In response to Eric Cantor’s Wall Street Journal op-ed calling for current tax rates to be extended for all taxpayers “and most importantly for small businesses and investors,” the White House posted a response on its blog yesterday. Written by its deputy communications director and entitled “No Excuse for Holding Middle Class Tax Cuts Hostage,” the response argued Republicans are preventing Obama from giving “immediate certainty and comfort” to the middle class:
Under the Obama plan, every middle class family would receive the immediate certainty and comfort of knowing their [Bush] tax cuts were permanently extended. … And here’s what [the Republicans] are holding middle class tax relief hostage for: having our nation borrow $700 billion that we can’t afford to provide an average tax cut of $100,000 to millionaires and billionaires.
There is another way to phrase the issue: should $700 billion be transferred from the private economy to the government, or should the government be required to cut spending by $700 billion to allow those who earned it to invest in their businesses and the broader economy? To put it in less subtle terms: should $700 billion be transferred to the organization that runs the post office, has yet to produce a budget for the current year, was unable to forecast accurately the impact of the $787 billion it used for “stimulus,” is already spending too much, and threatens to borrow $700 billion “that we can’t afford” if the private economy won’t cough up the money?
The reference to “millionaires and billionaires” (and the much greater number of non-millionaires who would face significantly higher taxes) is a little like a spendthrift teenager arguing his generous allowance ought to be increased because Dad has the money and won’t miss it. The teenager’s argument is a bit beside the point.
The White House threat to borrow $700 billion more unless its allowance is increased comes on top of the 3.8 percent tax increase inserted into Obama’s health-care legislation earlier this year as a new “Medicare contribution” – one that, as noted here, (1) is not a “contribution,” (2) has nothing to do with Medicare, and (3) was given its misleading name to hide the fact that Obama is currently seeking his second substantial tax increase on investment income.
It is a little unclear who is holding whom hostage in this debate, but the “immediate certainty and comfort” the middle class and others desire may be not Obama’s Chicago-style bargain but rather an end to one-party government seeking more tax increases to support an “unsustainable” level of deficits its own spending has produced.
Rumor has it that China has the worlds biggest banking problem by an extreme margin. China officially says 10% of private loans are non-performing which is very high. Many banking analysts claim the real figure is 30% – 40%.
It’s relatively September 1929 in China. Will the Mao Dynasty survive? I hope not.
gordon chang is more right than he chooses to disclose….
…assuming (and this is a reasonable assumption) that the american economy is more bumpy & bruised than bttered&beaten over the next year, we are positioned to do breathtakingly well – much as were were in the wake of the millennium’s telecom/internet bubble-bursting….
…those industries came back HUGE…the sorting out of credit, more intelligent investments in growth and (one hopes) reining in financial excesses in favor of entrepreneurial and middle-sized business growth should mean an economic resurgence…combine that with the need for those asian and latin american markets to grow via export – as well as internal development – and i think the case for optimism far outweighs the cries of chicken little cataclysm
Reid of America, China’s state banks are sitting on loans that are bad or will turn bad soon with a downturn in the economy. My back-of-the-envelope guess is that there is about US$900 billion in bad loans on the books of the banks and the central government. Official Chinese bad-loan statistics give no hint of the dimension of the real problem.
Beijing can censor news about these loans, but it cannot make them better by fiat.
mds, I agree with your analysis. Thank you for discussing the inherent resilence of the American economy, and especially its entrepreneurial and middle-sized businesses.
Hey Gordon,what I’m enclosing is related to this and your piece on China’s role in our crisis from the other day. Sorry about the length,but it is interesting.
Markets Reeling
By MADIS SENNER
The realization of how foreign central banks contributed to our current financial maelstrom has been lost in the debate over resuscitating the US economy and saving failing financial institutions. For over two decades foreign central banks, particularly Japan’s and China’s, have been pumping money into America, de facto loaning us money, so that we could buy their goods, thereby stimulating their economies. This deliberate policy choice, to build their economies on the backs of US consumers not only led to a deterioration of our country’s balance sheet but contributed to the excesses we are know suffering from.
Push Versus Pull
Whether foreign capital is “pushed” or “pulled” into a country has important implications. Money that is pulled into a country does so because its investments are attractive. Money that is pushed into a country does so for a variety of factors extraneous to the host country. In this case the host country, the US, is getting money not because of the investment opportunities it provides but rather because foreign countries want to stimulate Americans to buy their goods. History shows that money pushed into a country can lead to financial bubbles and borrowing binges in the host country as it must readjust to the inflow. Think of it like giving your college age child large sums of money each week.
