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The politicial consequences (if any) of the United States’ dependence on Chinese financing

by Brad Setser
September 20, 2007

I am participating in the Mellon Sawyer seminar on “debt, sovereignty and power” at Cambridge University today and tomorrow.   Expect light blogging.

My own intervention will focus on a topic close to my heart – “Can the world's biggest borrower also be the world’s greatest power?”   The question can perhaps be framed a bit differently:  does the maintaining the “balance of financial terror” require that the US accept some constraints on its own policy choices, or can the US count on the world’s central banks for financing no matter what policies it adopts?

I suspect opinion here divides on the question of whether or not the United States’ current dependence on Chinese financing – and specifically Chinese government financing, since private Chinese savers currently prefer RMB to dollars –  is a good thing, or a source of concern.

One point though shouldn't really be open to all that much question: US dependence on official Chinese flows has now reached a rather impressive level.  If current trends continue – the US current account deficit is around $200b a quarter in the second half of 2007, Chinese reserve growth is around $125b a quarter and Chinese keeps around 70% of its reserves in dollars – China could end up providing close to ½ of the net financing the US needs to sustain its current account deficit in 2007.    

china_financing_of_us_small

China provides a smaller share of gross inflows than net inflows.  But unless you think Chinese inflows have induced a large share of the outflows – the net is what matters.  Without a big net inflow from China, the US economy would look very different.   The current account deficit would be smaller.   Some of key financial variables – little things like benchmark interest rates – might be different.   And the composition of US output would likely be a bit different as well.

US economic and financial stability may now depend as much on continued financing from the Chinese government as on the continued flow of Saudi oil. 

On the other hand, it isn't clear that stability should be the goal for either US or Chinese policy — not if stability means the continuation of the current trajectory, one where the share of the US deficit financed by China is rising steadily, and the intensification of the balance of financial terror.  

72 Comments

  • Posted by Guest

    ” But unless you think Chinese inflows have induced a large share of the outflows – the net is what matters. ”

    How do you tell which inflows have induced outflows? If not China, who? Is it really possible to do this? Isn’t the attribution of net inflows as a subset of gross inflows somewhat arbitrary? So isn’t the point moot? Or is that the point? If so, why does the ‘China net’ matter more than the ‘non-China net’?

  • Posted by bsetser

    Why does the Chinese portion of the net matter more than the rest? B/c China’s portion reflects the policy choice of a single integrated entity (or portfolio), and the rest — the net from all other private inflows and outflows, and all other official inflows and outflows — reflects the decisions of a far wider range of actors.

    if china changed its policy, it would consequently have a bigger impact than a policy change by a smaller player.

    And i do think the net matters more than the gross — the gross includes a lot of short-term interbank stuff than almost always nets out (b/c it is not intended to create real underlying economic exposure). unless you think private outflows from the US will stop, a portion of private inflows will be needed to finance those outflows. Though the attribution of official inflows to the financing of the CAD rather than a portion of the long-term outflows is a bit arbitrary.

  • Posted by AC

    Why does China prefer the Agencies instead of Treasuries? Is there any potential problem with the Agencies (can Fannie and Freddy go bankrupt)?

  • Posted by Guest

    Here’s another perspective of Chinese lending as “vendor financing”:

    Calculate the ratio of net annual Chinese lending to the US, to the change in US nominal GDP. Doing the math quickly, for 2Q207 the ratio, expressed as a percentage, is 157% ($350 billion lending/222.8 SAAR change in GDP).

    In other words, for every $1 of GDP growth in the US, China lends us $1.57

    Many conclusions may be drawn from this dependence.

  • Posted by bsetser

    Why Agencies?

    Yield pickup.

    Spread Chinese purchases around a bit — so China isn’t just holding a large share of a small number of bonds (Chinese reserve growth is large v. net treasury issuance).

    Risks — well, in theory Agencies aren’t quite as good as Treasuries. But if the UK guarantees all bank deposits in a crisis, tis reasonable to think the US won’t let the agencies fail. plus, letting agencies fail now = direct affront to both China and Russia … so it has external consequences.

  • Posted by Bernardo Aito

    “B/c China’s portion reflects the policy choice of a single integrated entity (or portfolio), and the rest — the net from all other private inflows and outflows, and all other official inflows and outflows — reflects the decisions of a far wider range of actors.

    if china changed its policy, it would consequently have a bigger impact than a policy change by a smaller player.”

    quite peculiar: I was talking with a friend of mine about this issue yesterday. The point in discussion was: ‘Will china sell Dollars?’. I recall you saying thet it wont. Well…

    I think China is being scared of world non-Chinese investors. After all, if I’m not wrong, China accoutns for a third of annual US CA financing (200-odds vs. total of 800). It is a big stake, not the biggest though.

    World investors may be expecting a future dollar devaluation prompted by causes that go beyond the Chinese responsibility (and hence the financial terror argument). “True, – they may argue – China would have a good deal of responsability in the occasion of a possible Dollar sell-out. But there are some other players in the field.” These players are represented by the bulk of world investors that are spread all over the planet. If those people will eventually experience, say, a Wile e. coyote effect, the sellout will occurr — no wonder about it.

    I think China knows this. And should a global sell out occurr, China will wish to have been the first to sell. This is why I think China is being attentive, and not at all resting on the ‘financial terror’ argument. This is also why I think that, should sell out occur, China eventually will be the first to sell.

    Bottom line: the balance of ‘financial terror’ may be involving China vs. non-Chinese $ investors (rather than China vs US). The US role in this may be that of reassuring everybody that the Dollar will be fine (which it is not achieveing meanwhile).

  • Posted by a

    “But if the UK guarantees all bank deposits in a crisis, tis reasonable to think the US won’t let the agencies fail. plus, letting agencies fail now = direct affront to both China and Russia … so it has external consequences.”

    Affront China and Russia?! Who has the biggest military?

    Won’t let the agencies fail? On the contrary, based on legislation making its way through the Congress, it looks more likely that the U.S. is going to use the Fannies as the “buyer of last resort” for American real estate, increasing their risk profile (on very slim equity bases) and making it more likely that they default. Maybe Congress will step in and save the bondholders, but somebody is going to point out that: (1) those bondholders were getting paid extra interest precisely because they were supposed to bear the risk of default; and (2) a lot of those bondholders are foreigners, and there’s no reason for American taxpayers to bail out foreigners.

  • Posted by Charlie

    China has painted itself in a corner. I don’t think the Europeans and oil exporters will be as anxious to finance us going forward after we sold them a bunch of AAA rated junk bonds denominated in a falling currency.

