Economic Crisis is beyond the reach Of traditional solutions

Linked with Paul Craig Roberts – USA.

Published on, by Paul Craig Roberts, Nov. 12, 2008.

… Khazin points out, as have others, such as University of Maryland economist Herman Daly and myself, that consumer debt expansion is the fuel that kept the U.S. economy alive.  The growth of debt has outstripped the growth of income to such an extent that an increase in consumer credit and bank lending is not possible.  Consumers are overburdened with debt.  This fact takes monetary policy out of the picture.  Americans can no longer afford to borrow more in order to consume more …

… For years, the US government’s budget has been dependent on foreigners financing the red ink.  Countries such as Japan and China and OPEC suppliers of oil to the US have huge export surpluses with the US.  They recycle the dollars by buying US Treasury bonds, thus financing the US government’s red ink budgets.

The open question is: how much longer will they do so?

Foreign portfolios are overweighed in dollar assets.  Currently the dollar’s value is benefitting from the financial crisis, as investors flee to the reserve currency.  However, sooner or later the huge outpourings of dollar debts will cause foreign creditors to draw back.  Already China, America’s largest creditor, has sent a signal that that time might be drawing near.  Recently the Chinese government asked, as they do indirectly  through third parties, “Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”

Is the rest of the world, which has demanded a financial summit to work toward a new financial order, going to  permanently allocate the world’s supply of capital to covering American mistakes?

If not, the bailout and the stimulus package will have to be financed by printing money …

… Cutting the budget deficit by halting pointless wars and unnecessary military spending  and reducing the trade deficit by bringing jobs back to America are simple tasks compared to confronting inflationary depression.

The world has had enough of American irresponsibility and is taking away the reins. At the November 15 economic summit, the world will begin the process of imposing a new financial order on the US in exchange for continued lending to the bankrupt “superpower.”

With bailouts eating up the world’s supply of capital, continued foreign financing for Washington’s wars of aggression is out of the picture. (full long text).

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