The Spectacular, Sudden Crash of the Global Economy

By Joshua Holland, AlterNet. Posted February 24, 2009.

What’s Next? 

International trade existed long before the era of economic globalization, and will continue after its demise. The so-called “free trade” agreements championed by both Democratic and Republican lawmakers, liberals and conservatives alike, for the past few decades was always less about trade than constraining the policy options of governments through treaty.  

The one likely bright spot in all this is that the cookie-cutter, one-size-fits-all economic orthodoxy lies in ruins. What will replace it is a question for the long-term. 

The more immediate question is two-fold. First, in a global economic crisis such as the one we’re experiencing today, where is the engine of rapid growth that might pull the world’s economy out of the doldrums? Recessions of recent years -- in the early 1980s, the early 1990s and the early 2000s -- weren’t global in nature; rapidly developing economies in Asia and Eastern Europe, and later the rise of the U.S. housing market, pulled the world out of the doldrums. It’s difficult to see where that kind of growth might be found today. 

And then there is the question of how long foreign investors will continue to run our tab. As Americans’ demand for just about everything has tanked, economists from across the political spectrum have called on the government to take up the slack. So we got a big stimulus package -- probably the first in a series -- which will be tacked onto a budget that was already deeply in the red. The hole is cavernous, and we have little choice to dig deeper. In 2008, the official deficit was around $500 billion; the most optimistic projections are deficits averaging around $1.35 trillion in both 2009 and 2010.

In 2006, economist Barry Bosworth testified before Congress that “net foreign lending” had been almost $800 billion in the red -- a negative 7.2 percent of national income. “This degree of reliance on foreign financing is unprecedented,” he explained, “but has been achieved with relatively few strains because foreigners perceive the United States as offering safe and attractive investment opportunities.”  

Right now, foreign investors are still snapping up American debt -- the dollar is seen as a safe haven in turbulent seas. But how long, and to what extent they will continue to do so are crucial questions.  

China, with the world’s largest foreign currency holdings -- about 70 percent of which is in U.S. treasury bills -- is still buying, at least for the moment. Luo Ping, director-general of the China Banking Regulatory Commission, recently asked, "Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven," he explained. "For everyone, including China, it is the only option."

But the Chinese are concerned about the stability of their investments. If the U.S. government needs to raise the interest rates on its securities to attract enough foreign investment to cover our shortfall, the value of those T-bills China and other central governments are holding will drop. 

Last week, Secretary of State Hillary Clinton acknowledged that the world economy is anything but decoupled, all but begging the Chinese to continue to buy our debt. According to Agence France Presse, “Clinton and Chinese Foreign Minister Yang Jiechi largely agreed to disagree on human rights,” while “she focused on the need for China to help finance the massive 787-billion-dollar US economic stimulus plan by continuing to buy US Treasuries.”   

In a moment of clarity -- one that shone a light on the rot of the global economic system that has prevailed for the past 40 years, Clinton explained to the Chinese media, "We have to incur more debt … the US needs the investment in Treasury bonds to shore up its economy to continue to buy Chinese products."

See more stories tagged with: china, us, global economy, stimulus package, financial crisis

Joshua Holland is an editor and senior writer at AlterNet.

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