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8: How the World Can Get Out of this Mess

Setting aside the causes of the present economic conditions, the author suggests policymakers face two key goals: digging their economies out of the hole (EN: that the policymakers dug and pushed the economy into) and how to prevent a repeat in future (EN: by refraining from digging another one.)

There has been perhaps too much obsession over the second goal while neglecting to address the first. It's not that preventing recurrence is unimportant, and may even be more important in the long run, but triage mandates that the present hemorrhage should be given greater priority.

As such, the author intends to focus on "first aid" measures in the present chapter and consider preventative measures in the next. He assert there are some "philosophical roadblocks" on the road to recovery that prevent world policymakers from taking effective action to bring about a prompt and complete recovery, and have put them on the path to doing more harm than good by some of the measures they have already taken.

The case for doing nothing

According to some people, the best approach is to let the problem resolve itself. Historically speaking, periods of recession are the natural consequence of a preceding period of excess - and seen in that way, the recession itself is not a problem, but the solution or resolution toward balance as economic bubbles deflate.

The author begrudgingly acknowledges this, but suggests that a natural process of healing is worse than the disease, not only in terms of its unpleasantness to the patient, but in that the resolution is out of proportion to the problem - that the pendulum, left to the natural force of gravity, will swing too far in the opposite direction.

And to keep with the healthcare metaphor, it must be acknowledged that there is ample bad medicine, a patient is bled to death to control a fever or pumped full of carcinogenic drugs to sooth a bellyache, but this is a generalization and, all things considered, physicians generally do more good than harm.

The author wishes to avoid "years of misery and fear" to correct the previous misconduct, and feels that the moral hazard of a government bailout can be mitigated by refashioning the system with an eye toward preventing recurrence - but at the same time to alleviate the discomfort of the condition.

He also asserts that the Great Implosion was a purely financial event. No productive assets were destroyed, nor have people died, nor has knowledge been lost. It was all about monetary value of things - not the things themselves.

(EN: I think the author takes too extreme a position here, overlooking that real damage has been done to productive capabilities. When a factory is closed it does not set in pristine condition, ready to be reopened, but it is closed for good, its machines sold for scrap. When workers lose their jobs, their skills atrophy. And the increase in the suicide rate, which is presently the 11th most common cause of death, is exacerbated by hopelessness caused by sentiment about the economic state. And so, productive assets have been destroyed, people have been killed, and knowledge and skills have been lost. I would agree it is primarily about the monetary value of things, but to ignore the real consequences seems irresponsible.)

If we accept that nothing real has changed, why should the erasure of paper wealth cause so much mayhem?

First, consider that the burden of bad debt has fallen upon banks. Some of them have been wiped out completely, others reduced in their ability to perform their function of financing productive activity. Credit is the economy's life blood.

(EN: Another point of contention - credit is not life blood but a drug that provides a short-term high while doing long-term damage. Admittedly, the economy can grow faster if people have funds to be productive in advance of producing anything at all, but it is not necessary, nor is the ultimate effect positive: credit creates no more wealth that would otherwise have been created, except fro the lender who takes a share of the producer's profit as recompense for loaning him the money. I wouldn't go to the extreme of suggesting credit be abolished altogether, as it is a matter of choice or perhaps patience to want to borrow rather than waiting to save, but I would posit that it's a bad choice even when the borrower is able to service his debt.)

The obvious solution is to recapitalize the banks with public money, to relieve them of the burden of having made too many bad loans, or perhaps to set up a new bank that is publicly financed to replace the private banks that will fail. In either case, the objective is to ensure lending continues as before.

(EN: yet another objection - lending cannot and should not continue "as before" because it was a cause of the present problem. Lending should continue, but much less liberally and with far greater discretion. Lending should resume - but as it should have been, not such as it actually was.)

However, merely fixing the banks is not sufficient, because many customers will remain reluctant to borrow. Even if banks seem eager to lend, consumers who have suffered losses or who have witnessed the losses of others will be circumspect and cautious - which to some degree is a good thing, but taken to extremes, it becomes inhibitive.

