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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who started this subject10/21/2003 2:29:04 PM
From: el_gaviero  Read Replies (2) of 110194
 
Another interesting Auerback piece.

prudentbear.com

He says that China is starting to show signs of over-expansion, that the authorities are moving to cool the economy by clamping down on domestic demand, and that this will have the effect of making the Chinese even more dependent on exports. Result: a wall of stuff hitting our shores, and the legs knocked out from under any domestic expansion that might occur here.

Suppose something like Auerback's scenario takes place. If so, then we would have:

...an increase in US government spending caused by recession here (falling taxes, counter-cyclical measures, etc. etc.); and
a decrease in the purchase of foreign goods (strained balance sheets, rising unemployment).

But this would mean:
the great circulating current between the USA and Asia (goods to USA, dollars to Asia, dollars back to USA for government paper) would slow down. A slow down of this great circulating current would mean our government would have access to a smaller pool of loan-able funds yet would still need to borrow. Result: upward pressure on interest rates.

This is not entirely a serious post -- who knows the consequences of a slow down in China -- BUT Auerback’s piece got me to wondering about our geniuses in Washington. Is it possible that they on the verge of pulling off a remarkable feat: getting an economy into recession and at the same time causing upward pressure on interest rates in that self-same economy?

If some such outcome were to occur, the feedback loops would work in the wrong direction – towards further instability rather than stability. The thing would be a doozy.
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