Dear Friends,
It seems to me that the Chimerica analogy is apt but misses a critical point.
The Chimerica analogy is… That the growth we saw during the first decade of the 2000‘s was a result of China producing products, Americans purchasing those products and borrowing the money to buy those products from China. The collapse of the American home market translated into a collapse in the American appetite for Chinese products.
Where it misses the point is the part where China loans Americans money to buy Chinese made goods. The largest consumer of Chinese goods is the United States Government. In the form of debt. Take the US debt out of the equation and the American Chinese picture changes.
Today we hear rumors of sovereign insolvency. The news reports that Harrisburg Pennsylvania has gone insolvent. Another example of Sovereign insolvency. We find out Greece hasn’t come clean on it’s debt yet. Rumors abound, about the other countries in Europe teetering, even as Germany reaps huge profits from the devalued Euro.
Governments are spending money as fast as they can to “prop up“ their economies. Especially the American government. Spending to “Improve” the economy and drive up aggregate demand. Some are cheering the spending claiming that as long as the bond market keeps interest rates low government can keep spending. Ignoring the fact that most people thought Lehman Brothers was a good investment… until it wasn’t. So is government borrowing. There is a brick wall somewhere in the fog out there. No one knows where it is… So might it not be prudent to slow down?
Government borrowing also has the pernicious attribute of raising the expected level of government spending. People get more money from government and expect that money to never stop coming in. Look at the mohair subsidy. The US stopped putting mohair into military uniforms after the first world war.
The Obama administration believes, publicly, that there is a multiplier of .8 for government spending. So a dollar of government spending stimulates $1.80 in the private sector. If this were true then all spending should be channeled through the government. It would be a win win. This is exactly what some in the administration believe. That the government is in the best position to determine what should be bought and sold in the economy. Added a .8 multiplier and it makes it seem, to them, a no brainier.
Of course reality has to stick in it’s ugly head. Empirically, if that were true the 3 trillion dollars the US government spent on stimulus should have generated 5.4 trillion dollars in economic output. At a tax rate of 33% that aggregate demand should have generated 1.78 trillion in tax revenue. We clearly see that it did not. In fact government spending has a negative economic multiplier.
Now the money is spent, (on everything BUT infrastructure), and we nothing to show for it. The national debt load to foreign persons and nations has dramatically gone up. Driving up the aggregate balance of trade deficit, Soaking up capital for industry and creating fear of future taxation. All have a negative effect on any economy.
So the American economy is faltering. Due at least in part to the unrestrained spending. The US budget deficit is slated to be 100% of GDP this year. The last time this happened was during the FDR administration when we were fighting the Second World War. With no such existential threat the US government is spending like it is fighting an all out war.
Maybe it is… Against the American People, our children and our grandchildren…