    This is going to make China’s dollar peg even more expensive to maintain. If they let the dollar fall, their exports go down and the value of their holdings goes down. If they continue to prop the dollar, they get the same result. Delayed, but worse in the long run.

    If I were running China, I would start to expedite the loosening of the dollar peg and try to sell off USD debt to a bigger fool as stealthily as possible. The problem is, it looks like China will have a tough time finding a bigger fool. I guess they’ll just have to eat large losses sooner or later. I think it would be in their best interests to accept that they’re going to take huge losses and will no longer finance the mother of all debtor nations.

  • Posted by Guest

    ” Though the attribution of official inflows to the financing of the CAD rather than a portion of the long-term outflows is a bit arbitrary. ”

    Sort of goes to part of my point – I think the attribution of ‘what funds what’ in gross and net flows is tricky- maybe not completely futile, but there’s potential for some cherry picking in the interpretation.

    It depends on aggregation in units of country, product, and term structure – e.g. at the country level, if a bilateral CA imbalance was exactly offset by a bilateral capital flow, it would be easy to correlate to an inference. But things are quite commingled in reality, in all dimensions.

    But your view of the importance of the ‘China net’ versus all else certainly makes sense, given the concentration of China’s position; as well as the offsetting of gross bank flows, if they are predictably offsetting.

    Thanks.

  • Posted by Guest

    It is interesting that ‘vendor financing’ versus financing the excess of investment over saving (i.e. in the buyers country) are quite different perspectives on the same international flow.

    Seemingly malignant and benign intepretations for the same thing.

    How so?

  • Posted by Guest

    re: Affront China and Russia?! Who has the biggest military?

    and the largest asset base/ economy. what if u.s. investors simply repatriated their assets – if only for a while

  • Posted by Dave Chiang

    Off Topic: Saudi Arabia preparing to break US dollar peg

    Fears of dollar collapse as Saudis take fright
    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml

    Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

    “This is a very dangerous situation for the dollar,” said Hans Redeker, currency chief at BNP Paribas.

    “Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States,” he said.

    The Saudi central bank said today that it would take “appropriate measures” to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

    As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy. Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.

  • Posted by a

    Well Dave, maybe the Saudis are going to beat the Chinese to the punch and be first to dump the U.S. dollar. So who is the greater fool?

  • Posted by Dave Chiang

    Well I think the Chinese will sooner or later have to write off a major portion of their holdings of US Treasury bonds as worthless in monetary purchasing power. The losses from the 70% estimated holdings of US Dollars is partially offset by gains in the 30% estimated holdings of Euros. But the inflationary printing press policies of the Bernanke Federal Reserve are not without cost to the American economy. Over the past decade, the trillions of dollars in McMansions, Hummer SUVs, and Flat Screen Hi-def televisions purchased on credit are non-productive assets that don’t produce any return on investment. The rest of the world doesn’t have to put up with this nonsense of the US trading worthless paper for tangible products of “real” economic wealth. Already inter-regional trade across Asia surpasses exports to the United States. Europe is now China’s #1 trading partner. And 40% of Middle East trade is with the East Asian region surpassing the 10% of Middle East trade with the United States. The rest of the world has already decoupled from the US consumer, but no one in the Washington Consensus has noticed.

  • Posted by a

    “Europe is now China’s #1 trading partner.”

    Watch what happens to Europe when the U.S. tanks. If you think the Americans have thrown a party because of a bubbly real-estate market, then you should take a look at the Spanish and the British.

  • Posted by Guest

    “…with the dollar tumbling, Russia will be in a good position to pursue its objective of tightening the economy and reducing inflation… Ruble appreciation is not threatening to slow or halt the growth of industrial output… the Federal Reserve’s cut [has] pushed up demand for ruble-designated assets and created high demand for rubles… the Central Bank was unlikely to allow a dollar freefall after President Vladimir Putin last week told members of the Valdai Discussion Club, a group of Russian and foreign academics and journalists, that the tight inflation target for 2007 could be loosened… “Nothing unexpected has happened,”…” http://www.themoscowtimes.com/stories/2007/09/20/041.html

  • Posted by Guest

    re: “the Spanish and the British” – and the chinese…

  • Posted by Guest

    “Carlyle Group… will sell a 7.5% stake to the government of Abu Dhabi for $1.35 billion… Mubadala will buy the non-voting stake at a 10 percent discount… Carlyle’s outstanding returns, broad portfolio and global presence are a tremendous fit,” Mubadala Chief Executive Officer Khaldoon Al Mubarak said…” http://www.bloomberg.com/apps/news?pid=20601087&sid=amPTX9HhjPyQ&refer=home

  • Posted by Guest

    “…Mr Sarkozy himself has complained that the euro is overvalued against other currencies like the US dollar and Chinese yuan…” http://www.independent.ie/business/european/euro-leaders-call-for-greater-transparency-in-the-markets-1075732.html

  • Posted by Twofish

    Chinese and Saudi financing of the US savings deficits certainly constrain US policy choices, but I don’t think this is a bad thing. One big example, Taiwan is trying to get into the UN, but the US is giving it a cold shoulder. Another example, US defense priorities are likely to be focused on more ground troops and fewer naval troops, because that is what the Saudis and the Chinese want.

    The fact that the US is under such sort of constraints may be appalling for an “America first nationalist” but one really has to wonder if the world would be better off with a US that is constrained than if you have a power (any power) that is completely unconstrained.

    The economic and financial constraints that limit US policy choices also limit Saudi and Chinese policy choices too. The US can’t recognize Taiwan without massive consequences, but Beijing can’t invade Taiwan without even more dire consequences. The US has to support the House of Saud, but the House of Saud has to bind itself to US interests and crack down against al-Qaeda activities.

    All and all, I can’t say that this is a bad situation that everyone has to be nice to each other……

  • Posted by Twofish

    DC: Over the past decade, the trillions of dollars in McMansions, Hummer SUVs, and Flat Screen Hi-def televisions purchased on credit are non-productive assets that don’t produce any return on investment.

    I do wonder if the assets are as non-productive as DC seems to think they are. In my case, I took out a massive home equity loan in order to fund travel to various financial conferences, and this has certainly had a net positive economic effect.

    In the case of McMansions, what you see on the construction sites are lots of people from less developed countries which are receiving a steady income and sending the money back home. For high definition televisions and Hummers, you end up stimulating a huge amount of research and development. Trying to build my own hi-def system keeps my programming skills sharp, and that adds value to the economy since I can apply those skills to other things.