The consequences of fiscal pain

The enormous scale of government debt is another factor that has caused and exacerbated the fiscal crisis: the fear that government insolvency may undermine the monetary system, or that heavy taxation may sap productivity, are both inhibitive factors.

The author maintains that "this fear is essentially unjustified and that thinking about this issue is confused." Specifically, it fails to consider that there are significant differences between the finances of a household and the finances of society as a whole.

The government debt is not money that is disappeared forever, and the debt is held by many individuals and institutions in the form of government securities - widely held by pension funds, insurance firms, banks, private individuals, and foreign governments. The debt will eventually be repaid and the capital it represents will be returned to the economy.

The last class of investor, foreign government, feeds a xenophobic notion that this cedes sovereignty to foreign powers - but debt is a contract with very specific terms: the only power it confers to the holder is the right to be repaid. Besides which, the author asserts that foreign governments hold a relatively small percentage of the domestic debt. For the most part, we will be repaying ourselves.

(EN: I've done some research, and found that the facts are pretty well disguised, likely because it is a sensitive issue. Foreign governments hold around 30% of the debt, but the single biggest holders of government debt are the government itself - the social security trust fund - which can't really be said to be debt because it's merely been moved from one ledger to another. So the actual percentage held by foreign nations is disputable, but may be more than half. Regardless, the assertion that this debt gives creditors no more right than to collect remains, so it's chasing a red herring.)

Depression psychology

The economy of a nation is liked to the economic behavior of its citizens - and human behavior is the result of psychological factors, which in turn be contrary to reason and logic.

In that sense, economic bubbles are the result of mass psychology: an overabundance of optimism in spite of objective fact that causes people to become attracted to investment in unsound vehicles. It starts with a few individuals, and then others merely follow in their wake, and as it grows it gathers credibility by virtue of the sheer number of people involved.

There is just as much irrationality in the deflation of a bubble, as those who got into it without thinking seek to find other sources of blame, to maintain self-esteem in spite of their self-destructive activities. And in doing so, they vilify bystanders or other participants.

All of this is justified by some shreds of logic - there were, indeed, good reasons to move with the herd and there were likewise crooks and villains who took a profit along the way. But mostly, it is transference and displacement of blame to escape the guilt.

Even those who recognize and admit their own complicity suffer the psychological effects of self-doubt and fear that is well in excess of what would be necessary to exercise more caution in future, which is ultimately the benefit of negative emotions, to the degree that they are disinterested altogether.

The mood of depression in the wake of the bubble is as stubborn and destructive as that irrational optimism that created it. And just as the cure for depression is lengthier and more involved than simply telling the patient to snap out of it, so will the cure for our mass depression over the economy take time and effort.

Spending and recovery

The author identifies four critical components to economic recovery:

  1. We must rebuild the banking system and restore their ability to live
  2. There must be a boost to income, wealth, and liquidity
  3. Government finances must be stabilized without damaging personal incomes
  4. Confidence must be restored in producers, consumers, and investors

They keystone to it all is to encourage more spending in the private sector. Investment is only necessary if there is a need for capital to produce goods, and production is only necessary if there is a demand to consume. As a matter of logic, there is no other way to effectively stimulate economic activity.

Here is where economics differ between individuals and societies. As an individual, it is possible to produce more than you consume to amass a surplus for future consumption. For society as a whole, there is no point to producing more than will be consumed, as the remainder is not wealth, but waste.

(EN: This is in the sense of the global society - when an given market produces more than it consumes, it can export the excess to other markets to amass a surplus.)

There is the notion that saving money makes other people worse off, but the real issue is that saving requires restraint from consumption. The amount saved is not returned to the market to pay others for productive activity. As such, in a market in which many people are amassing a rainy-day fund rather than spending immediately, what occurs is a decrease in production proportionate to the amount that is saved (removed from circulation).

