Posts Tagged ‘monetary policy’

Putting the politicians on notice

Sunday, October 18th, 2009

Over the weekend, the Reserve Bank of Australia (RBA) governor, Glenn Stevens, surprised the financial markets with his unusually hawkish stand on interest rates. In response, as this news article reported,

Financial markets responded by pricing in the most rapid series of interest rate rises Australia has seen for 15 years. Markets now predict that the Reserve board will raise rates at seven consecutive meetings, lifting its cash rate from 3 per cent 10 days ago to 4.75 per cent by May and 5 per cent by July.

As we wrote back in July (see How are central bankers going to deal with asset bubbles?), under the influence of William White of the Bank for International Settlements (which is dubbed as the central bankers’ central bank), there’s a sea-change in central bankers’ thinking. Glenn Steven’s aggressiveness is the result of such a sea-change. Our long-time readers should not be caught by surprise at this, unlike the financial markets.

Economists like Professor Steve Keen reckons that if the RBA really carry through its threat that way, it will be a big mistake. The problem with monetary policy is that it is an extremely blunt instrument. Though rising interest rates can put a brake onto the growth of dangerous debt-fuelled asset bubbles, it will also constrict other sectors of the productive economy as well. The risk is that the productive sectors of the economy may be crippled, bringing down the rest of the economy along with it, and as a result, burst the existing asset bubbles in a spectacular way.

Therefore, what is needed is a very precise tool that can target asset bubbles specifically while leaving the rest of the economy alone. Unfortunately, the RBA do not have the power to to enact such a precise policy tool- they can only change the interest rates lever. On the other hand, the arm of the government that are controlled by politicians has the power to formulate such a tool. Very unfortunately, we have politicians who are unwilling to attack asset price bubbles (and worse still, inflate the bubble even more), due in part to control of vested interests and fear of losing elections.

The outcome is that we will have politicians (both at the State and Federal level) and the central bank engaging in policies that are uncoordinated and mutually incompatible. Unless that change, there’s a significant risk of loss of control of the economy by the government. Should this happen, the most convenient scapegoat will be Glenn Stevens as he will be accused as the man who bust up the Australian economy. But for us, we will point the finger at the Rudd government because they understood what the root cause of the GFC (see the essay written by Kevin Rudd here) but instead, not only did nothing to deal with Australia’s towering debt levels, but also introduced policies that increase the risk of a home-grown credit crisis in Australia (the most notorious is the FHOG). The State governments are not any better either.

The politicians must be put on notice.

How are central bankers going to deal with asset bubbles?

Sunday, July 12th, 2009

Prior to the Global Financial Crisis (GFC), central bankers tend to adopt the ostrich’s mentality to asset price bubbles. Alan Greenspan, the chief architect of this school of thought believes that central bankers should only target price stability and price inflation with their interest rate levers. Greenspan argued that since it is impossible to know when bubbles will burst, it is impossible to intervene at the right moment (we heard of another twist to Greenspan’s argument- one can never know whether it’s a bubble until it bursts).

What about Australia? As we reported in What should the RBA do?, the RBA, regardless of whether it believes asset price bubbles are dangerous or not, do not have the mandate to prick them,

The masses have not given the RBA the mandate to spoil the asset price inflation party. Although, Ian Macfarlane acknowledged that asset price bubbles can be very dangerous for the economy, his hands were tied. Elsewhere, Coalition opposition politicians were toeing the populist line by demanding that Glen Stevens (the current head of the RBA) be grilled more frequently in order to pressure him against hiking interest rates.

This ostrich mentality of central bankers is strongly criticised by the Bank for International Settlement (BIS). As we wrote before in Bank for International Settlements (BIS) warning on stimulus spendings, the BIS is the

… only international body that had correctly anticipated the global financial crisis (GFC) and warned of another great depression back in June 2007, when they released their 77th annual report (see Bank for International Settlements warns of another Great Depression).

The BIS is dubbed as the central banker of central banks. Its chief-economist, William White, whom we believe is from the Austrian School of economic thought, warned central bankers repeatedly of impending global financial disaster and implored them to re-think their strategy as early as 2003.

