Luc Vallee's blog

The debate over whether or not continued deficit spending should be pursued is often characterized as a choice between the short term beneficial effect of Keynesian stimulus as against the long term growing, and ultimately unsustainable, government debt to which continued stimulus would contribute.This view assumes there to be a reliable relationship connecting increases in aggregate spending to increases in employment. The absence of such causality, however, would undermine the case for deficit spending.

Winston Churchill defined appeasement as “feeding the dragon hoping he will eat you last.” As the eurozone banking crisis has morphed into a sovereign debt crisis, it is worth reconsidering the wisdom of appeasing the bond market in an attempt to stave off the possibility of default.

As I promised earlier this week, today, I am presenting the darker side of a centrally planned economy: The building of total chaos. 

The hard thing about China is to truly comprehend what is really happening on the growth front. Are the statistics real? But most importantly, is this sustainable? Is China a lemon or a long-term high performer? On the one hand, China has this amazing track record of very high growth for the last 30 years. Betting against it appears foolish. On the other hand, China is still, for the most part, a command economy which after a while, you would think, would stop allocating resources efficiently.

Now that everybody is busy the budget and the debt limit, we are forgetting that the single clear and present danger for the US economy is still the state of U.S. housing. As the economy is slowing again, it threatens to trigger more foreclosures. In turn, this would further damage banks' balance sheets and prevent already gun-shy banks from finally loosening credit. If banks decided to hoard even more reserves, it would have disastrous consequences for economic growth and job creation. At the end of my last entry, Dan wrote that a balance sheet recession requires a policy that would implement a speedy reduction in leverage. Here is how to do it!

Economists will long debate the efficacy of our traditional policy response but, whatever the results so far, there are constraints that place severe limitations on the effectiveness of such policy going forward. The US deficit and the trajectory of US spending is unsustainably high and, as the late economist Herbert Stein famously observed, “what cannot last, will not do so”. Any further fiscal stimulus risks pushing US finances past the tipping point, which would be a reckless gamble. At near zero short term interest rates, traditional monetary policy has become impotent, QE has been ineffective and the Fed has entered uncharted waters with its massive increase in the monetary base, risking inflation once private sector deleveraging ceases and velocity picks up. So neither traditional remedy is available any longer.

With US unemployment lodged stubbornly above 9%, what is to be done? Our policymakers, economists and commentators appear trapped in the confines of a paradigm that is no longer viable. Is there any other policy that might help spur recovery, or must we become resigned to waiting it out?

In 1978, the year China emerged onto the world stage with its four modernizations, China, a country with four times the population of the United States, had a paltry gross domestic product of $216 billion, less than eight percent of the United States. China exposed her strategy of four modernizations to the world as if to say, “Please invest in China and we will ensure that our workforce is educated, and that our business infrastructure is stable for your investment.” Yet, this openly expressed strategy, that may have seemed to the rest of the world as a difficult but noble goal for China to achieve, was only the tip of China’s Grand Plan, and only the part she wanted the world to see.

EurAmerica’s history with China was one of gunboat diplomacy, exploitation, and forced trading. When China opened her borders again in 1979, EurAmerica’s merchants were enthusiastic to exploit an opportunity again. Yet, China had not forgotten EurAmerica’s role in the Opium War, the Sino-Japanese War, and the Boxer Rebellion. China would never open her border again to be exploited. When she finally opened her border in 1979, it was from a position of power, deep strategy, and long lived planning that suggested EurAmerica was finally ripe for reverse exploitation. China’s grand plan was to emerge as the 21st century world power.

Via The Sceptical Market Observer.