Plan B

Plan B

If you need something else to worry about there is always the economy which is incrementally sliding toward a recession. But trying to understand domestic or global economics is like trying to understand gravity. We know it's there, we experience it constantly, but how and why, well, it's complicated.

What is known is that markets are volatile; supply and demand and competition are in play (except when they're not); there are micro and macro markets; we are currently experiencing a subprime lending crisis; in many areas of the country the housing market has tanked; our economy depends, in great part, on robust consumer spending which is, by all accounts, heading south. Why the dollar is growing ever weaker overseas is a maze inside of a labyrinth.

Most Americans' frame of reference is their household finances (a comprehensible microcosm) and in that context understand the crippling effect debt can have, both emotionally and financially (it is estimated that the average family carries about $8,000 in credit card debt, not to forget mortgage and car debt). To spend more than you produce is a formula for disaster. To enter into a mortgage which consumes an inordinate amount of your monthly income can pave the way to foreclosure.

And then there's the thought that Mr. and Mrs. Smith are writing IOUs while reassuring the banks that though they may not be able to pay off the loans in their lifetime, well, their children will. Meanwhile, family Smith has gone shopping.

So, keeping the analogue of a household budget in mind, here is an issue that should cause concern. It is something that has not been addressed directly by the President (who has, along with Congress, been on a shopping binge for seven years) or by those who are offering up their candidacies for president.

First, much of what will be touched on below is based on a recent article in The Atlantic magazine titled, "The $1.4 Trillion Question," by James Fallows. What Fallows is referring to is America's potentially disastrous relationship with China when it comes to debt.

Here is what Fallows lays out: Over the last 25 years, China has amassed a huge trade surplus &

over $1.4 trillion and increasing by about $1 billion per day. In fact, China's foreign reserves are now the largest in the world, followed by Japan and Russia. Strangely, China's surplus has not been spent on raising the standard of living of the Chinese people &

building infrastructure, improving schools, or creating clean energy, air, water and sewage treatment plants. Fallows gives the example of classrooms in Shanghai in the winter where the students are wearing heavy coats and can see their breaths. There are no heating systems. This is not an anomaly. The average cash income for workers in large Chinese factories is about $160 per month. On farms it's a fraction of that.

"China," writes Fallows, "as a whole, is unbelievably short on many of the things that qualify countries as fully developed." Instead of rebuilding China, for reasons that Fallows concludes are ultimately inexplicable, the leadership of the country has made the decision to park its staggering surplus primarily in low-yield U.S. Treasury notes. In other words, China has been injecting billions and billions into the American economy allowing Americans to go shopping and Bush to conduct a 2 billion a week war in Iraq. Meanwhile, China holds our notes (a debt that will come due at some point). Never before in history has America owed so much to just one nation.

But there is another aspect to this issue that likely likely keeps economists awake at night. Should the Chinese stop buying Treasury notes abruptly (monies which stabilize our economy and keeps the dollar from collapsing) because they are displeased with America's posture toward Iran, Sudan, North Korea or Taiwan (which is the elephant in the room), then things could get dicey. Fallows does point out that it is not in the best interest of China, given its investment in America, to collapse the dollar or damage our economy. But were something to happen, an unintended provocation, a misread incident &

our bombing of the Chinese embassy in Belgrade some years back &

China could, as Fallows writes, "sit out the next Treasury auction." Should that happen, take a deep breath for we will then be in uncharted territory. "Will it cause a cataclysm?" Fallows asks. "No one can know until it's too late."

The point is that our government has allowed America not only to become dependent on foreign oil, which is debilitating in the extreme, but has allowed us to grow dependent on a steady stream of cash on a scale that is unimaginable. Even the folks in the cheap seats, running the numbers on their home calculators, can figure out that we are, at this point, unable to chart our own destiny; rather, our nation has become boxed in by our own largess and lack of foresight. The way out &

would that be plan B?-- could be painful, fraught with unintended consequences. We have lived with a patina of stability for so long it is unimaginable to conceive of a financial climate akin to the Great Depression. But those who ignore history are doomed to, well, repeat it. Just ask Mr. and Mrs. Smith who have a for sale sign in front of their house.

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