Greenspan and White stood at opposing sides. It seemed that Greenspan’s views held sway among the central bankers. He was dubbed as the “Maestro” and was celebrated as the world’s greatest central banker. No one in the world of central banking dared to openly criticised Greenspan, except for William White of the BIS. Since Greenspan was a member of the board of directors of the BIS, he was technically White’s superior. Greenspan had the upper hand until…

… until the GFC erupted and the financial world order came close to collapse in 2008. And so, Greenspan is dis-credited today. White’s theory gained ascendency. As this article reported,

The group of the 20 most important industrialized and emerging nations, which is now left with the task of cleaning up the wreckage of the crisis, apparently faces less academic problems. At the London G-20 summit in April, the group decided to promote a crisis-prevention model based on White’s theories.

They want to introduce what might be called his hoarding model, which calls for banks to build up reserves in good times so that they can be more flexible in bad times. The central banks, according to White, must actively counteract bubbles and exert stronger control over the financial industry, including hedge funds and insurance companies.

As an adviser to German Chancellor Angela Merkel’s group of experts, White helped to shape the basic tenets of the new order. And the 79th annual report of the BIS, published in Basel last week, also reads like pure White. It lists, as the causes of the crisis, extensive global imbalances, a lengthy phase of low real interest rates, distorted incentive systems and underestimated risks. In addition to improved regulation, the BIS argues that “asset prices and credit growth must be more directly integrated into monetary policy frameworks.”

What does this imply for investors?

It means that any investments and investment strategy that depends on ever rising asset prices to work will no longer work in this new global financial order. To put it bluntly, in this new financial order, the Reserve Bank of Australia (RBA) will not let property prices balloon as it did over the past 10 years. As the RBA governor Glenn Stevens said (as reported in this Bloomberg article),

 Australian central bank Governor Glenn Stevens said policy makers must be cautious about cutting interest rates too far because that may encourage some borrowers into debt they can?t afford.

?It is the intention of current monetary policy settings to lower debt-servicing costs, assist efforts to reduce leverage and support demand,? Stevens told a conference in Townsville, Australia, today. ?It would be counterproductive, though, if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates.?

This is just an example of a sea-change in thinking among central bankers.

RBA 0.75% surprise rate-cut shows authorities are late into the game

Monday, November 10th, 2008

We know this is old news, but we have a comment about the RBA’s surprise 75 basis point rate cut last Tuesday. From the head of RBA’s statement on monetary policy,

International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well. These conditions have contributed to further falls in world commodity prices.

This is the first time that the RBA mentioned the Chinese slowdown. It was not too long ago that the RBA was forecasting that Chinese demands for commodities will continue to underpin the Australian economy. Therefore, it appears that it is dawning on the RBA that the last leg supporting the Australian economy is going to be kicked away. Was the RBA taken by surprise at this development?

If this is true, it goes to show that the RBA is late into the game. The fact that the Australian dollar, commodity prices and commodity stock prices had been falling rapidly for quite a while shows that the free market is already pricing in a Chinese slowdown. Even this publication is anticipating a Chinese slowdown. In January this year, we were already questioning the de-coupling theory in Can China really ?de-couple? from a US recession? and warned that

We may be wrong, but our theory is that this may be an epic boom waiting to be a bust.

Again in July, we repeated our warning in China?s slowdown & its implication for Australia,

But with the rest of the economy slowing down, we doubt Australia?s mining sector can pull the rest of the country out of this lethargy. That is where the danger lies. With so much debt lying around, Australia?s economy cannot afford to slowdown. If it slows down too much, the economy may stall and fall into a serious recession.

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This is an example to show that in a world of freely available information, the free market in general is much better then central authorities at sniffing out information about the true state of the economy. That is why government intervention on the free market (to solve the financial crisis) is usually a bad idea. For example, as we asked before in Where is Paulson going to get $700 billion for his bail-out plan from?,

… if the free market has no idea how much these dodgy assets are worth, then how on earth can the Treasury and the Fed work out their value?

Of course, in a world where information is not freely available, then this is not true.

On hindsight, it is easy to blame the RBA for being too incompetent to see that China is heading for a major economic correction. But for us, we do not blame the RBA. If the RBA is to compete against the free market in a perception competition, our bet is for the latter to win. In the months and years ahead, Australians will be blaming the RBA for ‘causing’ the severe recession with their ‘inept’ monetary policy.

Will deflation win?

Thursday, August 21st, 2008

In just a few months ago, the talk in town was price inflation. Oil, food and commodity prices were rising, as we wrote Who is to blame for surging food and oil prices?. Today, the talk is different. US house prices have never stop falling. Gold, oil and base metals are falling. There is even talk about the end of the commodity boom, the end of the commodity “super-cycle.” Economic slowdown and recessions are the expectations of the market.