(EN: The author is overlooking two things: first, that savings are set aside for a limited amount of time and will eventually return to the market; and second, that prior to the crisis the problem was that consumption exceeded production and resulted in a significant amount of debt, which must be repaid. If our consumer spending in the present recession was damagingly low, out consumption prior was damagingly high, and it will take time to resolve. The immediate solution, requiring privation, is that people must pay off their debts and the long-term solution involves a difficult cultural change for each household to consume what they produce, neither more nor less over the long run.)

The shape of a healthy global economy will certainly involve higher personal saving in the western countries and higher consumption in the eastern, the reverse of the present pattern. A healthy market, and a healthy household, within this greater picture will balance its production and consumption to avoid variances that require credit and debt.

There is a pause to consider the identity of consumers:

  1. Citizens - Domestic consumption boosts domestic production, and the benefits of production are received within the market
  2. Foreigners - Foreign consumption can boost domestic production, but the benefits of production are sent abroad and wealth (dead money) is amassed domestically
  3. Companies - Companies purchase and consume things, but they are generally consumed in the act of producing goods for sale. They are not ultimate consumers, and their demand is derived.
  4. Governments - Governments purchase and consume things, or distribute them to citizens for consumption, whether they are really wanted or not. Their demand is also derived, and in many cases is wasted.

Also consider the means by which goods are obtained for consumption. They may be purchased on credit, but the credit must eventually be repaid, the necessity of which has fueled to the present crisis. The better course is to obtain goods by trading product to others, trading value-for-value rather than value-for-obligation.

In a practical sense, it is difficult to convince people who are already deep in debt to spend more. The obvious target is to encourage those members of society who spent shrewdly and have not amassed debt to either accrue debt or diminish their wealth - or if they cannot be convinced to do so willingly, to seize their assets by means of taxation for the government to spend.

There's also the problem of being in a position where people need to spend more and save more - the two are at odds with one another. This has been attempted by providing favorable tax treatment for pension contributions, encouraging people to put aside capital for consumption in their retirement (when they are no longer productive citizens).

This considered "more spending by consumers will almost certainly entail more borrowing" - which ultimately has a zero-sum benefit as consumers save money for retirement, but purchase things presently and pay off the debt in their retirement with the funds they have saved now.

The author suggests that the companies are likely the best candidate for spending, to improve their productive stock for future production (EN: which only works out if the assets purchased today can actually be put to productive use in future, and to the degree that companies can remain solvent while spending more than is required to produce for the present level of demand.)

All things considered, it seems "We are stuck with the recession and we had better learn to live with it. After all, we brought it on ourselves, didn't we, so it is only right and proper that we should suffer now." Which is good ethics for an individual, but when it is practiced on the level of an entire society, it turns a recession into a great recession.

How can more borrowing be the answer?

A debt-finance spending spree is what caused the bubble to inflate, and after the collapse we find ourselves in a position to consume the things we already bought while we are paying off the bills. Or, if we have already consumed them, to curtail our spending on other things in order to pay the bills for what we consumed in the past.

The danger is that curtailing consumption also diminishes the need for production, which diminishes the need for companies to employ people, which diminishes their ability to consume, in a vicious circle.

The answer, then, cannot be to consume less but to spend more, even if that requires further borrowing.

Presently, that borrowing has been done by government. And while government debt is regarded as a problem, it is not the root problem of the current recession. Government did not borrow trillions of dollars to go on a spending spree before the crisis, but has had to borrow trillions to prop up the economy afterward. So while cutting taxes and reducing government spending will reduce the government's debt, it will do nothing to end the recession.

He concedes that the notion of encouraging a tax-and-spend government seems irrational to the point of being offensive, and that people are rightly concerned about the solvency of the government, but again that is a different problem, and likely a much less serious one in terms of restoring the health of the domestic economy.

The religious perspective

The author relates an encyclical by the Archbishop of the Church of England, who traded the economic crisis to moral failure: greed and materialism, borrowing with little thought to repay. The prospect of saving economies seemed to be a sin of complicity: giving people more credit is likened to giving more drugs to an addict.