Economists may argue over whether money has been pushed or pulled into the US. There is no arguing that starting in the early 1980’s when the Reagan administration began dismantling regulations that foreign central banks started aggressively buying US treasuries($2.7 Trl. held in the Fed’s custody account alone and does reflect Eurodollars, bank deposits, Foreign exchange swaps, Eurobonds, etc. held). We have consistently adjusted to this inflow by running record trade and current account deficits, ones that have historically brought calamity. Former Federal Reserve Chairman Greenspan remarked over four years ago how America’s ability to run deficits had gone well beyond historical norms. We have not been forced to pay the piper yet because foreign governments continue to “push” money into the US to maintain growth of their economies at our expense.
This massive inflow of capital (dollar purchases) over the last two decades has not caused a surge in our economic growth which has chugged along at only a modest rate. It has led to a host of speculative bubbles beginning with the 1987 stock market bubble and the innumerable crashes and ensuing bailouts that followed. It has also led to a borrowing binge by US consumers who are now saddled with massive debt($2.6trl.). In other words, all this money flowing into the US has not led to a commensurate surge in US growth but has significantly deteriorated our country’s and citizen’s balance sheet and made us vulnerable. Within a few decades we have gone from being the world’s largest creditor to being its largest debtor.
The long term consequence of letting a country continue to “push” money into a host country can be devastating. China, for example, has consistently intervened in foreign exchange markets by buying dollar denominated bonds and paying for it by selling its own currency to keep its value low and prop up the dollar (“push” money in). By letting the Chinese and others keep the value of the dollar artificially high and their currency value low, US exports have been made non-competitive in foreign markets. This has prevented us from exporting our way out of our trade deficit which is the mechanism by which trade imbalances are corrected. Over time this has meant the gutting of US exporting industries and a significant loss of jobs.
Fighting the last War
Economists and politicians are notorious for fighting the last war rather than understanding the current predicament. Today, fearing a repeat of the Great Depression, the Federal Reserve is pumping money into the system and Washington is bailing out financial institutions. The problem is not a policy choice, albeit regulation would help, it is viewing the world from a lens of the 20th century instead of the 21st century.
Technology and globalization are altering the world at an increasingly rapid rate. In 2007 Russia redefined war when it waged cyber war on Estonia by flooding its Internet servers with so many requests that their whole system crashed. Similarly, we have been attacked by foreign countries that have given us a Trojan horse of money that has deteriorated our financial health and given us a false feeling of superiority and security, thereby making us vulnerable.
Washington needs to collar Wall Street, not further indulge it. Wall Street was the architect in creating the financial structures, products and the liquidity that was necessary to enable large sums of money to breech our borders. For its collaboration Wall Street has profited handsomely, from the shill selling stocks, to foreign exchange traders, to participants in the US bond & money markets, to investment bankers, to the mutual fund industry to players in derivatives markets and all have profited from the financial invasion of the US.
Time For a Change
Instead of bailouts and easy money we need bold initiatives from a government that understands that we live in world that is smaller and increasingly linked by cross-border capital flows and the Internet. If the financial system is an integral part of our well being and national security, then the government should move swiftly to seize control of banking institutions and remove our vulnerability to the whims of foreign central banks and speculators. We need to nationalize financial institutions to insure that they act in America’s interest, not their own self-interest that has no allegiance except to the bottom line.
In addition, the government should do everything in its power to control and preferably outlaw derivative securities. Derivatives are securities whose value derives from another security and require a minimal amount of money down to buy. They are a financial innovation of the last 30 years that have been behind every financial crisis and bailout of the past few decades from the 1987 stock market crash (stock index futures), to Long Term Capital Management in 1998 (interest rate derivatives) to our current $700 billion buyout of banks precipitated by their purchases of toxic derivatives (credit/sub prime/mortgage derivatives). Derivatives give speculators enormous power and leverage that they used to attack the British pound in 1992, to attack the Asian currencies during the Asian contagion in 1997/98 and recently to push the price of oil higher. If it were not for derivatives that allow for speculation in oil and basic foodstuffs the price of food and oil would be much, much lower. Remember, it was margin buying (leverage) that led to the stock market crash of 1929 and margin buying was a precursor to modern derivatives (leverage).
