The Chinese Are Worried

The following is a post about the economy and hopefully sufficiently devoid of partisan interpretation.

Wen, the current Chinese Primier, states "Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

President Obama is rightfully assuring the Chinese that their investment in America is safe "There's a reason why even in the midst of this economic crisis you've seen actual increases in investment flows here into the United States. I think it's a recognition that the stability not only of our economic system, but also our political system, is extraordinary. I think that not just the Chinese government, but every investor, can have absolute confidence in the soundness of investments in the United States."

Of course, the Chinese are not worried about the US defaulting on any loans. It would be disastrous for the US if the US didn't honor its debts. What the Chinese are actually worried about is the printing of money that is not backed by equivalent creation of wealth (i.e., manufacturing, services, home building, and the like). If the US simply prints what it cannot borrow (which is bound to happen), the value of the dollar will plummet and the Chinese will be paid back with a greatly devalued dollar. The Chinese are between a rock and a hard space. If they don't loan more money, the US will print the money and ship it off to China to service our debt. If they do lend more money, their risk is increased if the dollar tanks (which seems unavoidable at this point).

All this hand wringing could be avoided if we had an economy that was producing more wealth to back up the printing of money. So I ask, how should the government act to boost the economy?

Reagan and a Democrat congress cut taxes in the 80's and the economy was very dynamic in the 90's because of this (benefiting Clinton tremendously). So this course has been demonstrated to work. We are now trying a new course: higher taxes and higher government spending. Will it work? We don't know yet, but this was the exact thing that happened during the Great Depression. So history seems to indicate that such a strategy does not work. However, times are different, maybe this time around the result will be different, but I for one am not counting on it.