The author does not dispute that he and other religious leaders have grounds to make the argument that moral failure was to blame, but the notion that we should embrace privation as if it were a just penance for our collective sins is unacceptable.

Recovery of production requires recovery of consumption, which can only be done by decreasing savings or further borrowing. Production is only done for consumption, and in order to be productive, you must consume.

In a spiritual sense, you might argue that society would be better off if people spent more time in contemplation and prayer and less in working hard to acquire material things. Nevertheless, the protestant work ethic is only functional if there is a demand for the work to be done, which is demand for the product to be made, which is a desire to consume the product.

And while it may be true that misery fills the coffers of the church, people living in deprivation are praying for relief. If god helps those who help themselves, they should likely get off their knees and get to work improving their own lot.

What should be our objectives?

Our immediate objective must be to restore the world banking system, to which end some measures have already been taken. The ultimate objective, however, is to restore aggregate demand to normal - when that is done, production and investment will follow as a matter of course.

However, a return to "business as usual" is not a desirable outcome even were it possible. The financial system was weak before the collapse, and restoring it to its previous condition merely perpetuates the problem and sets the wheels in motion for the next collapse.

The author suggests that the desired outcome would be a rebalancing of the world economy: to balance the super-saving of the east against the super-consumption of the west such that there is a sustainable balance. For now, the author will set aside the eastern problem to focus on the western one.

Dealing with the banks

The banking system has been the center of the problem, and must therefore be the center of the solution. The banks are the mechanism by which credit and savings are managed, and must be restored to performing that task.

The author mentions that action has been taken, and has to some degree been effective, but there is likely to be further weakness unless additional action is taken. He also suggests that government intervention is justified - this is not the case of an individual bank's misconduct, or mismanagement of many, but a problem so widespread it must be addressed by collective measures.

The problem is that of a vicious circle: the banks are unwilling to lend because the economy is weak, and the economy is weak because banks are unwilling to lend. Both must be aggressively addressed.

The first problem is the capital reserves of banks, which give them the functional ability to lend. Reserve requirements have been reduced to near zero, and the banks are still struggling to acquire sufficient capital from the private sector. The actions that have been taken thus far are insufficient, and banks need further "massive capital injections" to return to a healthy and functional state. Much, if not most, of the capital must be supplied by governments.

The author advocates "outright nationalization of most of the banking system." Thus far, the government has provided hand-outs without stepping in, and it seems utterly bizarre that any investor would hand over massive amounts of cash and exert no influence over what was done with it. Only by full government control can banks set lending targets to restore the economy, not merely to seek their own profit.

In effect, this has already been done: governments have nationalized or taken ownership of significant parts of the banking system, albeit "reluctantly, messily, and in piecemeal fashion" for fear of the political reaction among voters, who in free nations have a deep-rooted fear of nationalization. Even those whose political platforms are implicitly in favor of such (the UK Labor Party and the US Democratic Party) have refrained from explicitly advocating it for fear of upsetting voters.

It is also a massive problem, requiring a massive amount of money, which will inspire massive fear. Governments have been very furtive in their intrusion, doing things a little at a time rather than all at once to avoid drawing much attention. And while this has been successful at preventing panic, it has been unsuccessful at solving the problem.

However, supplying banks with the capital to lend does not mean that they will be motivated to do so. Most bankers suggest the essential problem to be liquidity, specifically in the interbank market in which banks led "huge amounts" to one another as a matter of course.

When the interbank market is functioning normally, banks could lend freely without worrying about their own capital reserves - if they had lent more than their deposits, they could borrow funds from another bank on the money markets. That is, they felt they had access to an unlimited sum of funds to lend because they had infinite ability to borrow from the banking system.

On the other side of the equation, banks and credit unions that were very effective at attracting deposits, but not as effective at extending loans, could make productive use of their reserves by lending to other banks. And this enabled specialization, such that some banks could be good at serving depositors and others at servicing creditors.