Long time readers of this publication should never be surprised to see this is happening. As we said back in March last year in Inflation or deflation first?,

If you have been with us long enough, you may have heard us mulling over both the threats of inflation and deflation on the global economy (see Spectre of deflation and Have we escaped from the dangers of inflation?). You may be wondering whether we are contradicting ourselves. How can both threats exist simultaneously? Since one is a general rising of prices and the other is the opposite, are they not mutually exclusive?

At this current phase of the financial crisis, we are experiencing deflation. It is reported that the US M3 money supply is currently “collapsing.” A falling money supply is the definition of deflation, for which the symptoms will be falling asset prices, which if prolonged enough, will lead to falling consumer prices. But before we go off to celebrate falling prices, remember that this is an evil type of deflation because it is the type that is associated with bad debts, bankruptcies, unemployment, falling income, bank runs and so on. The angelic type of deflation is caused by rising output and production, which is clearly not the case in the debt-addicted Western economies but more true for China with its government-forced savings.

When the US money supply shrinks, it increases in value relative to the other currencies as the US dollar gets repatriated back to make up for the dwindling supply of cash back in the US. That’s why we are witnessing a rally in the US dollar and a fall in commodity prices as there is a mad scramble to liquidate whatever assets to raise cash.

With the current legal powers, the US Federal Reserve is quite powerless to stop deflation (see Are we heading for a deflationary type of recession?). It can cut interest rates, but it cannot force people to borrow. Even at 2% Fed fund rate, the shrinking M3 money supply is proof that monetary policy is still tight (see What makes monetary policy ?loose? or ?tight??). Will the Fed continue to cut interest rates? It had already tried but failed a few months, which resulted in skyrocketing oil and gold prices. We doubt Ben Bernanke is going to try it again.

Meanwhile, the US Treasury is preparing open up the bottomless coffers of the US government to nationalise Freedie Mac and Fannie Mae, who are essentially insolvent. The question is, with the US budget deficit already in the red (plus the massive current account deficits), where is the money going to come from to do that? If a savings-less individual spend more than he/she earns, that individual is basically bankrupt. But for governments, it is a completely different story. They can make up for the shortfall by borrowing from the public by selling newly issued government bonds. As a last resort, it can sell the bonds to the Federal Reserve, which is called “monetising debt” or printing money.

Will it get that bad? It can if the deflation threatens to shock and awe the entire nation into a Greater Depression. By then, as we said before in A painful cleansing or pain avoidance at all cost?,

Even if Ben Bernanke is an Austrian economist, political pressure alone will do the job of forcing him to act otherwise. This is the Achilles? heel of democracy. The mob will scream at the Fed to bail them out by ?printing? money (i.e. pump liquidity into the economy in the form of cutting interest rates). Should the Fed refuse to comply, we can imagine the mob storming the Federal Reserve to demand the head of Ben Bernanke. Therefore, the Fed will have no choice but to acquiesce to the desire of the mob, whose aim is to avoid immediate pain as much as possible.

Therefore, as we advised before in Recipe for hyperinflation,

Therefore, watch what the US government is doing with the monetary ?rules? in its attempt to fight deflation.

Why is the RBA backflipping on interest rates?

Wednesday, August 20th, 2008

It was just a few months ago, the Reserve Bank of Australia (RBA) was very hawkish on interest rates. Its priority was to fight price inflation and with that, even approved of the banks raising their mortgage rates. It was said that if not for the mortgage rate rises, the RBA would have raised rates even more.

It seems that all of a sudden, the RBA began to hint strongly about cutting interest rates. What is going on? As this article,  The Great Interest Rate Forecast Back Flip, reported,

Indeed, the Macquarie analysts are actually concerned the sudden turnaround in RBA intention suggests it might know something about the economy we don’t. “Has the RBA’s business liaison program revealed some financial fragility in the economy that has not yet been unveiled?” while suggesting that “for this reason lower interest rates are unlikely to be the green light for growth investors might hope for”.

One thing many experts even fail to understand is that a fall in interest rates does not automatically mean a loosening monetary policy. As we explained before in What makes monetary policy ?loose? or ?tight??,

A common misperception is to assume that any rise in interest rates automatically implies a monetary tightening (and conversely for a fall in interest rates).

