Although it remains to be seen, I think you may well be wrong about the consequences of a U.S. collapse on the Chinese. They will be hurt but I would suggest that extrapolating the U.S. 1920's-1930's experience onto the Chinese is a mistake. We had "laissez-faire" leadership & ideology that had to be undone by Roosevelt. The Chinese are far more like a post-Roosevelt economy, with a leadership able and conscious of their economic responsibilities. A lot will depend on the Chinese government's ability to control corruption and to limit the impact of their disastrous financial markets. I'm not sure about the former. As to the latter it seems that their financial markets are far, far less significant in their overall economy than ours were pre-Roosevelt or today. The primary role of the Chinese government, which still controls the lions share of wealth seems to be in directing capital towards largely autonomous urban enterprise zones.

Should the Chinese weather the short-term storm, and move into a Roosevelt-Eisenhower production and distributive demand boom by encouraging development of exurban regions, the short to medium term economic consequences for us will be far more dire than you suggest particularly if we lack the will to get our house in order. This is true because the feedback loop will be disrupted as "our" multinatioals will have little or no reason to invest here as demand grows over there. There also is the not-to-be-minimized likelihood that if this scenario plays out we will seek to use our military to level the playing field with the Chinese, a game which is already, and dangerously, afoot.

We have no debt and, since we're young, not a whole lot of savings--although relative to our very modest living expenses I think we have close to 9 month's or 1 year's worth of cash in the bank. I would assume the value of the savings is going to evaporate though.

We rent an apartment and have no investments other than my 401(k)--but I don't expect to ever see that money anyways. We'll both be in graduate school starting this spring and will be receiving stipends or fellowships. I don't know how exposed that leaves us, but academia is usually sheltered a bit.

Up until we went off the gold standard, wealth was theoretically a matter of tangible assets. Since then, there has been an enormous bubble of paper assets in which the real economy is but a portion. When this pops, do we go back to wealth as tangibles, or do we work with the intangibles? Today the only support the monetary system has is the tax base of the issuer. If we begin treating it as the public utility it is, with rights and responsibilities portioned accordingly, we can make a functioning system. But so long as people think they can maximize rights and reduce responsibilities, the system will not be stable. The choice is between civilization continuing to advance, or the house of cards collapses into tribal warfare.

Link

There was a segment on the Beeb yesterday about advances in transitor technology. Mostly, the same old stuff (e.g. silicon's days are numbered), but a comment by one of the panelists really struck me.

It was something to the effect of "we really need to find a faster substitute for silicon as our level of miniaturization is hitting physical limits. If we can't produce computers and other devices that are faster, the big driver of the world economy--technology--will collapse as people find less need to purchase new products."

I was reminded of this again as a young friend was telling me about his latest purchase--a laptop with a 2.4GHz dual-core CPU. He was proud that he'd found a system with a 2.4GHz CPU for the price of a competitor's 2.0GHz. When I asked him which was better-constructed, he hadn't a clue. When I asked if he could subjectively tell the difference between 2.4GHz and 2.0GHz, he didn't know either. When I asked what he intended to use the computational horsepower for beyond email and web browsing, he had no answers.

Most of the time, I think of the human race as a bunch of chimpanzees screaming and throwing feces at one another--but sometimes, it appears that we're also rodents attracted by a shiny bit of metal...

We can also look at unfolding events from a value-free perspective, i.e.,as process of restructuring. "What goes up must come down," and "There ain't no such thing as a free lunch" are familiar adages of market lore. We are now entering a correction of excesses that is long overdue owing to artificial interventions, especially by the Federal Reserve. Corrections are always painful because they involve declining income and asset values, forcing changes in life style and, if severe, even the standard of living.

My take is that the ancien régime is crumbling of its own weight as the petro-economy gives way to the new order of zero carbon energy sources. This will involve some huge dislocations while also providing unprecedented opportunities. The US is poised to take advantage of these opportunities, although it has no lock on this opportunity.

The pain of restructuring will be proportional to the quantity of excess, hence, amount of economic dislocation, not only in quantity but also in quality. Added to the purely economic conditions are the political transition, e.g., change in US government in '08, with likely change in a broad range of policies, and environmental challenges, i.e., the exponential acceleration of the effects of global warming.

The US economy is still the global elephant in the room and changes in the US economy will still play a major role in the global economy, for good or for ill. How the US meets its challenges will determine a great deal about what happens elsewhere. The US has the momentum, intelligence and resources to restructure successfully with a minimum of pain unless politics gets in the way -- admittedly a big "if." I don't believe that China has this luxury, and the likely outcome is suppression of dissent rather than an elimination of corruption.

There are, after all, now more people in China than were within reach of the Brits when they first industrialized.

Capitalism is theoretically win-win (farmers, better plows, blah blah blah). Is the theory just plain wrong?

the world is running out of natural resources.... China is a very dirty and polluted place...they rely mostly on coal. Peak Oil and global warming are also contending to mix things up.

England was the first, which was a huge advantage; plus, in effect, they forced their colonies to buy their goods and made sure the colonies didn't supply manufactured goods in exchange.

