This, in some ways, is what I have been afraid of. Unlike the U.S., China actually has the money to pour into their economy for this kind of Keynesian stimulus. We don’t. We also get our money from China.
Now it has long been argued that the Chinese can’t afford to stop buying our government debt because it will kill their exports. But let’s just play out the string on my paranoia. If the Chinese (and whomever else) see their domestic situation deteriorating because of global economic conditions, they will, as is natural, use their wealth to stabilize their own economy and ensure (and this is always their primary goal) the Communist Party’s continued grip on power.
Now assume this $586 billion package is the first step towards that end. At what point (in the very near future?), does the cost of borrowing skyrocket for the U.S.? So far that hasn’t happened. In fact, just the reverse. American debt is still considered arguably the safest investment in the world. But should it be?
With every bank and government around the world now strapped, do we ever reach a point where we simply can’t borrow anymore, no matter what interest we offer? Do we, in fact, default?
Probably not. For one thing, the Fed would likely print up money to buy the government debt. Would this lead to Weimar/Zimbabwean-like inflation and essentially destroy our economy, anyway? Yes, but it would take longer.
Alternatively, the world could call a kind of global timeout before it lets America go under. After that, we’d be faced with an IMF-like austerity plan (but at least we’d reduce the Icelandic (18%) rates of interest that would surely precede this kind of a bailout, or so one would hope).
You see where I’m going.
My worry is that the excess savings that the world formerly parked in Treasuries will be put to urgent domestic use elsewhere. My worry is that there soon won’t be money for us to borrow.
Paranoid, I know, but this is a risky time. America is truly at one of its most desperate hours. And it has been nothing but bad morals that has gotten us here. Greed, profligacy, entitlement, and arrogance.
We can only pray that these various government interventions will get this world kick started, and that Obama and team will figure a way for us to muddle through. At this point, Japan 90s-style is looking like a great option.
Update (11/11/08): Here’s an analyst on CNBC who shares my paranoia.
Update (11/13/08): Former Goldman Sachs Chairman Whitehead shares my paranoia, too.