No doubt financial institutions, speculators and other special interest would be against draconian measures to seize control of financial institutions and outlaw derivatives. But bold initiatives are needed at this time of national crisis. The world is changing and unless we see and understand this we are doomed. Bailouts have not worked since 1987 and will continue to fail. We the people in the form of government need to reassert ourselves if democracy is to survive. People need to rule, not money!
Madis Senner, CPA, is a former global money manager turned faith based activist who is calling for Jubilee where we start anew (www.JubileeInitiative.org) . He has written for the NY Times, Barrons and others. He is author of Japanese Euroderivatives (1990). He can be reached at madiss(at)verizon.net.
Also Gordon, RCAR wrote this today.
RCAR Says:
October 3rd, 2008 at 2:06 PM
Here’s a nasty prediction about this bill. We should have been asking ourselves why the investors and foreign banks that bought up hundreds of billions of dollars of worthless mortgage-backed securities from US investment banks have not taken legal action against these same banks or initiated a boycott of US financial products. According to Brad Sherman talking to Larry Kudlow,”The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20 that it can’t be sold to the Treasury. Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure it can happen.”
GOOD GOING/ OUR IDIOTIC GOVERNMENT NEEDS TO KEEP FINANCING OUR DEFICITS;THIS IS THE TICKET.
Gordon,
One additional point. Intellectual capital is the key to the Information Age economy, and America’s lead in this area is probably unsurpassable for the forseeable future. Our graduate schools, particularly in the all important hard sciences, are the best in the world, attracting top talent from all over. Brains, ideas, talent, and ambition come to America like moths to a flame. Unlike virtually every other country, America is at bottom an idea — of freedom, individual liberty, and rule of law. And it is open to essentially to all people of brains and ambition who share this vision.
The 21st Century will be another American Century.
PALEO, thanks for pasting the piece by Madis Senner. The “push” and “pull” analysis is fascinating.
PALEO, I am sure that RCAR is right about Paulson’s intention to bail out foreign lenders. This aspect of the proposed bailout is especially misguided.
Inagua, as the son of an immigrant and the husband of another, I could not agree more. Thank you.
Let’s also not forget the technological theshold we are on: We are getting closer all the time to grid parity for solar power, economic biodiesel from algae or microbes, viable electric cars, cures for alzheimer’s and cancer, productivity-enhancing robotics in manufacturing and daily life, improved and more widespread recycling processes…all the while the information revolution continues to pick up steam. All these things will act synergistically to continue to increase the size of the pie for all of us… it can be a very glorious century indeed, if we only keep faith, tend to the health of our social civilization, and keeps our vision focused on the horizon…
Gordon,
To cite just one example, consider the day in the dismal year of 1979 (when xenophobic Japan was the rising economic power) that Mikhail and Evgenia Brin brought their six year old son to America.
That is how America renews itself and guarantees its continued success.
Like the debate in Congress the “push” analysis by Madis Senner is again another pathetic excuse to blame lenders for financial meltdown instead of questioning irresponsible behavior of spenders’. I guess the Wall Street is an easier target; it will be too much for Congress to blame their constituents. Are we consumers just like mine-sweeping robots programmed to seek destruction? Where is your common sense? Most first generation Americans who immigrate here with just enough money for their first month expense always amazed by the abundance of opportunities and shocked by the suicidal spending behavior of other Americans. Many of them carry zero credit card debt, pay cash to buy cars, pay-off house mortgage as soon as they could, don’t believe house equity loans; they wish they can pass their fiscal discipline to their children to live within their means, save and invest wisely. Everyone is responsible for their own financial choice and consequence, blame game is only cowardous.
Jliu, once again, yes, we Americans are ultimately responsible for our own failings.
And our failures also include not speaking to China plainly about unfairly gaming trade and creating incentives for both nations to push the international system toward catastrophe.
Gordon -you are blaming a country that 35 years ago was barely part of the 20th century.
At the same time -1973 the oil crises was kind of a big deal – but America (& the west) slid back without any alternative energy developments.
You want to take China’s money to fund your lifestyle on the cheap & then blame them when you & your fellow citizens cannot pay the grossly undervalued interest rates.What were they @%? Do you think money grows on trees?
Gordon,
you wrote: “Inagua, as the son of an immigrant and the husband of another, I could not agree more. Thank you.”
