Everyone knows the time honored tale of the Camel that was burdened by more and more straw to haul until it reached the tipping point of one straw finally being too much and the poor animal bought the farm. It’s that universal metaphor that speaks to the propensity of people who take the easy way out one time too many; trying to push the envelope a little bit further each time until the system breaks. Its actually what’s happening with American Debt right now: billions in relief have become trillions and soon it will be tens of trillions until the inevitable break occurs. The United States continues to issue more dollars and to borrow more dollars thinking that they can get away with a bit more and won’t stop this suicidal practice until the system is broken. This is a main dynamic at work right now but there is a competing dynamic that tends to exacerbate the dangers of the first. Each time the world markets tank or some big institutions look like they’re about to go belly up everyone has to guess where to put their money in a world where every investment now looks inordinately risky; so what do people do? They play the percentages and assume that the United States will emerge from this mess because we have the infrastructure, the power and the basic economic components to come roaring back better than any other nation on earth. But do we?
What if in the middle of the time honored story above the Camel was replaced by a Rabbit and everyone continued to pile on the straw testing the limits of what a camel’s back could bear? What if we’re piling on debt based on the economic firepower of our free market economy of the past that was recently traded in for cute and furry socialism as we bail out one industry after another? We even had an election to give the peoples stamp of approval to the emasculating of the American Economic engine and we’re about to face a wave of massive government intervention in business, and the complete reshaping of the government’s role in our social compact. We traded a sturdy camel to carry our straw into a bunny and to expect the rabbit to outperform a camel in the amount of straw it can deliver is outright insanity. The straw deficit of the camel can be overcome with hard work and time but the diminished capacity of the bunny means we simply can’t pay the straw deficit back nor can we do anything but make the perpetual deficits worse each and every year. A rabbit can’t haul more straw than a camel anymore than a socialist economy can outperform a free market economy. At the end of the day it’s just that simple. By giving up on our market capitalism one dark night, we’ve thrown away our greatest asset to right the wrongs and excesses of the past
Now consider the position of the people who’ve been loaning us the money to buy straw assuming that one day we’d be good for the money. They see us run up this huge deficit to thatch the roofs of houses that are sold to people who clearly can’t pay for them. They shake their head at our stupidity they continue to loan us straw because they believe we’re good for the money. Before long they’ve given us staggering sums of money so we can deliver luxury homes to people who can’t afford them and they realize that if we default that their economic goose is cooked right along with us. They come to the realization that our success is necessary if we’re to avoid default and what that would do the economy of the lender. So they keep loaning us money. More and more money and the situation only gets worse and we use the money not for straw anymore but to buy up everything because everything is dropping in value! Like frightened rabbits we buy Auto companies, Insurance companies, virtually the entire banking sector and soon we’ll be bailing out States like California and New York because they’re too big to fail. The creditors go along with this nightmare believing that the only way out is through perseverance and they loan us more and more all the while losing faith that we really will pay the money back.
Then comes the day when the people who’ve been loaning the money realize that we’ll never pay them back and that loaning any more will only make their own economic crash that much worse. That’s when the Rabbits goose is well and truly cooked. It turns out that everyone has been loaning money to keep our system afloat and there are several who have loaned us as much or more than the first people to realize we can’t pay our debt. Once the first lender, say China, decides to end the cycle of madness than the other lenders like the Arabs and the Japanese realize that they can’t lend us anymore if they wanted too, not enough to make up for China’s lending; and so the whole system crashes: the borrower and all the lenders and everyone else too! On that day people look at all the money that’s been printed and loaned to the USA and say: “This really isn’t worth the paper it’s printed on and they’ve lost faith in the ability of the American people to make good on the debt. Without a full measure of faith there is no credit for the United States and the world enters an economic holocaust that presents existential dangers to every nation on earth.
It turns out that the Camel was hauling more than straw. It was hauling AIDS medication for Africa, troops to thwart Saddam’s Iraq, education and technological innovation to keep the worlds possibilities expanding and so on. Granted that the Free Market Economy Camel was ornery and cantankerous and wouldn’t hesitate to kick you in the teeth if you treated him wrong or made a mistake: but that ornery camel could do amazing amounts of work. The Rabbit would never bite you or make a fuss but neither could it do anything close to the amount of work the camel could do. The rabbit sits around looking warm and furry and cute while blaming the camel’s example for the stagnation and regression of the rabbit’s economy. The rabbit makes things look better with lots of services like free health care and free education and even a free house, because they’re so cheap these days, but like the money it uses to buy us all this stuff: we find out that neither the health care, the pensions, the education or even the money had any value left. It all still sounds and looks good, like the idea of the rabbit; but the people urine for the days of the cantankerous, scary camel that demanded consequences for actions ,that if paid, allowed for a shot at greatness.
