"state of extreme disequilibrium'' ... global economy
"When the United States refused to abide by the rules of Bretton Woods by suspending the convertibility of dollars into gold, the adjustment mechanism that had previously prevented persistent imbalances ceased to function,''
the chosen Americans no longer needed to soil their hands with work to enjoy the good life. They printed the dollars, and used them in exchange for cheap foreign exports.
practically no check on American spending.
one asset bubble after another.
credit has blown the global economy into a bubble. Bubbles pop
As it almost certainly cannot pay its debts, the US is now a risky investment.
overindebted American economy has entered a recession that is likely to be as extreme and prolonged [20 years] as the economic boom that preceded it
neither Keynesian nor monetarist economic policies can go very far in solving the problems that lie in store.
stimulus only extend the cycle for adjustment.
excessive credit expansion ...threatens to make more bubbles.
if there were a country that can bailout the US, it is certainly not China.
the US will resort to monetary policy to stimulate growth, and, in case of failure, turn to fiscal policies through infrastructural investment. Failing all these, it can simply start a medium-size war.
the current American financial crisis is essentially the crisis of American way of life, or American values.
human beings are more and more seen as 'economic animals' informed by materialist aspirations, and deriving maximum materialistic satisfaction seems to be the whole meaning of human existence
subject this way of life to thorough critique, and reform
+++
American shopping spree led to global economic crisis
http://www.shanghaidaily.com/article/?id=383396&type=Opinion
Shanghai Daily
By Wan Lixin | 2008-12-6 | NEWSPAPER EDITION
THERE is no need to explain why "The Dollar Crisis: Causes, Consequences, Cures'' by Richard Duncan deserves a review at this turbulent time.
The book published in 2005 prophesies the New Paradigm bubble, whose repercussions we are experiencing today.
The degree of the distress we are seeing is a sufficient recommendation of Duncan's analysis of the "state of extreme disequilibrium'' the global economy has been in.
Duncan explains why the Bretton Woods system failed and was replaced by the unplanned, unmanaged dollar standard, and the consequences.
In 1944 the UN Monetary and Financial Conference at Bretton Woods (US state of New Hampshire) established the dollar as the international reserve currency, backed by gold.
The system collapsed in 1971 when US president Richard Nixon said that those who held American dollars could no longer exchange them for gold.
This seems to be the beginning of all troubles.
"When the United States refused to abide by the rules of Bretton Woods by suspending the convertibility of dollars into gold, the adjustment mechanism that had previously prevented persistent imbalances ceased to function,'' Duncan observes.
Until recently this seemed to be a win-win arrangement that made extreme high economic growth possible.
At its most sublime stage, the chosen Americans no longer needed to soil their hands with work to enjoy the good life. They printed the dollars, and used them in exchange for cheap foreign exports.
The gold standard once prevented countries from running large deficits, for the outflow of gold would lead to credit contraction, recession, lower prices, more competitive exports, and a restoration of trade balance.
But in the 1960s the US needed a huge deficit spending to finance its Vietnam War and its overseas investments, and the gold standard was proving cumbersome.
When there was no longer fear of the outflow of gold, there was practically no check on American spending.
Ostensibly, the dollar standard also works well for other countries.
"Those crisp green pieces of paper have acted as high-powered money as they entered the world's banking systems -- just as gold would have,'' the book reads.
By exporting as many goods to the US as possible, these countries created one economic miracle after another.
They also created one asset bubble after another.
"They have unleashed an unparalleled increase in credit around the world. That credit has blown the global economy into a bubble. Bubbles pop,'' Duncan sums up succinctly.
The inflow of dollars into Japan during the 1980s put the value of Tokyo's Imperial Gardens at more than the entire state of California, and the Nikkei Index went up to 38,000, nearly five times its current level.
Excessive investment built capacity surpluses, so prices fell, and the bubble burst.
But new bubbles continued to be inflated.
From 1983 to 2000 the Dow Jones Industrial Average rose more than 1,000 percent.
"The events leading up to the Great Depression were the same as those that created Japan's bubble economy, the Asia Crisis and the New Paradigm bubble in America,'' the book concludes.
The American debt burden has become prohibitively heavy, with its debt exceeding US$10 trillion this year and its debt-to-GDP ratio up from 152 percent in 1969 to 290 percent in 2001.
As it almost certainly cannot pay its debts, the US is now a risky investment.
"The overindebted American economy has entered a recession that is likely to be as extreme and prolonged [20 years] as the economic boom that preceded it,'' the book concludes.
Message to China
When American consumers realize they have been spending beyond their means for too long and begin to cut back, their newly found sense of moderation will have dire consequences for the rest of the world, China not excepted.
As a matter of fact, China tops the list of countries and regions set to be most affected by the US recession, according to Duncan.
Unfortunately, within China there has been precious little appreciation of the dynamics of the recession.
Some economists still talk glibly of "strong fundamentals,'' and our GDP growth targets have been marked down only recently.
China's latest economic stimulus package seeks to cushion the abrupt slide in exports, but according to the book, neither Keynesian nor monetarist economic policies can go very far in solving the problems that lie in store.
Japan had attempted fiscal stimulus programs in 1980s to sustain its bubble, and failed. It has found that even with zero interest rates, businesses still couldn't earn enough to survive. The stimulus only extend the cycle for adjustment.
Significantly, excessive credit expansion has led to the bubble in the first place, and threatens to make more bubbles.
Recently some Western countries have been very eager to congratulate China for her miraculous rise to become a giant, and it is very important for China not to expand at such flattery.
Obviously, some Western countries now need allies to help cover their huge deficits and stop the unfathomable holes of debts.
Recent statistics suggested that China's holdings in American treasury bonds amount to nearly US$600 billion, and are still growing.
But if there were a country that can bailout the US, it is certainly not China.
During the previous recessions, the seemingly insatiable American consumers helped other countries to export their way out of the crises. For the US, no such market exists.
And the US still has plenty of room for maneuver.
According to professor Chen Ping, the US will resort to monetary policy to stimulate growth, and, in case of failure, turn to fiscal policies through infrastructural investment. Failing all these, it can simply start a medium-size war.
Chen is professor of economics of the China Center for Economic Research, Peking University, and a senior research fellow at Fudan University.
The US will give serious consideration to the much-touted new international financial order only as a last resort.
Chinese policy makers should also look beyond the economics for a clear understanding of the nature of the crisis.
Professor Chen Xueming from Fudan University, while commenting on renewed Western interests in Karl Marx's "Das Kapital,'' wrote recently that the current American financial crisis is essentially the crisis of American way of life, or American values.
"Since the World War II, especially since the 1960s, in America and the rest of the West, human beings are more and more seen as 'economic animals' informed by materialist aspirations, and deriving maximum materialistic satisfaction seems to be the whole meaning of human existence,'' Chen said.
Unless we subject this way of life to thorough critique, and reform, it would be premature for us to congratulate ourselves on our cutting edge.
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