What had been happening is that the demand for credit in the Australian economy is decelerating very rapidly. That is, Australian households, individuals and businesses scaling back on their borrowings. When the demand for credit slows down tremendously, what was before a ‘loose’ monetary policy can become ‘tight’ all of a sudden.  If credit demand falls further, the RBA can still cut interest rates and still have ‘tight’ money. If you are confused by this, please read our earlier article, What makes monetary policy ?loose? or ?tight??.

The best way to explain this concept is to use Japan as an example. In the 1990s, Japan famously cut interest rates to zero. Yet, asset prices kept on falling for 16 years straight. That is an excellent example of deflation whereby credit became a dirty word. Even when interest rates was zero, Japan’s monetary policy was still ‘tight.’

For Australia, a rapidly decelerating credit growth is very bad news. Since a lot of Australian consumer spending is financed by the growth of credit, this will mean a severe slowdown in the Australian economy. Furthermore, rising asset prices is fuelled by exponential increase in credit. A rapid deceleration of credit growth will result in asset price deflation.

We can imagine the RBA worrying about the storm clouds gathering ahead- US is in recession, UK is going to fall into recession, Europe is stumbling into recession, Japan is feared to fall into recession, falling commodity prices, China is slowing down, etc. If the rest of the world economy is slowing down significantly, there is no way Australia can escape.

What cause booms and busts? Introduction to the Austrian Business Cycle Theory

Tuesday, February 6th, 2007

What causes the business cycle of booms and busts? According to popular belief, the business cycle is due to the collective mood of the consumers, which drives investments and spending. That is why Wall Street is so fixated on the readings of consumer confidence. Central banks, on the other hand, hope that by adjusting a lever called the ?interest rates?, fluctuations of the economic cycle can be smoothed through the resulting influence on investments and spending. Hence, it may seem that the Fed?s policy of ultra-loose monetary policy (of exceptionally low interest rates) several years ago not only prevented a recession, but created further economic growth.

But according to the Austrian School of thought, the control of interest rates is the very action that creates the business cycle. Thus, the Fed did not avert a recession several years ago. Instead, they merely defer it. Worse still, the extent of the coming recession is proportional to the excess of the prior artificially induced boom. By deferring a necessary recession and engineering a synthetic economic boom, the Fed is setting the stage of an even more severe recession down the track.

Before we introduce the Austrian Business Cycle Theory, let us ask a thought-provoking question: If we generally let market forces set the price of things (e.g. stocks, consumer goods, bonds, real estates, etc), then why is it that the price of money (interest rates) should not be chosen by the market? Does the central bank know better than the market to set the ?right? price of money?

Now, here comes the introduction to the Austrian Business Cycle Theory to explain the phenomena of booms and busts. For this, we will use a metaphor from this book, Economics for Real People:

Imagine that you are a bus driver, at the edge of a desert, about to take a busload of passengers across it. You have left all gas stations behind. Your destination is a town on the other side of the wasteland before you. You are faced with a trade-off: the faster you try to reach the town, the less the passengers can use the air-conditioning to alleviate the desert heat. Both higher speeds and higher air-conditioning settings will use up the gas more quickly. And since, in our luxurious bus, each passenger has his own temperature control for his seat, you, the driver, cannot control the total amount of air conditioning used on the trip.

In order to make your decision, you look at your fuel gauge and determine how much gas you have. You tell the passengers that they must now make a trade-off between comfort on the way and speed travelled, as the more air-conditioning they choose to use; the faster the bus will consume fuel. Then you collect statements from the passengers on what temperature they will keep their seat. You perform some calculations on mileage, speed, and fuel consumption, and pick the fastest speed at which you can travel, given the amount of gas you have and the passengers? statements about their use of the air-conditioning.

The passengers had to decide whether to cross the desert in greater comfort but arrive later at their final destination, or in less comfort but with an earlier arrival. The science of economics has little to say about the combination that they picked, other than that it seemed preferable to them at that moment of choice.

However, also imagine that, before you began your calculations, someone had sneaked up to the bus and replaced the passengers? real choices with a fake set that chose a higher temperature, in other words, one that makes it seem they will use less fuel than they really will. You will make your choice on travel speed as if the passengers will tolerate an average temperature of, say, 80 degrees, whereas in reality they will demand to have the bus cooled to an average of 70 degrees. Obviously, your calculations will prove to be incorrect, and the trip will not come out as you had planned. The trip will begin with you driving as if you have more resources available than you really do. It will end with you phoning for help, when the sputtering of your engine reveals the deception.