    So it’s really not clear that all these home equity loans won’t have a positive return. In my own case, what I spent my home equity loan on gave me a much better job and had a massively net positive contribution to the economy…….

  • Posted by Dave Chiang

    Twofish,

    Oh please, a McMansions, Hummer SUVs, and Flat Screen Hi-def televisions are productive investments for the overall US economy? At least in New Jersey, building McMansions with illegal Mexican immigrants doesn’t require any technological expertise. Gas guzzler SUV Hummers are nothing more than glorified low-tech pickup trucks. Flat screen televisions are exclusively engineered and manufactured in Japan and Korea. Consumer electronics has been long abandoned by US industry to foreign corporations that aren’t held hostage to the short term balance sheet. Believe it or not, the Toyota Corporation, still largely managed by the Toyota family, now the world’s #1 car manufacturer beating General Motors, actually has a 50 year development plan on paper. American Neo-liberal Economists will never understand.

  • Posted by EthanJ

    Dr. Setser,

    the dollar’s decline this year just about offsets the CA deficit, right? So where’s the political problem with taking the money China puts on the table?

  • Posted by London Banker

    The idea presented by some here that the US could default or even permit the radical devaluation of Treasury and Agency debts to push losses onto foreign creditors is disingenuous. It is, after all, entirely possible and plausible that China, Russia and Saudi could retaliate in subtle ways to even up the scales.

    Russia has already demonstrated that it is willing to use the power of the state to effectively seize valuable assets from foreign companies at will. First it alleges regulatory or taxation deficiencies, then asserts criminal violations by executives, then seizes the assets and sells them to cronies of the elite or to state owned companies. In some cases it graciously allows foreign companies to negotiate the disposal with the threat of more aggressive state action hanging over the table.

    The vast productive assets of US companies in China would be very tempting targets for making good any deficiencies in US performance on its debt to China. China-based factories underpin a huge amount of earning capacity for American listed companies. Should the US try to weasel out of payment on debt, it wouldn’t surprise me at all to see American companies start to lose factories and contracts overseas as China evens up the score.

    Saudi has a choice of where it sells its oil. The oil hungry East already takes 80 percent of exports, but Saudi shares the production contracts with its buddies in Texas. Should the US devalue the dollar assets Saudi holds, it might decide not to share so generously – or to boot the Texans out altogether.

    America is frequently seen as being so short termist it can’t project reactions to its conduct. Comments here that the US could get away with devaluation or defaults reinforce that perception. There would be consequences for Americans that would be costly and enduring. Actions beget reactions.

  • Posted by Guest

    “…In 1980, China’s productivity per worker equalled 10% of U.S. productivity. By 2006, the country had increased per-worker productivity to only 20%. Taiwan’s relative productivity also doubled in these years – from 35% of the U.S. level to 70%. In another doubling, South Korea reached 58%, up from 28% in 1980. Yet each of these countries still lagged behind the United States by wide margins…” http://www.globeinvestor.com/servlet/story/GAM.20070914.RREYNOLDS14/GIStory/

  • Posted by techy2468

    Dave i am surprised by your naivity (if there is such a word)….

    china and usa are in this together….atleast for now….infact china is going to suffer more if usa goes into recession and dollar drops more.

    reason: i beleive china is directly or indirectly dependent on usa exports to about 50%…and a decline in that will lead to massive unemployment….and a unrest among the masses.

    china will simply have to take the losses in its dollar reserves….because it cannot sell them…….never….since that will kill its export industry by depreciating the dollar to more than 40% from current levels.

    but i dont think that is going to happen….dollar is not going to keep falling….every country in the world will end up being a loser….since they own dollar denominated assets and USA is a net debtor (hence it will be gain for usa if dollar goes down)

    right now its just a panic selling….pretty soon all the central bankers of the world will put a stop (peg) and things will be business as usual (but it will be nice if usd depreciated another 5-6% to make usa exports more competitive and encourage local manufacturing.)

    Dave remember this….you may keep swearing at american consumers….but they are the one who have provided the world with their current prosperity….if they stop consuming….everyone will go back to living on farms…

  • Posted by Benard

    All the reporting by the Wall Street investment banks this week has been an unmitigated fraud.

    They still refuse to disclose the MARK-TO-MARKET value of their holdings in mortgage-backed securities, collateralized debt obligations and credit default swaps.

    And the people in the stock market just applauded (“good show!”). There is still no transparency. It is a joke. It makes me nauseous.

    They throw all kinds of numbers at you about the income statement (revenue, expenses, etc.) What about the balance sheet???!!!

    They are collectively sitting on maybe $4 trillion in assets with a capital base of $100 billion supporting it (25 times leverage). It only takes losses of $100 billion on their assets (4% OF THE TOTAL) to wipe them out.

  • Posted by Dave Chiang

    Techy, China is not directly or indirectly dependent on usa exports to about 50%. What you stated might have been true a decade ago, but it isn’t the case today. Europe has replaced the US as China’s largest export market. I don’t believe that very many Chinese products are re-exported or trans-shipped from Europe to the United States. The US market is a smaller percetage of Chinese trade today; I believe it is under 20 percent from almost 50 percent a decade ago.

  • Posted by a

    London Banker: This is why I dislike people insisting that the U.S. Government has some kind of responsability to bail out an Agency default. Because they say it, it is believed. Because it is believed, China and Russia might conceivably complain of being ill-treated should the U.S. government not ride to the rescue. But the U.S. government has made it clear that it is not backing the Agencies. So, sure, China and Russia could complain if the U.S. government doesn’t help them out in an Agency default, and sure they could retaliate. But they have no moral or legal claim to do so.

  • Posted by Guest

    or conceivable benefit

  • Posted by Guest

    by the way, how are u.k.-russian relations these days?

  • Posted by Guest

    and saudi-u.k. relations

  • Posted by Twofish

    DC: At least in New Jersey, building McMansions with illegal Mexican immigrants doesn’t require any technological expertise.

    The Mexican immigrants I know then take the money and invest in starting up side businesses.

    DC: Flat screen televisions are exclusively engineered and manufactured in Japan and Korea.

    But the chip and circuit design is still largely done in the United States.

    DC: Consumer electronics has been long abandoned by US industry to foreign corporations that aren’t held hostage to the short term balance sheet.

    All of the assembly has moved overseas, but US-headquartered firms still do the basic chip design. Also the various HQ operations (financial, legal, marketing) still end up being done in the United States.

