A bit late, but excellent post. Just the idea of having an interest rate bottom. But wait until the next boom. But I agree that the 2001 downturn should have been allowed to run its course, however painful for the politcos of the day. That would have saved the world a lot of trouble.

Perhaps that is why the Chinese are very publicly looking for alternatives to a reserve currency managed by a (possibly irresponsible) national government interested only in its domestic electability. Every modern bank regulation theorist is familiar with the “gambling for survival phenomenon” that usually impoverishes outsiders. Looks that is exactly what the GWB gvt did and no doubt the present gvt will do if the circumstances rquire.

But that is also the main reason why no US gvt would sit by and let “the world” take away its main tool of domestic economic policy. I am sure the Chinese are aware of this and what they may want is something far less ambitious (yet costly for the US). It would be interesting to know what that might be. It cannnot be anssurance of policy quality because that would not be a credible promise (no democratic gvt can restrict successors economic policy or ability to change laws, except by constitutional change). Perhaps some form of guarantee. Leveraging the IMF as seems to be in the process now has limits and is in essence a crazy idea. Perhaps a new type of SDR, with the CNY in it and some liberation of China’s capital account.

If there had been a significant and sustained downturn in the US from 2001 onwards it would have forced household savings rates UP, forced capital allocation into areas of TRUE internationally competitive PRODUCTIVITY, slowed China’s growth rate and potentially improved capital allocation in that country too.

In interesting corollary to the current discussion about regulation implied by this analysis is that more than likely improved regulation is not the full answer. Curbed credit expansion and closer supervision of credit agencies while important are probably not a complete solution. Ironically higher interest rates may well be. More than likely all this fuss could be avoided if it was not permisable for the FED to lower interest rates to below lets say 4%.

If no one can come up with a sensible plan to allocate capital effectively and pay interest at 4% its probably not worth while doing it.

I question the assertion that increased savings rates result in lower interest rates. Is the short end of the curve controlled by central banks or not?

Didn’t the export of manufacturing to the Far East basically guarantee a savings glut/scarcity imbalance?

The entire global glut and credit expansion looks like a generational scheme to repatriate profits while bypassing virtually all workers and avoid taxation.

What did anyone expect – eliminate large volume of decent income jobs in the US – replace 75% of lost income with cheap goods. No middle class wage pressures in US – check. Inflation at “3%” even though imported consumer goods are roughly 15-25% cheaper. Hmmm – can’t be the volatile energy and food, that’s always excluded.

Pump up trade volume because incremental unit margin decreases. Over production of retail, electronics, toys, apparel, automobiles, hedge fund managers. WalMart becomes largest US private employer – someone in HR forgets about health insurance.

China gets to invest in Soviet-scale infrastructure projects, with better architects. Workers gets taste of Western lifestyle – after 15 years back to the farm – sorry no work. Specialize in producing things not designed nor needed in China. Basically global wage arbitrage game.

Pile up of dollars in Chinese central banks – big f*ing surprise. What to do? Lets call it something that sounds really bad – like a glutton eating all those dollars disappearing from US worker paychecks. What a waste of the last quarter century. At least the east coast of China looks like Las Vegas.