It seems like only last week that reports were all over the news about how great the stock market was doing. Going up and up and up, breaking records…and now that is all over, for now. The Dow has dropped nearly 400 points, the Asian markets have begun a downward turn, and Europe is now trying to head off a potential financial catastrophe.
These market problems are extremely complex, but there are two primary reasons for this downturn: the US housing market, and China.
The US housing market is, if anything, a temporary speed bump to the world’s economies. The problem: the real estate market was too sweet. They call it “a buyer’s market.” Good for buyers, also good for unscrupulous realtors and bankers. Bad for the ignorant.
Those that weren’t taken in by shady dealings were betting against the market, getting into adjustable-rate mortgages and home loans, then crossing their fingers, hoping that interest rates wouldn’t rise. When interest rates rose, thousands defaulted on their loans. Bad for America’s real-estate industry, and bad for the markets.
The other problem is China. China has been in the midst of a military build-up for years. Recently, they’ve been posturing, making economic threats against the US. The problem: if China decides to act on those threats, the US could be in real economic trouble.
Years ago, the United States adopted a policy that is basically a form of Cold-War era Mutually Assured Destruction, or MAD. We already have a sort of MAD policy going with China, in the more traditional, nuclear holocaust sense, but this new MAD policy has nothing to do with millions dying from nuclear weapons and radiation fallout: it’s economic MAD. The theory is, we tie our economy into China’s economy until we’re so tangled up that if they take us out, they’re ruined economically. The problem: it’s a global economy, and the scales are tipping in China’s favor, to the point that they now wield a cannon, while the US is holding a BB gun. China owns much of the United States’ debt. If they were to call in those loans, the US would be in a world of hurt. It would cause major, possibly irreparable damage to the US economy. This kind of economic attack would doubtless hurt China, because our economies are tied so closely together, but China is dependant on US consumers…and losing the US market would be a blow, but one they could eventually recover from by branching out to other markets. The US has become so dependant on cheap goods imported from China that an “economic war” with China could cripple the US economy for innumerable years, until the United States was able to turn back the clock, becoming a primary producer of goods once again.
I’m not very old. I remember being in junior high school and hearing about the debate over granting China Most Favored Nation (MFN) status in order to stimulate trade, and thinking about how bad of an idea that would be. Well, we’ve been trading with China, they were granted MFN status, and the time to reap what we have sown, it seems, has come sooner than we thought.
The moral of the story: never trust a Communist nation. You’d think that after Russia, the Cold War, the Korean War, Vietnam, the Cuban Missile Crisis, Kim Jong Ill & North Korea, the incident with China shooting down a US military plane, and Venezuela’s Hugo Chavez, we’d learn not to trust Communists…unfortunately, the State Department is slow to learn.