This is what the start of a global depression looks like. With American households unable to borrow, savings currently exceeds investment in the world economy, even though investment is high. First stock markets crash, then investment crashes, then prices go down, then factories lie idle.

Only the Asian trade-surplus countries, especially China, can pull the world out of this right now. The Asian governments could do so if they suddenly switched to all-out fiscal, monetary, and trade policies designed to stimulate consumption and imports and reduce their countries’ savings.

That won’t happen. Instead, China will buy even more dollars and euros in hopes of lowering their currencies versus the dollar and euro stealing more U.S. and European market share. This will cause U.S. companies to go bankrupt, but won’t help keep their factories active because the markets for their goods will be shrinking too fast.

Ironically, the current Chinese leadership is signing its own death warrants when they continue to pursue their export-oriented-growth policy even after that policy is no longer possible (due to debt-laden consumers in the importing countries). When factories go idle in China, a hardline-Communist ruler will take over and force the current leadership to undergo re-education sessions where they have to confess their capitalist tendencies.

The United States still has a solution which avoids all of this. Warren Buffett’s Import certificates plan ( http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm ). There is no surplus of savings in the United States. If we adopt the Buffett plan to balance trade, our businesses stay profitable no matter what happens in the rest of the world.

Howard Richman
http://www.tradeandtaxes.blogspot.com

I think you’ve got the solutions you requested, in a two-step process, right here among the comments on your blog:

1. ” – and as the fastest way out of a crash is straight through it . . . . why persist in trying reducing interest rates to a level at which people are once again prepared to borrow ? why not raise interest rates to a level at which people are once again prepared to lend?” – Gilllies

(This is the solution to the “Death of a Thousand Cuts” deleveraging chaos we are now experiencing)

2. “Then if we survive this, a very serious look needs to be taken at what kind of financial instruments are allowed, and also rationalize mortgage lending standards. Be nice if we re-criminalized white collar crime too. Perhaps we need something like the FDA for financial products. Do it like drug apps. Make Wall Street present their products for approval and make their case why we need them. If we can’t understand them, the answer is NO!” – Cedric Regula

(This is the post-crisis way to not have to go through the same thing again in twenty years)

[flush with nearly $1 trillion in foreign exchange reserves] “We are ready to provide our funds to the IMF,” Mr. Nakagawa said.

Such a move would send a lifeline to countries like Iceland, where the government’s efforts to bail out the country’s three biggest banks has pushed the small nation to the edge of bankruptcy.

- and when is mr paulson’s next lecture tour of beijing ?

- and to all world leaders this weekend who think that there is no easy way out – look, the crash IS the easy way out.

- and as the fastest way out of a crash is straight through it . . . . why persist in trying reducing interest rates to a level at which people are once again prepared to borrow ? why not raise interest rates to a level at which people are once again prepared to lend ?

- buffet is right when he says that we have experienced – or are experiencing – an economic pearl harbour. but history never repeats itself, and i suspect that the difference is that this time around WE are the japanese.

“We need a new banking system… The Great Depression had bank failures, we have bank zombies.”

“From central bank to central planning? …despite all this, we still have not had enough central planning in finance. For, even as the central banking authority administered the price of liquidity, the price of risk was left to the tender mercies of the market. And it is the price of risk that is the source of our current distress… The Fed and the Treasury are walking down a road that ends with making the price of risk in financial markets, along with the price of liquidity, an administered price.”