The market dried up out of fear of bad credit - a bank that loaned out its deposits was relying, by the proxy of a bank that had borrowed its reserves, on the loans being repaid. As some of the largest and most solid institutions teetered on the brink of bankruptcy, there was concern that the loans would not be repaid and they would be left holding the bag. Thus they decreased or ceased providing funds to the system, and paid their own depositors less interest.

This becomes a self-fulfilling prophecy: if banks believe the interbank system is failing for lack of funding, they will stop funding it, exacerbating the problem. Even if all banks are solvent, the liquidity of the banking system will be undermined.

Fortunately, the situation can also work in reverse: if banks believe that the system is stable, they will place more faith and funds into it, and the market will re-liquefy itself. This is where private ownership is obstructive, as the fear of owners for the welfare of their assets makes them unwilling to participate in such a scheme.

Interest rates and the zero bound

Lowering interest rates has traditionally been a mechanism by which the economy can be stimulated: it enables the establishment or expansion of businesses whose rate of return would be insufficient to repay a high-interest loan to accept financing at a profitable rate.

However, given that interest rates have been pushed to nearly nothing, the demand for funds will be largely insensitive to lower rates, and banks are inclined to keep most of the benefit of a lower rate to themselves by maintaining higher rates charged to customers while enjoying cheap interbank financing.

The author contends that it is right for central banks to maintain interest at such a low level:

  1. Even if banks fail to decrease their consumer lending rates, it should discourage them from increasing the rates.
  2. Even if banks keep the difference for themselves, they are arguably in need of additional profit to recover their own financial reserves.
  3. Reducing the cost on government yields better enables them to service their debt by debasing currency or becoming insolvent
  4. Low rates of return on government-issued securities makes private securities more attractive to investors, shuffling investment to the productive sector.

As such, keeping interest rates near zero for an extended period is likely a necessary condition for recovery, though it is unlikely to be a sufficient reason to cause the recovery on its own.

Quantitative easing

By control of currencies, governments have the ability to literally print money, in whatever quantity they care to have, though doing so debases the currency, and other governments can spin up their printing presses to keep the exchange rates stable, so this cannot be seen as a sustainable solution.

A more furtive way to accomplish the same goal is to print bonds and securities instead, and spend that income buying assets from the private sector, which gives the government a portfolio of assets to bolster its currency while getting more currency into the hands of the public.

Ultimately, even an expansion of the money supply by issuing securities rather than printing money is bound to cause inflation. When money is essentially free to obtain, it loses its value. The result would be particularly nasty for bondholders, who would find their investment to be unprofitable, even to the point of eroding when inflation surpasses interest rates. This could create mayhem and throw the economy into another crisis.

It is similar to the encouragement of banks to lend - they simply do not see this as an attractive option, but merely holding assets on its balance sheet does nothing to restore the liquidity and profitability of the bank. Quite the opposite, in fact, so it's just as well that the assets are amassed by government instead of the private sector.

With this in mind, it seems there are only two courses for a central bank: the first is to offer negative interest, in effect charging banks for holding deposits at the central bank to encourage them to lend them out instead. This seems unthinkable. The second option is to carry on with quantitative easing until it does have an effect, by slowly and incrementally increasing the money supply. In theory, the government's ability to amass unlimited debt means that there is no definite end to QE. The problem lies in planning an escape.

The solution is simply the reversal of amassing assets - the government can sell off the assets it has purchased to reclaim some of the money it has unleashed on the market. It's easier said than done, as selling off assets requires there to be a buyer with the money to purchase them.

Fiscal expansion

The author presents the Keynesian argument that when the private sector will not spend, the economy can be vitalized by government spending, even if it must run at a deficit to do so. From a crude, macroeconomic standpoint it does not matter who is spending, just that money is moving into the market and aggregated demand is increasing. And ultimately, government spending is funded by taxes, such that it is merely spending the public wealth by proxy.

