Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Right Angle Club: 2015
The tenth year of this annal, the ninety-third for the club. Because its author spent much of the past year on health economics, a summary of his latest book on the topic takes up a third of this volume. The book I published in 1980 is now selling on Amazon for three times its price when new, so be warned that at one time, the subject used to improve with age. George Fisher

Two Chapters of the World Economy's History

World Economic History, Chapter One.

In 1972 Richard Nixon and Henry Kissinger persuaded China to change sides. As a consequence, America and the Far East prospered, Soviet Russia collapsed, Europe devoted its attention to a twenty-hour week. The American consumer had a picnic at bargain prices, but it was too much of a leap for the Chinese consumer, so the party leaders prospered mightily from corruption, nepotism and casino gambling.

After America then over-invested in affordable housing, and Wall Street distributed the profits through the securities markets, their stock markets froze in a panic, then collapsed. The American government rescued Bear Stearns, but then reversed itself and refused to bail out Lehman Brothers. Its markets collapsed further, its economy ground to a halt, and the Federal Reserve lowered long-term interest rates with Quantitative Easing, while Congress imposed the Dodd-Frank financial regulation bill.

The economy responded with a very slow recovery from the crash, and in seven years was still not fully recovered, except Quantitative Easing maintained abnormally low interest rates, so the American consumer went on a spending spree.

World Economic History, Chapter Two.

By 2015, the Chinese consumer was getting restless because of failure to participate in the boom, so the Chinese premier clamped down on leadership corruption, plus devaluing its currency.

The Chinese leadership, who owned most of the stock, responded to what seemed like an attack on its privileges, by dumping its stock holdings; the Chinese market crashed, followed by the rest of the world to a lesser degree. The Federal Reserve had promised to raise interest rates, but became fearful of making the crash worse.

The American stockholder had been told this was what had happened in the crash of 1937, which had been worse for the stockholder than 1929. Others said it was mostly a Chinese problem. The Federal Reserve continued to hold $3 trillion of Treasury bonds. During all this Keynesian activity, American inflation remained below its 2% target, at 1.5%, some say actually 0.3%. Manipulation of our currency or markets was suspected, a practically unheard-of event in view of our size.

So, what seems to have happened is the collapse of the Chinese stockmarket scared the wits out of the Amedican stockmarket, which dropped like a stone. And that seems to have frightened the Federal Reserve into saying it wasn't so sure it wanted to raise interest rates, after all. So the American stockmarket shot up like a rocket, recovering most of its losses. It may be a happy result, but how many times can we repeat it?

And then, the Developing countries, which sell raw materials to China, dropped. And then Europe announced it was going to do Quantitative Easing, because -- horrors -- there hadn't been the inflation they hoped for. Which reminded everyone that Obama had spent more money than Congress appropriated, forcing US to borrow more, or else shut the government down. The flood of Treasury bonds seems to be what holds down inflation, since the market responds to a flood of bonds by lowering interest rates. Perhaps we do not need a debt limit, if the market imposes its will, placing a limit on borrowing. The American stock market is on the way down, unless Obama stops borrowing, or until Congress raises taxes. And, curiously, it seems to be China that gets hurt, first.

 

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