    All told, the idea of the wasteful, free-spending, proflagiate American that is going to get what he deserves is one that has been around for a long time.

    Maybe the US hasn’t crashed and won’t crash because the US economy is basically sound…..

  • Posted by Twofish

    a: So, sure, China and Russia could complain if the U.S. government doesn’t help them out in an Agency default, and sure they could retaliate. But they have no moral or legal claim to do so.

    If you lend someone money, and then don’t pay it back, then you generally have a moral claim to get angry. In any case, you aren’t going to be interested in loaning them money again……

  • Posted by psh

    Everything will be fine. Taiwan for a 28% currency-debasement haircut, even Steven. And we’ll throw in the Spratlys

  • Posted by Twofish

    Bernard: They still refuse to disclose the MARK-TO-MARKET value of their holdings in mortgage-backed securities, collateralized debt obligations and credit default swaps.

    Yes they do….

    Bernard: They are collectively sitting on maybe $4 trillion in assets with a capital base of $100 billion supporting it (25 times leverage). It only takes losses of $100 billion on their assets (4% OF THE TOTAL) to wipe them out.

    Your numbers are off. There are about a dozen or so trillion dollar banks in the world. A typical trillion dollar bank has a net equity value of about $100 billion. Which is still pretty leveraged. However, there are lots of procedures in place to control risk, and most of them boil down to common sense things. (i.e. don’t think you can predict the future since you can’t, don’t throw good money after bad, don’t gamble with money you can’t afford to lose, don’t invest in something you don’t understand …).

    One of them is that if you start losing money, stop what you were doing and take the loss, which is why all of those bankruptcies you see in mortgage companies and hedge funds aren’t necessarily a bad thing.

  • Posted by Twofish

    I don’t think that a recession in the US will seriously hurt China. Right now the Chinese economy is a little on the warm side, and cooling it down is not a bad thing.

    Also, stopping unemployment isn’t all that difficult, you just put on massive public works programs.

  • Posted by Dave Chiang

    Twofish: The Mexican immigrants I know then take the money and invest in starting up side businesses.

    DC: The United States is a high labor cost nation that can never compete with China on the basis of cheap labor. The substitution of cheap, illegal labor for high intensity capital investment is the exact opposite policy of every other developed nation.

    Twofish: But the chip and circuit design is still largely done in the United States.

    DC: No it’s not. The Japanese and Korean manufacturers of HDTVs are vertically integrated corporations with their own chip fab operations. Panasonic, Samsung, Sony, Mitsubishi, Sharp develop most critical components in-house including chipsets, LCD screens, surface mount components, etc.

    Twofish: All of the assembly has moved overseas, but US-headquartered firms still do the basic chip design. Also the various HQ operations (financial, legal, marketing) still end up being done in the United States.

    DC: US headquartered companies including Hewlett Packard and Dell are becoming merely marketing and distribution operations that not only outsource the production but even the development of products. For instance, the laser engines at the heart of every HP printer is manufactured by Japan’s Canon corporation.

    Twofish: Maybe the US hasn’t crashed and won’t crash because the US economy is basically sound…..

    DC: Maybe the US economy is structurally crashing, but the effects are being papered over by the blizzard of cheap money from the Federal Reserve. Nominal stock prices are rising only because the US dollar is drastically being devalued. With the US dollar crashing throgh the 1.40 Euro level, Gold soaring to $740 per ounce today, long bond rate actually rising, perhaps foreign investors have awoken to the monetary fraud committed.

  • Posted by Dave Chiang

    It is open secret that the IMF is de facto controlled by the US Treasury department, so it should be no surprise at the hostility by the IMF against the Chinese business deals in Africa. – DC

    World Bank and IMF Alarm over China’s Africa deals for Natural Resources
    http://www.ft.com/cms/s/0/d66142e4-66d9-11dc-a218-0000779fd2ac,dwp_uuid=9c33700c-4c86-11da-89df-0000779e2340.html

    The International Monetary Fund was scrambling on Wednesday for clarification of a planned deal between China and the Democratic Republic of Congo.

    The deal would tie up mineral resources in exchange for $5bn (€3.6bn, £2.5bn) in infrastructure projects and loans. A preliminary agreement was signed this week just as an IMF mission landed in Kinshasa to review progress towards the resumption of budget support for Congo.

    IMF, World Bank and African Development Bank officials seem to have been caught offguard by the scale and timing of China’s plans.

    Western mining groups, such as Anglo American and Rio Tinto, were spending increasing amounts of time and money weighing opportunities in Congo. But China’s move might mean they had left it too late to secure the best assets.

  • Posted by John

    This is game theory: who will blink first the U.S. or China?

    If the U.S. economy goes into the ditch, China will go with it. Its export led economy cannot nimbly survive without the U.S. trade deficit. China is an enabaler to U.S. credit dependency. The U.S. economy is very imbalanced because of excessive wealth and income concentration, and demise of its middle class which has endured over the past ten years only through widening credit.

    Perhaps it’s time for a new Bretton Woods world monetary arrangement that followed WWII along with agreed macro-economic policies among the world’s powers. China and the U.S. would have to first reform its domestic economies.

    More likely, none of the major powers recognize the dangers that persistent economic crisis and imbalances bring.

  • Posted by a

    “If you lend someone money, and then don’t pay it back, then you generally have a moral claim to get angry. In any case, you aren’t going to be interested in loaning them money again……”

    I repeat: those people who lent money to Fannie and Freddie have no moral claim against the U.S. government; they do not even have a moral claim to get angry at the U.S. government. They have a moral (and legal) claim against Fannie and Freddie; that’s all. If you lend money to IBM and IBM collapses, are you supposed to get angry at the U.S. government for not bailing out IBM?

    If the Chinese don’t want to buy Agencies after that, then that, of course, is their right. On the other hand, the best time to lend money is after a default (higher rates, less endebted client).

    By the way, Bernanke said today: “However, in my view, the reason that GSE securitizations are well-accepted in the secondary market is because they come with GSE-provided guarantees of financial performance, which market participants appear to treat as backed by the full faith and credit of the U.S. government, even though this federal guarantee does not exist. Evidently, market participants believe that, in the event of the failure of a GSE, the government would have no alternative but to come to the rescue. The perception, however inaccurate, that the GSEs are fully government-backed implies that investors have few incentives in their role as counterparties or creditors to act to constrain GSE risk-taking.” He’s telling everyone as clearly as he can: no guarantee, no rescue. If the buyers of Agencies don’t want to listen, then when the day (if ever) the default comes, they should get angry at themselves, rather than at the U.S. government, because for a few lousy extra basis points, they took on a lot more risk.

