Problem
Bush is wrong. His $700 Billion bailout is not taxpayer money. It is more debt. The federal government already has a deficit. So there is no “tax payer money” laying around unused. We spent it all in Iraq and on Medicaid. If we want $700B more we are going to need to borrow it from China .

If we borrow our way out of this hole we may be just moving the crisis from Wall Street to Washington. If you have not read my post on the Chinese Paper Nuke you should give it a look. We will only make the problem worse if we try to borrow our way out of our debt.

Old Solution
During the great depression the goal of the Big Chiefs was to preserve the value of the dollar at the cost of liquidity and credit. The result was a credit crisis while the dollar gained in value during the depression. At the end of the recession and following war we had one of the strongest currencies in the world. This lead to some of the most prosperous years in our nation’s history.

New Solution
Now our goal is to preserve our need for liquidity even at the cost of the dollar. The result? Inflation. We can inflate our way out of this hole if we don’t care about our currency.

My Solution
Maybe we should focus on trying to pay off our debt. By that I mean you as an individual paying off your mortgage ahead of time. I mean corporations paying off their loans and the government paying off its bonds. Maybe getting out of debt is a better solution to a debt problem than more debt.  But that’s just me.

Blame
Ron Paul has seen this problem coming for a while. The democrats have denied it all along and the republicans can’t find a solution because they are unwilling to cut spending or allow a painful market correction. The media blames the free market and lack of regulation. yuck. As if regulated economies don’t have more problems.

Cause
The cause? A mix of over regulation and under regulation. The government penalized banks for not lending to sub prime borrowers. Then it required them to mark their assets to the market daily. This caused several banks to become insolvent on paper over night when they could not sell their mortgage backed securities.

Take Away
The economy is too complex for a handful of policy makers and central bankers to effectively manage. These sorts of mistakes are only to be expected. More regulation will not fix the problem. Getting out of unnecessary debt can.

House of Cards: Clinton’s Fault

http://uk.youtube.com/watch?v=1RZVw3no2A4

What do you think?
I would love to hear what you think about our troubles. I talked with Michael Clark at length about this and he had some interesting insights. He feels a market correction is too painful and that the bailout is not that dangerous.

I also talked with Dr. Larry Woodward the Wizard of UMHB. Woodward saw this problem coming and didn’t lose any money on the market slide. He is still very bearish and thinks we are far from the market’s bottom. He thinks we need to modify our current regulations and cut taxes and spending.

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Great empires don’t fall at the top of their economic strength. Most empires walk the same road: moral decline followed by economic collapse and then military failure. The morality in our nation is slipping but our economy is still strong… or is it?

Right now, we issue roughly 2-3 Billion dollars in government bonds each day. This is current debt and does not include all of the promises we have made in entitlements to future generations. China has devalued their currency by 40% and so they purchase U.S. Treasury bonds because the Yuan is a bad investment right now. The result of this is that China is putting the money they make off our trade deficit with them back in our economy artificially propping it up. We then spend this going in further in debt.

"The borrower is servant to the lender."
-King Solomon

Here is the problem: Bonds garner a lower return than stocks because they are lower risk. If China were to sell their bonds the supply would go up making the cost go down. As the costs go down the investors would sell their high-risk stocks to buy these cheap low risk bonds. What this means is that China could at any time suck billions directly out of our stock market.

If China sold a handful of these bonds (lets say 500 billion) it would cause a catastrophic drop in stock prices AND a drop in the U.S. money supply. This would trigger a panic amplifying the problem all the more. Wall Street would respond to this panic through cost cutting and layoffs. Unemployment would go up causing the economy to continue to go down resulting in an economic tailspin. I could get more technical into the economics of this but in short, this chain of events could cause a depression like we have never seen before as a nation.

Why would China employ the paper nuke? One word: Taiwan . China has been staring longingly at Taiwan for decades. The only thing between China and their prized possession is a U.S. carrier group. Right now, nothing trumps an aircraft carrier militarily except for a nuclear bomb or diplomacy. By threatening with the paper nuke, they can strong arm us out of the South China Sea and seize Taiwan. But why stop there? If they find they can manipulate our sovereignty through finical terrorism then there is no telling where it will stop. How would we fight them since we fund our military with the money they loan us.

Just within the last month, China made their first threat to start selling bonds as leverage in a diplomatic negotiation, interestingly, to protect their trade advantage. If they play their cards right they could trigger a panic by selling only a portion of their bonds and save the rest for leverage. Or better yet keep the bonds as a ransom and just use the threat to undermine our sovereignty.

I am far more concerned by this sophisticated economic attack than I am by the Jihadists who blow themselves up. The only solution to limit China’s economic power over the United States is to eliminate the national debt as quickly as possible. If we don’t get out of debt soon (both as individuals and as a government) our lack of fiscal restraint will be our downfall.

Unfortunately, only one candidate understands this problem. I don’t know if Ron Paul has connected the dots as I have but one of the reasons he gives against the war in Iraq is that, he says, we can’t afford it because to pay for it we have to borrow from the Chinese.

If we feed the lion to fight the tiger, are we better off or just deceived?

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