Yao Jingyuan: China's foreign exchange reserves exceed US $2 trillion

China's foreign exchange reserves currently exceed US $2 trillion, said Yao Jingyuan, chief economist at the National Bureau of Statistics of China, at the China Industry Investment Forum on November 27.

From what I've seen thus far, I sure hope somebody forces Obama to sit through ECON 101 sometime soon because he is absolutely clueless how the economy works. Given that, his economic advisers are going to be critical appointments as he doesn't know enough about economics to formulate policy. A bad omen was that he used Franklin Raines as his chief economic adviser during the campaign...you know, the guy who was the head of Fannie Mae, cooked the books, paid himself $90 million in bonuses, got caught despite the best efforts by Maxine Waters (et al), paid a $1 million fine (still sounds like a sweet deal to me), and then gets tucked under Obama's wing as a political adviser.

Deep trouble ahead, people...deep trouble...

First we had 1) supply side economics (has this ever been tried?), then 2) trickle down which I guess is massive government spending and growth with income tax cuts, increasing revenue but even bigger deficits, and bailout of investors which leads to : 3) (spring 2008 stimulus and Obama)= welfare check economics, government borrows money to send out welfare checks to ‘those that need it’, who buy cheap Chinese stuff.

I think that #3 buys democrats elections and republican losses, at least pre-2009.

No one knows what the future holds, or do they? It looks like celebrated investor Peter Schiff might have a crystal ball.

Video of Schiff when he predicted this disaster.

http://www.youtube.com/watch?v=2I0QN-FYkpw

The Prediction

http://www.cnbc.com/id/27823932

Since WWII, the US has been reliant on a growing, inflation economy based in ever increasing national debt. Whenever a downturn threatened, the Republican response was growth via tax cuts; the Democrat response was inflation and tax hikes. Importantly, both ideas resulted in an increasing debt spiral.

This was the fatal flaw. Not just that the spiral grew, but that the rate of growth kept increasing.

The two biggest debt holders are Japan and China, but Japan is no longer buying US debt, for which we would just owe interest, in fact, it is selling US debt, which means that the US must repay the principal, which is lot more than just the interest.

To do this, the only thing the US has done is offer to sell *more* debt, to China, the big buyer. But that gravy train is rapidly running out.

China has had an overheated growth economy at 7.5%, but because of the recession, the rate has dropped to about 4%, which is not enough to support their production bubble. Already one of their top consumer goods production cities has had 1M layoffs.

And China has had to fork over about $600B in their own bailouts.

The bottom line is that there is no way China can continue to buy such huge amounts of US debt. But the US cannot spend money if it cannot raise debt.

Already $7.5 Trillion has been promised by the US government. In real terms, that is half the annual US Gross Domestic Product. It is money they don’t have and can’t get.

If no one will, or even can, loan the US government more money by buying Treasury bills, the government will have to “monetize the debt”, which means just declaring that money exists for them to spend. This causes two things to happen.

First of all, hyperinflation of this “virtual money”. But at the same time, deflation of paper money and coins. Since monetized debt is not backed by anything, no one is obligated to accept it, as it is worthless.

However, paper and coins are “legal tender” that will deflate, because they are in great shortage in the US, with only about 5% of our daily retail trade backed by paper.

Trickle down economics has a better chance of success than welfare economics. For some technical reasons, the gov't spending multiplier (i.e., the amount of "bang-for-the-buck" you get from each dollar spent) is always one less than the consumer spending multiplier. What this means is that you always get a bigger "trickle down effect" if you simply let the private sector keep more of their money than if you route that money through the gov't.

My real issue with stimulus checks, however, is that they are a one-time shot to the system. Indeed, if you didn't have excess inventories, they could do little more than cause a bump in consumer prices. The worse thing about them, however, is that they produce no long run change in consumer spending. A permanent tax cut would do that. Permanent cuts allow you to adjust your consumption pattern to buy large ticket items, and that's what we need now. We need people to buy homes and cars, not a crock pot or a Wii.

RE “Trickle down economics has a better chance of success than welfare economics.”

Trickle down is a term that democrats use to ridicule tax cuts , republicans never use the term ,except those that are against tax cuts. I believe the term we use is ‘supply side’. I have discussed this with democrats before and here is the problem.

The problem we have is when republicans promote massive government military spending and tax cuts along with other unconstrained spending. It looks to the ordinary citizen like ‘trickle down’, Joe gets a few dollar tax cuts, but huge companies get to hire more high paid managers, stocks go up and the so called rich get a ‘capital gains tax cut’, then have the government refund their losses in endless bailouts (that Maxine Waters supports, guess why!). It’s a PR nightmare and led to Obama-Pelosi Empire. Everybody wants their handout now and a smart guy like BoB to fix it.

We can argue about what is good for economy. But add republican majority for at least 5 years, tax cuts to millionaires(with us), massive military spending, a crapout economy, voters who dont know who Speaker of house Pelosi is, a President who is hated (up there with Carter 1978) by the majority, a republican Pres candidate McCain who stands for nothing (except the surge), and you got the perfect socialism storm.

GWB used to brag he doesnt care what the public thinks. Well maybe we should care .....

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