  • Posted by Twofish

    DC: The substitution of cheap, illegal labor for high intensity capital investment is the exact opposite policy of every other developed nation.

    That’s why I think the US has a great century ahead of it. There’s no lack of people in the world that want to be Americans, the only real challenge to to have a more rational immigration policy. In particular, the fact that the US is a destination for immigrants, means that the population will stay rather young.

    The US, where imported labor meets imported capital.

    DC: Panasonic, Samsung, Sony, Mitsubishi, Sharp develop most critical components in-house including chipsets, LCD screens, surface mount components, etc.

    With design centers in Silicon Valley and in Silicon Hills. My point about that companies are rapidly becoming global entities also applies to Korean and Japanese-headquartered companies, and give another decade, it will be true for China-headquartered companies.

    DC: US headquartered companies including Hewlett Packard and Dell are becoming merely marketing and distribution operations that not only outsource the production but even the development of products.

    And this is a bad thing because ????? Marketing and distribution is where all of the big margins are at.

    DC: For instance, the laser engines at the heart of every HP printer is manufactured by Japan’s Canon corporation.

    With parts from thirty different countries and design bits from all over the world, including the United States.

    DC: Maybe the US economy is structurally crashing, but the effects are being papered over by the blizzard of cheap money from the Federal Reserve.

    The problem with this explanation is that you can only paper over something for so long before it falls apart, and people who have complained about the structural weakness of the US economy has been doing so for decades. The US has some huge structural strengths, a relatively open immigration policy, some of the worlds best schools, some of the worlds best minds in law, management, marketing, distribution and finance.

  • Posted by Twofish

    Also we are losing sight of the original question which is why China buys agency bonds rather than just treasuries. The trouble with just buying treasuries is that if you have $250 billion/year to invest, you just can put all it in treasuries without driving up the price by bidding against yourself. GSE’s are useful because the mortgage market is huge, and you can dump money in there without worrying to much about asset allocations.

    As far as “letting the GSE’s fail.” The current arrangement is that the Federal government keeps a close watch with limits on the activities of the GSE’s (and the big banks) and this “preventitive regulation” should keep them from doing anything that gets them anywhere close to failing. A failure of Fannie Mae (or for that matter Citicorp) would be so financially clamatous that the government actively interacts with them to make sure that this is very unlike.

  • Posted by RebelEconomist

    a:

    As I said on the previous post, I doubt that the agencies can be declared bankrupt as a result of mortgage defaults. The agencies’ creditors surely do have the moral right to insist that the defaulting borrowers are foreclosed to recover as much of their money as possible, and it is that which makes it politically impossible for the agencies to go bust in such circumstances. Anyway, almost every country with reserves invests a considerable proportion in agencies, I dare say including allies like the UK, and not only China and Russia.

  • Posted by Dave Chiang

    Twofish: There’s no lack of people in the world that want to be Americans, the only real challenge to to have a more rational immigration policy. In particular, the fact that the US is a destination for immigrants, means that the population will stay rather young.

    DC: True, the average Chinese, Russian, East European, or Indian immigrant is far better educated than the average native America, but that is more than offset by the millions of poorly educated Mexican and Hispanic immigrants that pour over the border annually. Surprisingly, the children of Mexican immigrants are even more poorly educated than their parents with an over 60% nationwide high school dropout rate. The future of the United States is bleak if uncontrolled, illegal immigration is not put to a stop.

    Twofish: With design centers in Silicon Valley and in Silicon Hills. My point about that companies are rapidly becoming global entities also applies to Korean and Japanese-headquartered companies, and give another decade, it will be true for China-headquartered companies.

    DC: There are already over 200 chip design firms in Shanghai alone. Silcon Valley will be going the same route as Detroit. Engineering wages in Shanghai are a fraction of wages in San Francisco with far more engineers graduating in China than the US. Moreover, with most of the newest semiconductor fabs in the world under construction in Asia, it is more practical for corporations to co-locate their R&D semiconductor operations along with their chip fabs. By the way, the largest contract chip fab manufacturer in the world is TSMC which was established by the Taiwan government. The Chinese government is emulating the state-driven funded model with SMIC which is building 300mm chip fabs in Beijing and Shanghai. The CEO of SMIC is the son of former President Jiang Zemin. Neo-liberal economists are aghast at any state funded industrial project.

    If you haven’t noticed, things are literally coming apart in the United States including the infrastructure, the stupid war in Iraq, the collapsing US dollar, the Housing market, the disfunctional Bush Administration, and US shattered reputation around the world.

  • Posted by Anonymous

    a,
    Today’s tough talk is the normal precursor to the well anticipated bailout in the making. The tan man and his Wall street buddies just conveniently pocket billion of dollars from the US tax payers and investors around the world. More rate cuts and expansion of GSE’s are coming. Bet on it.

  • Posted by Twofish

    DC: Surprisingly, the children of Mexican immigrants are even more poorly educated than their parents with an over 60% nationwide high school dropout rate.

    Which is usually much further than their parents were able to get. There is a lot of grunt work that needs to be done to run a society. Waiting tables, collecting garbage, building houses. The people who do this essential sort of work don’t get the credit that they deserve.

    Also, I wouldn’t agree about the “average Chinese immigrant” in part because there is no average Chinese immigrant. Certainly some one who comes over to university is well educated, but most of the people that end up undocumented in NY Chinatown are much more similar in class background and SES to the Mexican immigrant than to the university professor.

    Differences in education level I’ve found are class-based and not ethnic-based. I know Mexican professors. I know Mexican day laborers. I know Chinese professors. I know Chinese day laborers. The professors and the day laborers have a lot more in common with others of the same occupation than they do have with people with the same ethnicity. Kids of university professors tend to do really well in school. Kids of day laborers and short order restaurant cooks (whether Chinese or Mexican) tend to do a lot less well, not because the parents don’t care, but because they are dead tired after work.

    DC: Silcon Valley will be going the same route as Detroit. Engineering wages in Shanghai are a fraction of wages in San Francisco with far more engineers graduating in China than the US.

    Nope. The wage differential for experienced engineers isn’t that high, and the best Chinese engineers end up in Silicon Valley anyhow. The wages in Silicon Valley are higher which means that you can find the best engineers in China, bring them over, and turn them into Americans. Neat trick……

    DC: If you haven’t noticed, things are literally coming apart in the United States including the infrastructure, the stupid war in Iraq, the collapsing US dollar, the Housing market, the disfunctional Bush Administration, and US shattered reputation around the world.

