A Day of Serious Reckoning

People in Washington are beginning to sound the economic alarm. These are the same people who for years have worked hard to put a happy face on the state of our economy.

For starters former treasury secretary Robert Rubin says “The traditional immunity of advanced countries like America to a Third World-style crisis isn't a birthright... we are facing a day of serious reckoning.”

Then former fed chairman Paul Volker was quoted as saying “We face a 75% chance of a crisis within the next 5 years...”

Here’s the reason…the US continues to run a substantial account balance deficit with the rest of the world and in particular with China. Things have been plugging along quite nicely with China absorbing all of our dollars in return for the cheap trinkets that they produce. The Feds would like you to believe that this can go on forever, that all of the cheap labor countries of the world will always want dollars, but the reality is that it can’t. Right now China takes our dollars and buys US bonds and mortgage backed securities and for now the system seems to be working fine. We send the dollars out and they come back in return for debt, but at some point the interest payments will become so large that we will be sending all of the dollars we normally use to buy things to China as interest payments for all of the debt they are holding.

The whole system will fall apart long before the interest payments get that big. When we can no longer afford to buy Chinese goods our prices will go up here, interest rates will go up, and real estate prices will fall. When that starts, our day of reckoning will be upon us in full force. We will become the next Argentina.