ENGINEERING A CRASH TO END ALL CRASHES

very rough draft.

This is a wild perspective on the economic/financial crisis. So take everything I say here with a grain of salt.

1. Let us say that there was a trade and currency war between the United States and China before the crash. Let us say that China was adamant about not allowing its currency to appreciate so that theoretically -- theoretically, no more -- our products (the two we produce in the U.S.) would be cheaper and our people would be working thanks to China importing from us. Just as their people were working thanks to our people importing from them.

2. Let us say that Britain had gone through something similar when it used to import tons of tea from China. Britain would ask China to import something in return from Britain -- to no avail. Britain then devised a scheme: we grow opium in India and use our Navy to force that opium on the Chinese as a way of re-balancing trade with them. This way we’ll get some of our silver back, the same silver we were paying for the tea.

3. Let us say that the White House and Alan Greenspan colluded on engineering the crash in that they both acted with purposeful nonchalance – with (intentional) gross negligence. The White House squandered a Clinton-era surplus; and the Fed refused to raise rates so as to control a wild real estate bubble -- and to control the White House's profligacy. Taxation (a White House’s initiative) and/or higher interest rates (the Fed’s) would’ve avoided the disaster. But it wouldn’t have forced China to re-assess its stubbornness on balancing the trade between the two countries. Tangentially, or maybe not (likely not), China’s economic strength was sooner or later to translate into military power. One more reason (maybe the main reason) to deflate the Chinese economically.

4. Let us say that the Fed knew the bubble would explode; but, as it partook in the trade war, the Fed considered that so many foreign rivals were investing in the real estate bubble -- and creating American jobs and wealth for developers and the Fed’s friends the bankers -- that it kept a hands-off approach. That it figured that when the bubble would burst, so many of the foreign rivals would go bankrupt. Since the U.S. can print money which still would be considered a safe haven (Treasury notes) the U.S. should be able to print its way out of the meltdown, but it’ll be more difficult for the foreign rivals, including China, to do the same..

5. Let us say that this hands-off policy, in its results, would re-assert American dominance over a united Europe and would force the issue of balanced trade with China. Or, more to the point, would scuttle China’s push towards the super-power status.

6. Let us say that China prepared for this American scenario by piling up two trillion dollars-worth of hard currency in reserve.

7. Let us say that for now the crash engineers will need to wait out the Chinese until these spend the $2 trillion and be made modest, accepting the engineers’ conditions for a more balanced trade. But there’s a problem here: the only way balanced trade will occur is if wages in the U.S. are so scaled back, so repressed, as to equal in their meagerness the wages in China. Even if one accounts for a re-evaluation of China’s currency, how could an American worker be expected to accept wages so low? (Should we expect a domestic social upheaval?)

8. Let us say that the White House played its role in this trade war by spending away on “wars” -- on its constituency, really, in the military-industrial complex. (These “wars” made millionaires out of so many.) The White House, too, played its Fed-assigned role by squandering away the Clinton-era surplus in a tax give-away, and wouldn’t even think about raising taxes for the “wars” it chose to wage, yet another route to speed-up the crash.

9. The questions: Did the Fed and others around it know that the crash would be so severe? Will we pay a price in social upheavals as a result? And what’s the plan for what comes after? Is there a plan? Are we going to be able to see a manufacturing re-birth in America? Less importing? Will the international players be able to synchronize new trade rules that allow for all to have their cake in employment share? Or is the crash the norm for what’s to come: repeated crashes meant to discipline China and prevent it from gaining a super-power status? Which might just mean that we’re up against more of the same -- with China piling up more of a surplus and our Fed (in cahoots with a White House) engineering more crashes in the future to scuttle China's goal of attaining the sought-after superpower status.

My guess: politics will eventually displace public policy and a new Bush-Greenspan-like team will emerge to give us more bubbles. More crashes. More of the same.