UPDATE #2: Today, Robert Samuelson has a column that discusses the crisis and which makes a couple of the points I’ve been making.
Traumatized by plunging home values and stock prices — which have shaved at least $7 trillion from personal wealth — they’ve curbed spending and increased saving.
I’ve made the point that we have been criticized for our low savings rate but the world has, at the same time, been dependent on us to drive the economy, especially for the Asian export economies.
High-saving Asian countries have relied on export-led growth that, in turn, has required American consumers to spend ever-larger shares of their incomes. Huge trade imbalances have resulted: U.S. deficits, Asian surpluses. As Americans cut spending, this pattern is no longer sustainable. Asia is tumbling into recession.
There is even a theory that the entire bubble is a consequence of China’s manipulation of its currency, funneling huge surpluses into the US capital markets.
Geithner is correct that China manipulates its currency. What’s more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China’s cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.
Did the US demand simply draw all that investment money ? Is it our fault ?
If Americans’ insatiable appetite for loans explained the flood of Chinese capital into the United States, we would have seen the evidence in a rising price for those loans — that is, higher interest rates in the bond market. But bond rates were strikingly low at mid-decade. This strongly suggests that it was the supply of lending that went up, not the demand for it. Chinese money flooded into the United States because of the push factor from China, not the pull factor from Americans.
Interesting theory and it seems to be the policy of the new Treasury Secretary.
Hmmmm.
UPDATE: Here is a Bruce Bartlett piece on the stimulus package and the economy that seems to me to be a good summary of the history of economic slumps since 1929.
The Weimar Republic ended in a hyperinflation that radicalized the German middle class and led the way for Hitler. Some of that was deliberate as the Germans decided to inflate their currency to wipe out war reparations. That couldn’t happen here, could it ? Look at this graph.
Look at that chart. It is the US money supply. Look at the curve, then look at 2008. Yes, that is a vertical straight line. It looks like Weimar Germany to me.