDR, cigarette tilted up almost vertically, a grin on his face that stretched from ear to ear.  Dancing about him in a circle, hands clasped together, their faces glowing with ecstasy, the braintrusters, vested in academic robes, sang the magical incantation, the great discovery of Lord Keynes: ‘WE OWE IT TO OURSELVES.’

“With five talismanic words, the planners had disposed of the problem of deficit spending.  Anyone thenceforward who worried about an increase in the national debt was just plain ignorant of the central insight of modern economics: What do we care how much we – the government – owe so long as we owe it to ourselves?  On with the spending.”

Symbiotic Harmony

Some time in the early 1980’s, for the first time in its history, the United States’ trade balance went progressively negative…it began importing more than it was exporting…it began consuming more than it was producing.  In other words, the United States began earnestly transferring its wealth to other nations.

Yet the trade deficit didn’t really get too off kilter until after the turn of the new millennium.  Since then the trade deficit has gone negative by Grand Canyon sized gulfs and gorges.  In fact, the trade deficit was $166 billion in 1998; by 2006 it was a gaping $753 billion chasm.  With the onset of the current depression the trend has subsided somewhat…with a trade deficit of $700 billion in 2007 and $681 billion in 2008.  You can take a gander at the U.S. Census Bureau data here: Foreign Trade.

Looking at just the trade deficit, however, only tells half the story of what has been going on…and ignores the possible consequences which have yet to be fully expressed in the world economy.  For as the U.S. exported dollars – largely to China in recent years – in exchange for cheaply manufactured plastic doodads, undergarments, and electronic knick-knacks, China had its own conundrum…  What to do with its rapidly growing pile of dollars?

In a relationship of symbiotic harmony China recycled their dollars into U.S. Treasuries.  Essentially China took the excess dollars from the U.S., resulting from the U.S. trade deficit, and loaned them to the U.S. Government, thus financing more and more of the national debt.  For a time, this system of finance worked only too well…interest rates remained low for the U.S. consumer so they had seemingly endless credit to shop with while China had plenty of jobs for their more than one billion person population.

One Billion Communists

But, alas, all good things must come to an end.  And in very simple terms, as is the GDO custom, here’s why this is no exception…

The U.S. is China’s biggest customer…and Chinese exports fell 25.7 percent in February.  Nonetheless, the Obama administration is counting on China to buy more U.S. Treasuries to help fund the many bailouts, stimulus plans, and spending bills of late.  Yet China is already Washington’s biggest foreign creditor, with an estimated $1 trillion in U.S. government debt.

Why should China keep loaning the U.S. government money when U.S. revenue (i.e. GDP) doesn’t support the spending?

As we explained several weeks ago (Enjoy the Ride), the $1.75 trillion 2009 U.S. budget deficit amounts to 12.3 percent of GDP.

Historically, when a nation runs a budget deficit in excess of 6 percent of GDP foreign investors become anxious, and the country’s currency becomes stressed.  And sometimes, if foreign investors get too anxious, they sell in mass resulting in a rapid devaluation.

Last Friday, following China’s annual legislative meeting, Premier Wen Jiabao expressed China’s concern about the safety of its U.S. Treasury Holdings.

“China’s premier didn’t say it in so many words,” reported AP from Beijing, “but the implied warning to Washington was blunt: Don’t devalue the dollar through reckless spending.”

‘“Without China’s buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher,’” said Frank Gong, chief China economist for JP Morgan.  ‘“That could be very destabilizing in this very recessionary environment.”’

Talk about understatement.  If China dumps U.S. Treasuries the consequences of higher interest rates and a collapsing dollar would effectively demolish economic activity and impoverish American dollar holders overnight.  This very prospect was described in China’s state media as the “nuclear option” back in August of 2007.  If you don’t remember, you can read this story from CBS News: China's "Nuclear Option".  

Is use of the term “nuclear option” just provocative hyperbole? Who knows?  But regardless, what a wacky world we live in.

For in a grim twist of ill-fated irony…  We no longer ‘owe it to ourselves’.

We owe it to one billion communists.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  We’re not happy about this debt problem one bit.  In truth, it makes us downright mad.  We lived within our means.  And you did too.  Now were at the mercy of China’s relationship with the Obama administration’s policies to keep this Ponzi scheme going.  But there is something you could do to make some quick profits and put the insiders to shame.  Learn all about it here: The Money Vault.

 

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