Lonesome Tree in Sandhills

Friday, December 26, 2008

The Blinking Red Light

American leaders ignored the blinking red light at OUR economic peril.

In the past decade, the Chinese loaned trillions of excess savings to the US at very low interest rates.  China invested earnings mostly from manufacturing exports by buying U.S. T-Bills, bonds and government-backed mortgage debt.  The more they bought, the lower the interest rates. Lowered interest rates helped fuel a historic consumption binge and housing bubble in the United States.

US leaders became complacent about borrowing from a communist country & American consumers were lulled into complacency about spending beyond their means.  Economists say Americans should have recognized borrowing from abroad for consumption and deficit spending at home was not a formula for economic success.  Its not rocket science!  WHAT WERE WE THINKING??

China accumulated trillions of US debt instruments (2/3rds of US national debt) & the US taxpayers in turn pay billions of dollars in interest, with which China competes for oil supplies against the US.  If China had allowed its currency to float according to market demand in the past decade, its export growth probably would have moderated & it would not have acquired the same vast hoard of dollars to invest abroad.

"This was a blinking red light," said Kenneth Rogoff, a professor of economics at Harvard and a former chief economist at the International Monetary Fund. "We should have reacted to it."

But the Fed & Alan Greenspan didn't react.  Interest rates stayed low, contributing to the US housing bubble even as China stoked our easy-money economy to export more goods. These so-called economic experts looked right at that blinking red light like a deer in headlights & stoked speculation in real estate.  Perhaps Alan fell asleep at the wheel, but were the Fed's other members asleep, or mesmerized by the blinking red light?

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