Does this mean you think the best and brightest from China emigrate to America and other Western countries? I don’t expect you to toot your own horn, but this seems to be the case with immigrants from China.
Rininger, I was born here, so I’m not tooting my own horn. But, yes, I do think a lot of my dad and my wife. They’re very special people, and they are both Chinese.
Many bright Chinese come here because the United States is the greatest nation in history. Migration patterns of all ethnicities confirm that.
Thanks for your comment and asking the question.
Considering the accuracy of Mr. Chang’s predictions in his seminal work, the Coming Collapse of China… his best guesses about the future of the American economy are as believable as Bear Stearns assessment of mortgage risk.
Cynical Reader, the “seminal work” predicts the failure of the Communist Party by the end of this decade. So stay tuned, please.
I agree that America is stronger than she appears to the jaded eyes of the world right now. If Western civilization had been going to die out because some people make mistakes, it would sure would have done so long before now. And America is always considered down for the count by someone, but never is.
I hope economic turmoil becomes an opportunity for China. I don’t know that China has any hope of going directly to consensual democracy. No nation other than America had the political base to start from that we had, and China certainly doesn’t. But England became the Old World’s exemplar of constitutional government, and America’s inspiration, by overcoming feudalism, bloody religious strife, and her own series of civil wars. In their own ways, other nations have done similar things, from India to Spain to Brazil. Nothing about her character or history condemns China to a lesser fate.
What we have invariably seen in every age and every corner of the globe is that the main thing holding people back is their governments and their regulations. Trying to regulate all the risk and uncertainty out of life is man’s most common tendency, and his worst one. China’s government is a major actor on that principle today. America’s has become too much of one. But the American people still have much of the latitude we need to get ourselves on a better footing than the insane one our government has pushed for the last 30 years: the one that says our economy depends on there being trillions of dollars in debt circulating around the finance-osphere.
I do hope China has an opportunity to roll back a significant portion of her government’s sclerotic and unresponsive regulatory regime. If the Chinese people are unleashed — stand back. No people becomes ascendant through collectivism, but the Chinese are at least as able to take advantage of individual liberty as anyone else. It’s when China is free that she will have her century.
gordon,
with all due respects, when you wrote the collapse of china book, did you ever ever have a slight of thought that we would be getting there first? while i would give you another chance on “seminal work” prediction on china’s plight within 2 years, let me ask another irrelevant question: does “seminal work” predict how soon we can come back in US?
a while back, a guy named warren, from some university in new york and sat on some national security committee on china’s policy, doubted the sorry-a$$ feelings of chinese experienced 100 years ago. well, i think if he were able to grasp the impact from this financial tsunami, he might have understood it now. when ones’ ego went so high that only ego itself can cap it, then once the bubbles burst, one just can not understand and accept the reality.
Gordon,
Even this morning Phoenix TV was talking about whether the Chinese government should “rescue” America from financial ruin in light of Washington’s recent $6 billion arms deal w/Taiwan. Some pundits in the PRC seem to believe that this financial crisis is China’s chance to gain influence over Washington on issues such as Taiwan and trade. I hope you’re right about the coming collapse of China, we really can’t afford a “Chinese century” under the CCP.
Gordon:
Do you know what are you talking about here? The country on the verge of bankruptcy and its financial system has already been doomed is the United States of America, not China. You said China would go down years ago, have you ever imagined that LEH, MER, WM or other major wall street firms would go down first because of greed and lack of regulation? China is the one that provides funding to the US, and will be one to save the world should the US go down. Good luck on your day dreaming of China going down, it is a shame to see someone has a Chinese last name day dreaming such thing.
KC
Today is Oct 9th, another 678.91 drop at Dow Jones (8,579.19).
Anyway, thing you predict at China banks have not happened yet.
However things you have not predicted already did.
Like any politician, you likely won’t admit your mistake, if so, please be kind and contribute to the Dow Jones NOW – like any American, talk is cheap.
And will you recant once your 2010 schedule harmlessly passes by? Or will you extent it further by another 10 years??
Didn’t Deng expect PRC to have democratically elected President by 2020? I wouldn’t consider a voluntary transfer of power from the CCP back to the people as a “Collapse”. On the other hand, what’s happening to Wall St does look like the “Collapse” you foretold for China. Do you have the slightest clue how much American wealth is being destroyed here??
mtm, Deng said national elections in fifty years from 1987.