    But the core strengths of the United States are still there. One good thing about the United States is that it manages to keep doing well even if the President is lousy. China has to count on reasonably good leaders to keep progressing, and it’s been lucky to have a few, but if you have one bad leader, then China is in serious trouble. By contrast, there is enough resilence in the US system so that the country will survive even if the President or the entire government is incompetent.

  • Posted by Twofish

    RebelEconomists: As I said on the previous post, I doubt that the agencies can be declared bankrupt as a result of mortgage defaults.

    It depends on whether or not the agency has agreed to pick up the cost of the default. In the case of Freddie and Fannie, they guarantee principal on the securities they issue, and so if there are a huge number of defaults in prime mortgages, they could be cooked.

    However, one thing to remember here is that even in the hypothetical case that Freddie or Fannie went broke, that doesn’t mean that the securities that they issue are worthless. The securities that the Freddie and Fannie issue are usually put into a “special purpose vehicle” which is legally separate from the Freddie and Fannie. So even if Freddie and Fannie went broke, the securities that they issue could still be paying.

    Suppose in the great crash of 2012, you get a 20% default rate on prime mortgages. Freddie is obligated to make good on the securities that it issues, and suppose it can’t and it goes broke. Those securities are legally separate from Freddie and will still be paying from the mortgages in the pool.

  • Posted by Ponzi Q. Globalization

    The paper losses are not too much of a price to pay for becoming the productive center of the world. What the Chinese leadership is doing can be viewed as simply a wonderful investment in future wealth. A wealth based on the ability to develop and produce those things which people around the world need and desire. A wealth that is the result of the riches of the world flowing in, not by the running up debt or the selling off valuable assets, but of trade. The future will show if it was a successful strategy.

    How much of the debt that America is running up is an investment in the ability to produce for future export? I’m talking about American production, not production done by so-called American companies. If it’s not a big amount, then just why the hell are we running up such a large debt? To party hard today and give our children nothing but a bucket of crap?

  • Posted by bsetser

    My own view is that too little us investment is in US capacity for future export. Boeing is the exception, not the rule. Vegas suburbs don’t necessarily yield much export revenue. That is my core concern. The only consolation is that this is at least as much a problem for the United States creditors as for the US, as they are the ones who are financing the US dollars. My concern is that a growing number of the United States creditors seem to be waking up to the risks that they are now taking — risks that frankly they have taken for some time, tho perhaps not on their current scale.

  • Posted by Asian Man

    U.S. gov’t ethnic makeup will change as well as locally thanks to open doors policy to unchecked and unlimited immigration — in the end, the declining dollar value nor the increasing foreign financing of current account deficit will ever matter because again (I repeat) the U.S. is not so much of a country but a “Big Giant Market Place” for all walks of life to make a name or statment for him/her self — just like what myself and everyone is doing daily with so much free time (blogging…blogging).

  • Posted by Guest

    DC is wrong about HP. They have thousands of hardware and software engineers in the US. HP laser printer technology is based on a partnership with Canon, but their inkjet technology and new Edgeline printing technology was developed in the US.

  • Posted by Guest

    I suspect the reason the US has still not attacked Iran is fear that this might cut off Gulf oil and precipitate a world wide panic with disastrous effects on the US. I wonder what China might do IF the US did attack Iran. I would even go so far as to wonder why the Chinese might not “loan” some nukes to Iran to be used to protect it from attack. But…..probably not.

  • Posted by TH

    Twofish: “So it’s really not clear that all these home equity loans won’t have a positive return.”

    With the degree of foreign consumption, the US consumer has been basically writing checks to the rest of the world. That’s great for the global economy but I don’t see it improving the US directly (aside from the extent to which an improving global economy affects the US). Not to disagree that the US is still in good shape, just that the US has lost huge ground that would not have been lost if consumers truly did, as a whole, put housing windfalls to productive domestic use such as education, small businesses, etc., or just did the prudent thing and left that equity in the house for a rainy day.

  • Posted by adiemuso

    UST are sold off. Look at the price actions. I think it is not by coincidence that such downward moves happened after the 50bp cuts.

    It has become a fact rather than myth. Dollar weakness compounded by imported inflation will render US assets lesser than attractive.

    By that, though the stocks are higher nominally, in real terms it is not. The rise might be just to keep them in relative worth.

    The Chinese will in no doubt, or perhaps even the Middle Eastern, take over the baton from the US if such conditions persist without remediation.

    Remember that the CNY is still not floated. Imagine what will happened. Dollar will crash.

  • Posted by Twofish

    Just to clarify something…. Freddie Mac and Fannie Mae issue two entirely different types of securities. One type is when the package together mortgages into a pool and resell them as a MBS. The second type is when the issue debt on their own to purchase mortgages directly.

    Neither is guaranteed by the US government, but the first type is far safer. In those types of securities, Freddie and Fannies role is limited to insuring the mortgages against default, and if Freddie and Fannie go bust, it doesn’t matter much because the mortgages backing the securities are still there. The second type of debt security is far riskier because Freddie and Fannie are basically issuing corporate bonds.

    Also, the politics behind these bonds are different. If you hold a mortgage backed security with massive defaults, and Freddie goes bust, you then can proceed to foreclose on the mortgages and kick the people out of their houses. If it got bad enough so that tens of millions of people in the United States were losing their houses to the Chinese central bank, I can’t imagine the US government not organizing a massive bailout, and it has the ability to do this through FHA and the Ginnie Mae program.

    Also the type of mortgage that gets put into the MBS are “conforming” meaning first mortgages with at least 20% down and no more than $250,000.

    It’s unclear from the statistics exactly what type of “agency bonds” the PBC is buying, but I suspect that most if not all of it consists of secured mortgage backed securities rather than direct Fannie/Freddie debt.

