If Liz were Queen

According to Dean Baker, the same crew of failed analysts who could not see the $8tn housing bubble now argue that we need the Chinese government to keep buying its debt or interest rate in the US will rise chocking off the recovery.

Many of the too big to fail banks such as Citigroup and others are the ones who would be hurt–not the US economy.

It it true that the Chinese central bank purchases keep interest rates low  BUT it also keeps down the value of the Chinese currency against the dollar (currency manipulation).  The Chinese are not stupid.  The dollar would fall in value against China’s currency.  This would make Chinese goods more expensive in the US and US consumers would purchases fewer imports from China and more domestically produced good.

A lower-valued dollar would make our exports cheaper in China and thus allow us to export more to China. (This is the only part where I have a problem with Baker’s theories.  Do we still have enough to export after the glut of our manufacturing economy by the Clinton’s push for globalization in the 1990’s?)

Theoretically, the  net effect would be an improvement in the trade balance.

Dean Baker believes that our economy would be better off even if this happened tomorrow.  Even the rise in interest rates would have a positive effect because it would allow for house prices to return to normal and enable us to get on a path of sustainable growth.  As for a rise in interest rates, that should not make that much difference to most Americans since the greedy banks are not loaning money anyway in spite of the billions of dollars worth of handouts.

BUT the story would be different for pigs like Citigroup.  If interest rates rose the value of government bonds that they hold would plummet.  If the interest rate on a 10 year Treasury bond goes from a current 3.5% even to 4.5% (which is still low) banks will have lost 8% on their holding.  If it went to a 5.5% interest rate (still far below the rate of the 1990s) the loss would be 15% and banks on the edge like Citigroup would fold.

SOURCE

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QUEEN’S ADDENDUM

One thing is for damn certain:  Americans need to work to get our economy back in balance. We need to have more goods to export.  We need to bring back manufacturing and with it a healthy balance to our economy.

Globalization, by creating huge trade deficits and job losses, made the US economy more vulnerable to exactly the recession/depression we are facing.  What Washington preached for the past 20 years and especially what Wall Street Bankers told us was a lie in terms of it being to the benefit of the majority.

Over the past 20 years we have shipped several million manufacturing jobs overseas and while this may have been “great” for the Wall Street Bankers and the upper 5% of the USA, it has been a disaster for most of the American people.

In my opinion, the ONLY way that we are going to get our economy back in balance is to revive our production of actual goods (make our economy real once again) and to stop shipping our money off to Wall Street.  We do this by investing in the stock market and by patronizing Wall Street financial groups like Bank of American, Citigroup, JP Morgan Chase, etc.  We need to work to establish a state-owned bank in our own states.

Look to North Dakota, the only state in the union with a state -owned bank as an example.  Their economy is more stable than any other state in the union.