Wednesday, January 14, 2009
VECTORS OF POWER
Here's a nice, bitter pill for your morning:Today, however, our dependency upon foreign investors will approximate more and more the state of international indebtedness we historians associate with the reigns of Philip II of Spain and Louis XIV of France -- attractive propositions at first, then steadily losing glamour.
It is possible that the early sales of Treasurys this year could go well, since panicked investors may prefer to buy bonds that pay nothing to shares of companies that may go bust. But certain sharp-eyed analysts of the Treasurys market already hint that the appetite for Obama-bonds is limited.
Do people really think that China can buy and buy when its investments here have already been hurt, and its government can see the enormous need to invest in its own economy? If a miracle happened, and China bought most of the $1.2 trillion from us, what would our state of dependency be then? We could be looking at as large a shift in the world's financial balances as that which occurred between the British Empire and the United States between 1941 and 1945. Is everybody happy at that? Yet if foreigners show little appetite for U.S. bonds, we will soon have to push interest rates up.
While I disagree with some of the identification of causes in this piece (it is all laid far too readily at the feet of the hated Bush), the basic economic logic of power described here is inescapable.
So ... it's time for me to ante up something positive, some prescription for how to escape this death-spiral. The problem is what I think of as "financialism:" the idea that all the problems and all the solutions are somehow to be found in the manipulation of money in ever-more-sophisticated ways. Both the monetarists and the Keynesians get this wrong. You simply can't make something from nothing, no matter how clever you are.
An extremely gifted financial operator told me a few weeks ago that the only way out of the mess we're in is inflation -- printing money. I don't doubt that the radical first-aid required at this point to keep the patient alive long enough to get to the hospital involves a massive dose of inflation. It's analogous to pumping fluids into a bleeding man going into shock. But in the long run, inflation is just an emergency measure, and one with its own dire consequences if kept up too long.
No, there's only one long-term solution to the problem. We -- the American people -- are going to have to earn our way out of the hole we've dug ourselves into the old fashioned way; by creating something real that other people in the world want to buy. If we don't see that, if we don't take the distorting glasses of "financialism" off and see the world as it really is, we can kiss "the American dream" goodbye.
Barack Obama will either see this, and deliver this news to the American people, or we are well and truly doomed to second-rate status as a nation and a civilization -- at best. Why it has to be Obama who does this is the subject for another post ...
GB, THHotA
posted by Greg 8:11 AM