In the last election the American People pulled a cute, furry, warm rabbit out of our national hat and his name is Barak Obama. He looks good and he sounds good and he’s going to boldly continue the regimens of stimulus, (toxic borrowing) to fix the economy even while he spreads the wealth around to make green car companies, and free health care, and probably free education too. And in the wings the Chinese and the Arabs look on at our astonishing luxury and excessive standards of living and ask themselves if its worth it to loan us another dollar and one can see the reluctance setting in. One more dollar, than another, and another until, they come to the point where one more dollar to us will break their own back. What happens then? With each dollar more we come closer to an international tipping point that the Chinese will probably use to assume superpower status in the wake of our demise.
How odd to live in a time where our lack of ability to man up and face the consequences of our economic stupidity has become a national security issue as much as it is a moral issue; for selling generations to come into slavery. We can’t handle the consequences of the Fannie/Freddie/ Subprime disaster and so we’ve embarked on a short term fix that can only destroy our nation and take lots of people with us. The solution to this problem is clear and immediate and it doesn’t matter if you’re a federal, state, county or city government: STOP THE SPENDING! YOU CUT EVERY PROGRAM BY 30% and eliminate all entitlement programs because we’ve proven that governments can’t be trusted. Government is not an agent of social change it’s a self destructive agent of corruption if it’s too big and a necessary evil if its scope and size are harshly limited. We need to cover the essential services first and foremost and leave the welfare state and socialism for dead. We can’t allow government to divide us into groups and buy our votes while playing one group against another. We need to cover national defense but we don’t need to cover the energy department, or the education department or the social security department or the Medicare department. The vision the baby boomers held of government being an agent of good and “social change” has become a nightmare that threatens our existence. We need the courage to stop spending and borrowing and asking the kids for generations to come to pay for our mess. We need to get our camel back and to be willing to endure the decade of pain ourselves because it’s the right thing to do. We need to man up and face the situation candidly before the soul cancer of socialism can destroy the engine of progress and prosperity that was our freedom and our market economy.
Here are some clips from an interesting piece in the International Herald Tribune and its URL:
U.S. debt is losing its appeal in China
By Keith Bradsher
Thursday, January 8, 2009
HONG KONG: China has bought more than $1 trillion in American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home – a shift that could pose some challenges to the U.S. government in the near future but eventually may even produce salutary effects on the world economy.
At first glance, the declining Chinese appetite for U.S. debt – apparent in a series of hints from Chinese policy makers over the past two weeks, with official statistics due for release in the next few days – comes at an inopportune time. On Tuesday, the U.S. president-elect, Barack Obama, said Americans should get used to the prospect of “trillion-dollar deficits for years to come” as he seeks to finance an $800 billion economic stimulus package.
Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt – largely U.S. Treasury bonds and American mortgage-backed securities.
But now, Beijing is seeking to pay for its own $600 billion economic stimulus – just as tax revenue falls sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and midsize enterprises, many of which are struggling with slower exports, and Chinese bankers say they are being instructed to lend more to local governments to allow them to build new roads and other projects as part of the stimulus program.
“All the key drivers of China’s Treasury purchases are disappearing,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland. “There’s a waning appetite for dollars and a waning appetite for Treasuries. And that complicates the outlook for interest rates.”
The long-term effects of this shift in capital flows – with China keeping more of its money home and the U.S. economy becoming less dependent on one lender – are unclear, but the phenomenon is something economists have said is long overdue.
What is clear is that the effect of the global downturn on China’s finances has been drastic. As recently as 2007, tax revenue soared 32 percent, as factories across China ran flat out. But by November, government revenue had actually dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn Monday that 2009 would be “a difficult fiscal year.”
The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were U.S. Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said.
But China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of looking like it is torpedoing the chances for a U.S. economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.
“This is a political decision,” he said. “This is not purely an investment decision.”