Like Enron...but with Nuclear Weapons.

Does anyone really think that these massive levels of government debt are sustainable?  Just look at Glendale's disastrousforay into stadiums, California's public pension crisis, or the US commitment to Social Security and Medicare.  The only reason that governments have been able to buy all the little baubles that keep incumbents in power is that China has been willing to finance them.   

Someday soon, that's going to end. 

China's fortunes over the past decade are reminiscent of Lucent Technologies in the 1990s. Lucent sold computer equipment to dot-coms. At first, its growth was natural, the result of selling goods to traditional, cash-generating companies. After opportunities with cash-generating customers dried out, it moved to start-ups -- and its growth became slightly artificial. These dot-coms were able to buy Lucent's equipment only by raising money through private equity and equity markets, since their business models didn't factor in the necessity of cash-flow generation.

Funds to buy Lucent's equipment quickly dried up, and its growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough, until it came time to pay back the loans.

The United States, of course, isn't a dot-com. But a great portion of its growth came from borrowing Chinese money to buy Chinese goods, which means that Chinese growth was dependent on that very same borrowing.

Comments

[Travis]

It's so frustrating to listen to the constant din demanding the teaching and discussion of topics like climate and social interaction.

WE NEED TO TEACH BASIC ECONOMICS!!! Couple that with ethics and we could save the planet ten times over.

[todd]

The article sort of mentions this but does not make it clear - the Chinese buying of the dollar has the effect of continuing to keep our trade deficit with China very high. If China stopped doing this, our trade deficit with China would dramatically decline and would be a huge stimulus to the US economy through increase exports.

[Jack Simmons]

If you really wanted to put the brakes on big government, it would be to convince the Chinese to stop buying our debt. They enable these massive spending programs by our government. No one else would be able to finance our debt. We wouldn't have a choice but to cut back on spending, or else our currency would collapse. Eventually, we're going to exhaust even the Chinese.

I just love it when liberalism just hits a wall.

Margaret Thatcher said it best:

"The problem with socialism is that you eventually, run out of other people's money"

[Josh]

Travis,

This is one area where my liberal democrat self agrees with you 1000%. The decline in teaching basic economics has created a dumber and weaker population. (and electorate) How many people would not be in poverty or on gov't rolls today if they had just learned basic economic science? I see people every day who are 40+ years old and have never balanced their checkbook or even looked at their cashflow aside from whats their current total balance.

[Patrick]

Todd nailed it. Concern over China investing in US is completely unfounded. Listen to Wayne Stutzer on this topic or for that matter Thomas Friedman.

[Thane Eichenauer]

http://en.wikipedia.org/wiki/I.O.U.S.A._-_The_Book

Exploding debt, revenue generation flat - if the US government was a company, anybody can see it has an appointment with bankruptcy.

[ron]

I heard President Obama lecture the Chinese about buying more US goods. Pray tell, what do we produce that they need? We can't even sell them a complete Boeing airplane - the engines are made in China. God forbid that we get into a war with them and need to crank up jet engine construction. We don't have enough machinists left to build half a plane.

[col.smeag]

Does anyone think this Cash for Clunkers debacle resemble the Arizona Alternative Fuel Scandal from the '90s ...BTW how's that working out for you? Cleaner air yet?