May 4, 2010

Lessons for America from China and Greece

China: The New Economy.  The next economic superpower.  Maybe not.
A growing number of market gurus are predicting a slowdown or crash in the next year.
China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.
The government has banned loans for third homes and raised mortgage rates and down-payment requirements for second-home purchases. Prices rose 11.7 percent across 70 cities in March from a year earlier, the most since data began in 2005.
The government has stopped short of raising interest rates to contain property prices. Within an hour of the central bank announcement on reserve ratios, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.
Meanwhile Greeks are balking at austerity measures as markets tumble;
"We want an end to the freefall of our living standards," said Spyros Papaspyros, the head of ADEDY, which represents about half a million workers in the Aegean nation of 11 million.
Greeks have become accustomed to government pampering/pandering.  Their standard of living that is in free fall was artificially inflated because of unpaid-for government largess.  Like the U.S. the government of Greece could not borrow money forever to pamper its citizenry into voting for socialist government after socialist government.  The party had to end sometime, and that time is now.  Like China, where the government is trying to real-estate boom itself into the First World by creating shopping malls without tenants - government can't fake real prosperity.  Not forever.

The lesson?  Never send a government to do a business' work.  Why?  Because the government model has no business being a model for business.  When governments try to do things, there are typically always unintended consequences.  Whether it's Greece, China or the United States, the longer the distortion of the market exists the deeper the problem will become and the worse the needed correction will be.  Government is meant to be a referee, not a participant.  The more it tries to do the latter, the less fairly and intelligently it will do the former.

Conservatives have been saying this until they are blue in the face.  It's hard to get people to turn their backs on what they perceive as a free lunch.  Nonetheless, if it can be done, America is the country to do it.  and if it can be done, now MUST BE the time.  Don't follow the Greeks and Chinese into oblivion.  Yes there was a market crash in the United States in 2008.  Such is the nature of the economic cycle.  Booms and busts cannot last forever. It is an unfortunate by-product of capitalism that the deadwood has to be cleaned out from time to time - both on the business and consumer sides.  But to follow the path of greatest indulgence will never lead to lasting prosperity.  Everyone in their heart must realize this to be true, whether they have the courage to act upon that knowledge or not.

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