  • Posted by Visitor

    @Twofish: “people who have complained about the structural weakness of the US economy has been doing so for decades. The US has some huge structural strengths, a relatively open immigration policy, some of the worlds best schools, some of the worlds best minds in law, management, marketing, distribution and finance.”

    two friends of mine went for PhD and post-graduate medicine studies in NY and Chicago, and their definite impression 12 years ago about the USA was this: “the system is screaking, although not yet shaking”. They predicted a couple of years to start shaking, and it did in 2000-2002. It was saved with a huge military force parade to sweep away overseas’ investors distrust and also to racket some smaller countries (pushing “clientelar” regimes subordinated to USA/UK/NL-based oil/resource multinationals). As we know, force is the last resort argument in a “free market” competition, so it’s not thoughtless to suppose that we’re coming to the final stage.
    The level of state and citizen’s debt is at a maximum, also the global list of partner states which share the losses (more or less at own accord) is at the maximum: you can’t find now other members available for EU or NATO proposals, and even some key muslim allies are close to mutiny. So the solution of the last 6 years (printing USD/Euro) is reaching its natural limits. To enter the WTO global system, emerging countries’ central banks had to buy huge amounts of USD/Euro, primarily as a buffer for much greater transactions (and the dissapearance of barter) and also to avoid financial crisis and short-time insolvency (hot money). All that should have made EU economy and life-standard soar after 2001, but it didn’t too much as EU was totally sustaining USA economy and american wars over the world; also it proves how catastrophic is this union rulled (and each member individually). So now the best USA sponsor is facing bankruptcy too (just take a look at EU defficit in 2006 and 2007) – and it’s only the beginning, ECB is pumping hundreds of billions in banks to keep ‘em alive after the subprime crisis emerged in USA. We got a printing press working day & night at ECB, and the EU economic growth is only 3% – less than the real inflation rate, so it’s indeed a camouflaged recession (as in USA, of course): you produce less, but the prices growth is greater, so finally you have a nominal increasing of GDP at the end of the year. And finally some consumer prices are kept low by increasing imports from China with an artificially devaluated RMB, but that’s not going to work forever.
    Also, Japan central bank lowered their benchmark at 0.5% , so nearly zero-interest money! they force their citizens and investors to buy USA treasury instead of national bonds and they give helicopter money to the commercial banks. How could they lower even more this rate? To zero? Or maybe give free money and a bonus to those who take them from central bank printing press.

    USA may have best marketing agents, but not so good to make the world buy enough american products; in fact, although $ is sinking, USA exports aren’t increasing at all! it’s not very hard to sell chinese products, cause they sell themselves at their prices, but it will be very hard in the future to find buyers for US Treasury Bills, and I hope the over-confident american economists and retailers will find a very well-paid job as treasury bonds brokers now that we can’t count on the boombastic popcorn real-estate sector for vigorous recruitments.
    Also, worlds best managers may be at GM, Ford and Chrysler – judging by their wages and incentives, but that don’t help at all those firms to survive even on their country’s market!

    P.S. when you said about worlds best minds in law you were thinking about the former president, who was an eminent lawyer? or maybe about government’s experts who designed the homeland security laws? I agree, they must have been some kind of geniuses to pass such laws through the provisions of the Constitution. And one question please (if you don’t mind) about world’s best schools in USA: what highest university did present president graduated? I ask you because I’m not sure, but it must have been a famous one… do they really have grammar and geography courses?
    God, please save us of any more experts, this planet is too small for them and they wanna blow it up fast!

  • Posted by London Banker

    What Visitor said! Excellent summation of the challenges of exporting the US out of the hole it has spent so long digging.

  • Posted by Twofish

    Visitor: Also, worlds best managers may be at GM, Ford and Chrysler – judging by their wages and incentives, but that don’t help at all those firms to survive even on their country’s market!

    Curiously, GM, Ford, and Chrysler’s big problem is the same as Chinese state-owned enterprises, health-care and pensions. The companies made commitments starting in the 1950′s for lifetime health-care and pensions, and these are coming due now.

    Visitor: I agree, they must have been some kind of geniuses to pass such laws through the provisions of the Constitution.

    Followed by the worst of those laws getting thrown out by the Supreme Court, and also the Secretaries of Defense and Attorney General getting fired over various things. My point is that the system fights back.

    Visitor: And one question please (if you don’t mind) about world’s best schools in USA: what highest university did present president graduated? I ask you because I’m not sure, but it must have been a famous one… do they really have grammar and geography courses?

    You are trying to argue that because Bush graduated from an American school, and Bush is an idiot that my point about US schools being the best in the world is incorrect. Correct?

    That doesn’t make any sense…..

    Also, GWB and Ronald Reagan are people that shouldn’t be underestimated politically ****especially**** if you don’t like their policies. What they tend to do is to act, really, really stupid so that people assume that you can politically outmaneuver them, and when you try, you find that tactically, they aren’t that stupid at all.

  • Posted by Guest

    Visitor: Bush went to Yale since Daddie went there too. Daddie was bright and got into PBK, Shrubby was dumb and got barely passing grades. Shrubby said once that he never learned anything at Yale and that is one of the few true statements he has ever made. Yale is an excellent institution, but can’t make a dolt into a brain.

  • Posted by RebelEconomist

    Twofish:

    The Ivy League may be reputable but they help America less than they could if a lot of their American students get in because of nepotism. We have a similar though less extreme problem with Oxbridge in the UK.

    I agree that the US has immense potential, but this can be dissipated by populist politicians and an ignorant electorate. The danger is that the US declines like Argentina.

  • Posted by EthanJ

    Twofish,

    Thanks for the great answer about Agency MBS vs. Agency debt. Very informative.

    More to the point, the MBS have underlying debtors beyond Fannie and Freddie; the general Agency bonds do not. The MBS only face an unexpected risk if (a) they suffer default rates substantially higher than their ratings/history have indicated, (b) if the values of the underlying homes have declined so far that the principal of the conforming loans cannot be recovered from the foreclosure sale price, and (c) that this happens to so many properties at once that the GSEs go broke guaranteeing them all.

    Recall that for “conforming” loans, the loan itself cannot exceed a certain percentage of the value of the property – usually 80% – and must be the FIRST mortgage. The buyer must secure financing for the other 20%, either cash or a second mortgage. If the buyer defaults, the first mortgagor gets paid first from foreclosure proceeds. That means such a property already has a built-in 20%-price-decline cushion for the Agency MBS buyer.

    Most of the worst loans that are scaring the markets are NOT the GSE conforming loans. It’s the loans covering 95%, 100%, or 105% of the purchase price, or the second mortgages. The loans that will default and leave lenders hurting are the ones where a foreclosure sale won’t cover the principal. Those are NOT the loans bought by China, Russia, etc… That share of the housing disaster is ticking softly in banks and SIVs.

  • Posted by Guest

    Actually Rebel, the number who get into Yale, Harvard, etc., due to “nepotism” is extremely small. The vast majority are chosen through very tough screening methods. Bushyboy was an uncommon exception and he got in way back in the 1960s before things had changed that much. Oxbrige too is very competitive. If you can cite more competitive institutions please do.

