A in full inebriated man was stumbling down the avenue with at one foot on the curb and one foot in the gutter. A cop pulled up and said, “I’ve got to carry off you in, pal. You’re obviously drunk.”

Our wasted old china asked, “Officer, are ya truly stable I’m drunk?”

“Yeah, buddy, I’m foolproof,” said the copper. “Affect’s go.”

Breathing a mourn of projection, the wino said, “Thank goodness, I thought I was crippled.”

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The financial innovation you cite was applied to increase the bandwidth of our capital-reimportation system. Money used to recirculate in our country through Main Street banks, but as more and more of our capital came to consist of repatriated petro-dollars, the port of entry moved to New York, and ways had to be found to create paper attractive to foreign investors. The devices created were easily scaled to permit the explosion of credit that you cite, but I think it was the need to absorb the dollars that created the devices, not vice versa. That those devices then did attract MORE dollars is another story.

Sorry, but I don’t believe that. It seems to me that the oil market and stock market started rallying about the time that AIG counterparties (especailly GS) got bailed out with enough gov’t debt. Once bailed out, they could borrow at 0.5% (??? or a really low interest rate) to drive oil prices and stocks prices up while hoping to make a nice profit along the way.

“IMO, the main driver for public debt was the war in Iraq and tax cuts.”

See here:

http://www.cbpp.org/cms/?fa=view&id=640

“The dominant factor in the unprecedented fiscal deterioration thus was not the performance of the economy. Nor was it increases in domestic programs. The key factors have been large tax cuts and increases in security-related programs.”

It seems to me the fed wanted more public debt (treasuries) because they knew a lot of lower and middle class private debt was being created. They wanted those extra treasuries in case something went wrong, and then they could swap public debt for private debt.

Don’t know about the Japanese trade deficit. Do know that the U. S. trade deficit with the world did begin to decline in 1987, two years after the exchange value of the dollar went into a nose dive following the Plaza Accord.

Noah – Correct. That is exactly what I am saying. The credit creation generated the American demand for imports, which put pressure to appreciate on the Renmimbi, which led to China buying dollars, which led to China buying Treasuries.

The U.S. financial system did not create the credit alone. Go back to 1997. In that year, the U.S. stock market went on a speculative tear, which induced foreigners to send money to the U.S. to participate, which raised the value of the dollar in international currency markets, which increased imports (U.S. share of world imports went up 3% in three years).

Credit creation was one of several factors that caused the U.S. trade deficit to increase which played a part in inducing Chinese exports.

The U.S. stock market and its influence on international currency flows is, in some sense, out of the control of the U.S. financial system.

When I say “obsess” I merely mean that China is an increasingly important player in global economics and finance, and, as such, it is important to know what is going on there. I was not suggesting the China was the principal culprit in anything. Their FX policy was an amplifier, not a driver, is what I believe I said.

Don’t give me that old saw about exchange rates. We didn’t see any reduction in the US trade deficit with Japan after the Plaza Accord.

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I agree with Twofish: trying to prop up the export sector when the problem is foreign demand is a no-brainer stupid idea. Hence, the Chinese government hasn’t tried to do that. Instead, they’ve taken rather intelligent steps such as reducing the amount of taxes unnecessarily taken from exporters in the form of reduced VAT rebates. This may be a difficult notion for economists from places where there is no VAT, but the simple notion is that tax refunds are now closer to the original intention (100% rebate of VAT paid on imports when they are part of exports) than in the past, when exports were penalized by smaller tax rebates.