Stay tuned for the explanation of this metaphor!

The Bubble Economy

Monday, October 30th, 2006

 

Introduction

Over the course of the past several years, the ?wealth? of many people in the Western English-speaking countries (mainly the US, Australia and Britain) had increased, thanks to the real estate price boom. Consequently, the economies of those countries had been growing and expanding over that period. This type of economic growth is what the IMF called the ?asset-driven growth.? One manifestation of this kind of growth is the rise of ?wealth-creation? fades, which advocate the attainment of riches through property ?investments.?

As contrarians, we see that such growth should be more appropriately called ?bubble-driven growth.? For the economists trained in the Austrian School of economic thought, such kind of growth is unsustainable. Furthermore, they believe that the severity of the following eventual bursting of the bubble is related to the preceding inflation of the bubble.

It is good if we could learn from our own mistake. We would be wiser if we learn from the mistake of others. But if we repeat the same mistake of others, we are indeed fools. It is amazing to see that the US, Australia and Britain (for convenience?s sake, let?s call those countries the ?UBA countries? from now on) are not only not learning from the mistake of Japan, but even worse, following the same path. The collapse of the Japanese property bubble in the 1990s led to a downward recessional spiral of the Japanese economy for more than a decade. Property prices have been falling (at least not rising) for 16 years since. At least the Japanese have their savings to count on. But what about those UBA countries, whose savings rates are below zero (that is, they are already deep in debt)? What will happen when the property bubble burst in these countries?

Illusions of ?wealth?

Sydney?s housing property market was the epitome of the great amount of ?wealth? generated by the housing boom in the UBA countries. It started in the mid-1990s, accelerated after the 2000 Olympics and reached its apex in 2003 when house prices were rising at staggering rate of more than 20 per cent a year!

Yes, you heard it right. More than 20 per cent a year!

Where can you find other financial investments that can pay more than 20 per cent return except for the ones that are highly risky in nature? The belief that housing property investment was the way to great wealth was highly delusional. Surprisingly, the mob believed that. At that time (in 2003) there were proliferations of seminars that taught attendees how to be rich through property investments. A cursory glance at the investment sections of bookshops yields titles upon titles of wealth attainment through real estates.

In reality, such ?wealth? was and always is an illusion.

First, let?s see the ludicrousness of the idea that a nation?s general rise in asset value equals a rise in wealth. In a nation?s stock of real estate, only a tiny fraction of it got sold and changed hands in any given year. Those sale prices were imputed into the values of the vast majority of the other properties that never got traded in the market. Therefore, in a rising market, the vast majority of un-traded properties have rising imputed values, which is commonly described as ?rising asset values.?

Theoretically, an economy with only (a very important qualifier) rising asset prices does not produce a single extra widget. That is, there is no real growth. Rising asset prices are illusionary in nature because they are basically imputed values, which are rising fast during the bubble period of exceptionally low interest rates. Meanwhile, the real economy is theoretically no better than before, regardless of the movements of asset prices.

In the case of what is happening in those UBA countries, rising property values merely created higher valued collaterals for which money can be borrowed. With the introduction of equity redraw facilities, borrowers could even extract the ?values? in their properties as cash. As long as property prices kept rising, borrowers needed not worry about repaying back the loans – the increase in the ?value? of their property would take care of that. Meanwhile, some ?investors? (more accurately, speculators) used a sophisticated sounding financial strategy called ?negative gearing? to bet on continuing rise in house prices. Thus, with the economy awash with plenty of borrowed money, there was little wonder why people felt rich! With such feelings of wealth, people tended to spend more. This effect is what the economists call the ?wealth effect.?

Today, with the benefit of hindsight, we could see what a great spectacle it was!

Source of the ?wealth?

Now, the question is: where is the source of all these ?wealth??

For the answer to this question, we will take the case of Australia for example. Over the past 5 years, Australia?s money supply (M3) grew (that is, printing of money) by 10.1% per annum, which is much faster than the rate of economic growth. In other words, the growth of the amount of money circulating in the economy exceeded the growth in the production of goods and services. The natural consequence of this is inflation as there are now more money chasing fewer goods and services.