It can be argued that the success of the British Empire was directly related to being the dominant sea power in a mercantile world rather than any overriding economic factors. This, of course, changed post-WWII, which left the US superior economically and militarily. The developed world, led by the US, has used global economic levers like the World Bank and the IMF to establish neocolonialism and continue mercantilism. Similarly, the military dominance of the US has shaped the global game in the favor of the US, especially since becoming the world's only superpower. In fact, contemporary US policy states that it will brook no rival militarily or economically. (Will the US act to maintain dollar hegemony? )

The traditional mercantilist game only broke down when the US ruling elite decided to abandon its work force in favor of a global labor pool that would permanently depress wage pressures, removing the major thorn in the side of capitalism. It can be argued that it would only do this if the US were able to control the game militarily to prevent eventual competition of capital also. This is considered a matter of natonal security. (Will the US allow SWF's to acquire choice US assets? Are free markets, free trade, and free flow of capital are only operative if it's a one way street?)

Since the sub-prime mortgage mess cracked open in August, the losses in the stock market AND in the collapsing dollar come to $4.5 trillion . . .or nearly 10% of the entire net worth of the United States of America.
http://www.dailyreckoning.com/Writers/Mogambo/DREssays/MG111907.html

This is just the beginning. I've seen reports that the "D" word is being bandied about in some Wall Street corridors now - and I don't remember that happening in my life time.

Here's the view from London, where over half the world's currency and derivatives trades occur:
http://www.dailyreckoning.com/Writers/Mogambo/DREssays/MG111907.html

"While the rich are trimming their sails, the poor are positively sinking. They can't pay their bills. An article in today's International Herald Tribune tells us that the number of people who rely on food banks and homeless shelters if rising sharply. New York City food programs are serving up 24% more grub this year than last, says the piece.

"And the middle classes are caught between the hurricane of rising living costs...and the doldrums of falling asset prices. They have less money to spend...and more ways to spend it. The unstoppable force is bearing down on them from one side. An immovable object blocks their retreat. They're going to get clobbered.
They are the ones that own houses and mutual funds...and they are the ones that owe too much money...and whose living expenses have gotten away from them.

"They may have substantial salaries...but they have very little margin. Everybody is already working full time...or more. After paying the mortgage, the car loan, the kids' tuition, their health care premia...and other regular expenses...they have less left over than their parents had. Is that progress or what? "

from Reuters

URICH (Reuters) - The odds now point to a U.S. economic recession that slows global growth significantly even if necessary policy changes are implemented, former U.S. Treasury secretary Larry Summers said.

Summers, who served in the Democratic administration of former president Bill Clinton, said the U.S. authorities needed to act urgently in avert long-lasting economic damage from the global credit crunch.

"Without stronger policy responses than have been observed to date ... there is the risk that the adverse impacts will be felt for the rest of the decade and beyond," Summers wrote in a column in the Financial Times on Monday.

Summers said the U.S. Federal Reserve should recognize that "levels of the fed funds rate that were neutral when the financial system was working normally are quite contractionary today."

The Fed has already cut the policy rate to 4.5 percent from 5.25 percent since the global crisis was triggered in August by defaults on U.S. mortgages, and financial markets expect further easing.

Summers said fiscal policy needed to be "on stand-by" to provide immediate temporary stimulus through spending or tax benefits for low and middle income families if the situation worsens.

The authorities also had to respond urgently to the contraction in credit, said Summers. "The time for worrying about imprudent lending is past. The priority has to be maintaining the flow of credit."

Summers said a "super conduit" promoted by the U.S. Treasury to take on assets of troubled structured investment vehicles (SIVs) had never been publicly explained in any detail by the Treasury. "Perhaps there is a strong case for it but that case has yet to be made," he added.

He urged the authorities "to assure that there is a continuous flow of reasonably priced loans to creditworthy home purchasers."

Summers said forward-looking indicators suggested the U.S. housing sector may be in freefall.

"It is hard to believe declines of anything like this magnitude will not lead to a dramatic slowdown in the consumer spending that has driven the economy in recent years," he said.

He also said only a small part of the financial distress that must be worked through by financial institutions had yet been faced, and warned of the potential damage to confidence from a sharply falling dollar.

"In such an environment, economic policy needs to be governed by the clear and public recognition that restoring the normal functioning of the financial system and containing any damage its breakdown may do the real economy is the central macro-economic and financial challenge facing the U.S."

and there are no quick fixes I know of.

About the best we can do as individuals is get our own situations in order, but even that is set in many cases.

The unfortunate thing is that as banks find themselves in trouble and people have a harder time servicing debts in a shrinking economy, those with equity in their properties will be better targets for foreclosure than those that owe more than their holdings are worth. Banks are likely to flog those "upsidedowners" for whatever they can bleed out of them while shackling them to the debt while those that have diligently paid for all these years and earned equity will lose their property.

New bankruptcy laws should help banks do their dirty work.

I did inhale.

i remember just a few years back, the bullhorn guy, alex jones, screaming about the impending crash and urging everyone invest in gold. he was, if i recall right, trying to generate a mass movement in this. i haven't been back to his sites lately and wonder if he's still pushing that button as hard.

what if he'd succeeded beyond his wildest dreams? would gold now be worth $800.00 an ounce?