  • Posted by RebelEconomist

    Guest on 2007-09-21 08:31:12:

    Regarding Ivy League, I recall reading about a system of “legacy preference” that operates in the US.

    Regarding Oxbridge, the Financial Times published several reports this week about how to get into Oxbridge. Start by going to a fee-paying school. Alternatively, buy an expensive house that comes with a chance of access to a good state school.

  • Posted by Bionick

    Actually Rebel, the number who get into Yale, Harvard, etc., due to “nepotism” is extremely small. The vast majority are chosen through very tough screening methods. Written by Guest on 2007-09-21 08:31:12

    So why do you think, say Yale, asks the applicant on the admission application whether the applicant’s relatives (parents, grandparents) attended Yale? Out of pure curiosity, no?

    http://www.yale.edu/admit/freshmen/application/pdf/yale_supplement.pdf

  • Posted by Ponzi Q. Globalization

    A review of…

    THE PRICE OF ADMISSION

    How America’s Ruling Class Buys Its Way into Elite Colleges — and Who Gets Left Outside the Gates

    By Daniel Golden

    http://www.washingtonpost.com/wp-dyn/content/article/2006/09/07/AR2006090701299.html

  • Posted by Twofish

    One pet peeve that I have is that people use the Ivy League to mean something other than the eight universities it means. There are a lot of elite private institutions that don’t belong to the Ivies (MIT, Caltech, Chicago, Stanford, CMU, NYU to name several) and there are lots of prestigious public university (UCLA, UC Berkeley, UIUC, UT Austin). In addition the US has a relatively good system of community colleges and technical schools. So taking a discussion about the quality of US universities and restricting them to admission policies of the Ivy League seems odd.

    Also, America’s “ruling class” knows far better than to try to overly restrict admissions. The gates are open enough so that anyone who has the ability to seriously challenge the power of the ruling class, gets in and becomes part of it. An example is the “class of 1965″ (kids of Asian immigrants who arrived as a result of the immigration act of 1965). These make up a huge fraction of the Ivies.

    It should be noted that the cited reference estimates that the number of people who would benefit by removing all legacies is about 15% of the incoming freshmen class (which sounds right) and that the beneficiaries would be the upper middle class (which also sounds right).

    Also the paragraph at the end sounded a bit hollow to me. I wonder “what professed ideals” the reviewer was referring to.

  • Posted by Ponzi Q. Globalization

    America’s “ruling class” knows far better than to try to overly restrict admissions

    Let’s not be naive just so we can feel better about the admissions system.

    I assume the ‘ruling class’ loves their children and wants what is best for them just like everybody else. Screwing some unconnected stranger out of a position is a small price to pay to get your kid into an elite school. To argue that they would not use whatever leverage they have to do this because of some desire to co-opt potential threats to the status quo down the road is silly. After all, it’s not a conspiracy, it’s simply the result of human beings trying to help out their kids by working a system that allows such favoritism.

  • Posted by Twofish

    The way that the admission system works is that your kid’s application to Harvard gets placed in one of several queues, based mainly on the part of the country that you apply from. If you have a relative that went to Harvard or if you donate a huge amount of money, then you get put into a special queue, in which you are compete against the other people who have rich and connected parents. Only a small fraction of people who go to Harvard go through that “legacy queue” but the people who get into that queue is even smaller, so your chances of getting in are far higher if you get into that queue. Also, this is only for undergrad admissions, none of the professional schools do this.

    And the people designed this system, *did* intentionally set things up to perpetuate their power and status. If it is one constant in history that is that people with power and status do everything that the can to keep their power and status, and this often involves making deals with people who can challenge them. The admissions systems of the elite universities can been seen as a deal between the upper class power elite, and the upper middle class “want to be’s”. The upper class needs to keep the upper middle class happy since the upper middle class has the means and resources to overthrow the upper class if they wanted to. By making most of the positions in Harvard open to the upper middle class, their threat is neutralized.

    What makes the system work also is that US has a Federal multi-party system. If you want to be among the people who run the United States, you can get there directly through Harvard (graduate Kennedy School, get a job in a think tank or in a staff position in a federal agency). However, if you don’t make it to Harvard, you can be one of the people that run the state of North Carolina by going to University of North Carolina – Chapel Hill (become a local lawyer, or state assemblyman, or state court judge), and if you are hungry, ambitious, and lucky enough, you can get to Washington through the local elites. There is also a Republican establishment and a Democratic establishment, and the two groups really don’t like each other that much.

    This makes the dynamics of power in the United States vastly different than in Japan or France which don’t have regional elites.

    Yes there is a conspiracy in which people with power seek to keep that power. That’s the way that it’s always been, that’s the way it always will be. From time to time, you need to change who is in power, but don’t expect the new people to ultimately behave much better than the people they replaced.

  • Posted by Ponzi Q. Globalization

    That’s the way that it’s always been, that’s the way it always will be. From time to time, you need to change who is in power, but don’t expect the new people to ultimately behave much better than the people they replaced.

    Do not attempt to change any of the workings of the system. It is futile. It always was and always will be. Nothing can be done to improve it.

    I assume you don’t believe this but your resigned tone makes one think you do.

    However, apart from this adopting a position of impotent resignation, I agree with much of what you write here. My point was that the actors today do not think in terms of power relations and conspiracy. Most of them just want what’s good for their kids and use the system that exists.

    Like you say, you can’t expect people to act differently. Therefore, you have to change what they are allowed to do.

  • Posted by Twofish

    Ponzi: Do not attempt to change any of the workings of the system. It is futile. It always was and always will be. Nothing can be done to improve it.

    Ponzi: I assume you don’t believe this but your resigned tone makes one think you do.

    What tone of resignation? All I’m saying is that an naive frontal assault on the system is rarely going to be successful. In order to change the system you need to have a clear-eyed notion of how the system works, so that you can spot weak points in it, and figure out what deals to make and what deals not to make.

    Any most importantly, you need to think about what you will do if you win. Power is dangerous and wielding it can be self-destructive. The real tragedy is not so much the people who failed at overthrowing the system, but the people who *succeeded* at overthrowing the system and then promptly destroy the people around them.

    Finally, people are much more likely to surrender if you can convince them that there is a good place for them in the new order.

    Ponzi: Like you say, you can’t expect people to act differently. Therefore, you have to change what they are allowed to do.

    Who watches the watchmen? If you are in a position to control what other people do. Then who controls you. Whoever controls you, who controls them?

  • Posted by Anonymous

    Has anyone considered that GWB may be dyslexic? The stupidity thing is a leftwing media thing.