But in Australia?s case, the inflation remained within the Reserve Bank?s target of 2-3%. Where did all those excess money go? Part of the answer to this question, as you would have guessed by now, lies in the inflation of asset (house) prices. The well-known ?inflation? that everyone talks about in the media is the consumer price inflation, which can be seen statistically by the rise in the Consumer Price Index (CPI) and experienced by everyone from the general increase of price levels in everyday life. Unfortunately, the CPI figures do not capture the price behaviour of assets (property, stocks, bonds, etc.). In Australia?s case, the housing boom was contributed by such excess money printing.

Furthermore, another force was at work in curbing Australia?s consumer price inflation – the rise of Chinese manufacturing. In recent years, Chinese productivity had soared, which means overall, the Chinese economy was producing more and more goods at lower and lower costs. In China itself, that had a good deflationary effect – the fall in the consumer price levels. As China exported more and more of its cheaper goods to Australia, the effect on Australia was disinflation (decelerating growth in consumer price inflation). That helped keep a lid on the Australian consumer price inflation.

This phenomenon is an example of what were happening in the UBA countries. It began in the US in 2001 when it suffered the mildest ever recession after the crash in technology stocks. In order to prop up the economy, the US central bank – the Federal Reserve (commonly called the ?Fed?) – embarked on a massive expansionary monetary policy. That is, the Fed printed huge amount of money, which also increased the amount of credit granted (the flip side of granted credit is owed debt) in the economy. When central banks print money, they cannot control how the excess money is being used. In the case of the UBA countries, the excess money and credit fed the housing bubble.

In the US, interest rates consequently had to fall significantly to accommodate the monetary inflation (printing of money). With that, other countries had to follow suit by lowering their interest rates (to prevent their currencies from appreciating too much against the US dollar), resulting in a worldwide trend towards lower interest rates and monetary inflation.

Effects of the rising ‘wealth’

What was the effect of rising house asset prices, which were caused by the increase in money supply and credit in the economy?

When house asset prices rose, house owners felt wealthier. When they felt wealthier, they increased their spending. This is what the economist called the ?wealth effect.? Increased consumer spending in the economy resulted in businesses expanding their production due to their perception of increased demand by the consumers. Ideally, expanding production should in turn lead to increase in hiring and business investments, which in turn increase employment and productive capacity of the economy respectively. That should result in economic growth.

But unfortunately, the reality in the US was not as good as the ideal. The increase in consumer demand resulted in the increase in import of foreign goods. That showed up in the widening current account deficit, which simply meant that the US was spending more than it produced. The implication for this was that the increase in production in the US economy was not keeping up with the increase in consumer demand, which was fuelled by the boom in house asset prices, which in turn was fuelled by the inflation of money supply and credit in the economy.

Meanwhile, the amount of debt owed (its flip side is credit granted) in the US economy ballooned as the rising house asset prices increased the collateral for which money could be borrowed for consumer spending.

Indeed, this was how the UBA countries? economy grew. The IMF called this ?asset-driven growth.? The question is, how sustainable is this kind of growth?

Sustainability of such growth

Is such kind of economic growth sustainable in the long run?

Before we decide on the answer for this question, let us ponder upon this quote:

The deficit country is absorbing more, taking consumption and investment together, than its own production; in this sense, its economy is drawing on savings made for it abroad. In return, it has a permanent obligation to pay interest or profits to the lender. Whether this is a good bargain or not depends on the nature of the use to which the funds are put. If they merely permit an excess of consumption over production, the economy is on the road to ruin. – Joan Robinson, Collected Economic Papers, Vol. IV, 1973

In the case of the US, the side effects of the economic growth manifested itself in the form of ballooning household debt and widening current account deficit. Put it simply, the US, as a nation, was borrowing money not to invest in the betterment of its future, but to consume to the detriment of its future. Since 2001, the economic growth was accompanied ?with unprecedented large and lasting shortfalls in employment, income growth and business fixed investment? (Restructuring the U.S. Economy – Downward). Indeed, such kind of profligacy is the beginning of the transference of wealth from the spend-thrift nations to the prudent nations (see Transference of wealth from West to East).

These are some of the serious questions we would like to ask:

  1. As the US spends its way into economic ruin, its economy is being damaged structurally. How much longer can the US sustain its colossal debt?
  2. Right now, the US housing bubble is deflating. Will it eventually burst and wreck havoc on the rest of the economy?