The author proffers the straw-man counterargument that in order to spend the government just borrow, which decreases the funds available to private borrowers - hence wasteful spending by the state does not stimulate the economy, but merely replaces more productive spending in the private sector.

The author dismisses this argument as being from people who are "obviously completely unaware of the whole argument." Essentially, the government debt is financed by private investors through the purchase of government bonds out of idle savings. In effect, Keynes sees government debt-and-spend as merely the facilitation of loans of nonproductive capital to productive means.

The author concedes that government spending is not effective when the economy is at full employment because, in that scenario, the full measure of the citizenship are actively engaged in production and no financial measures can be taken to encourage greater productivity.

(EN: The Keynesian argument seems to rest on the assumption that government spending does, in fact, result in economic stimulation - but given the present situation, where the public debt exceeds $15 trillion, one might expect there to be some noticeable evidence that it was spent wisely.)

A second straw man the author sets upon is the notion that the swelling public debt creates a sense of malaise about future taxation, causing people to further curtail private spending in order to amass future resources that will enable them to weather the harder times ahead when tax is increased to repay the public debt. In effect, this diminishes spending in the public sector, counterbalancing the excess in government spending.

(EN: David Ricardo presented this argument, later called the "Ricardian Equivalence Theorem," based on British war bonds in the 1820s. But even he was doubtful that people really considered the distant future, suggestion that while there seems to be a relationship between increased public debt and decreased consumer spending, there is not sufficient evidence that there is a direct correlation. So this straw man was disarmed even when it was made, making it a particularly easy victim for the author to defeat.)

Even if you accept the Keynesian argument, it must still be admitted that government spending to stimulate an economy is counterbalanced by concerns of government solvency: that is, there is the risk that the government may default on its debts, driving the yields on public bond issues higher, driving the rates for private lending higher, resulting in debasement of the currency itself.

There have been "umpteen" government defaults in recent years, echoing the defaults that occurred in the Great Depression. And if you go back before the modern era, defaults by sovereigns were a regular occurrence: there was no authority to prevent a king from reneging on his obligations, and no recourse for lenders to collect.

In the modern era, there is less tendency for governments to overtly default on their debts, but they do so in a covert manner by debasing their currency buy simple creating more of it. This results in apparent inflation, which is less to do with the price of goods than with the value of the currency in which goods are priced.

Where government debt stimulates economic growth, debt can be more easily retired: increased incomes accommodate increased taxes, and with government bonds locked into low rates from a pre-inflationary era, the debt can be repaid. So long as the debt is modest recovery is gradual, the effect is virtually unnoticed. But at higher levels of debt, fears of default become more urgent and widespread, leading to a disinterest in government securities, which leads inevitably to default.

Until recently, it would seem incredible that government could default on debt - but the present situation is more dire. The total public debt exceeds 13% in the US, 15% in the UK, and 10% in most developed nations. The author takes the fact that no major government has defaulted as evidence that the Keynesian argument is valid.

Ultimately, the author dismisses the notion of public debt's direct influence on the economy: after all, it's simply money we owe to ourselves and seems of little importance. What is more significant is the way in which the public irrationally reacts to it, chiefly in lowering the output of goods and services.

As such, he feels it makes sense for the government to continue to spend liberally, even increasing the deficit further, until the economy recovers and the debt can be retired from surplus production.

Restoring confidence

Essentially, the solution to economic inertia is to convince the consumers to consume - such that production must increase to meet demand, and people must be hired to produce goods, and the negative cycle of unproductiveness and privation is replaced by the normal cycle of production and consumption.

Unfortunately, it's not as simple as having politicians make rousing speeches that encourage people to "spend money" and "be confident." Such enticements are given little credibility by fearful consumers living in daunting conditions.

Transparency may be one answer: when the state explains to citizens exactly what it is doing, rather than remaining vague, this may serve to bolster their confidence about the future, and cause them to regard the public debt as something that can be feasibly repaid.

There is also a need for governments to coordinate policies internationally, again remaining transparent as to their intentions and the expected outcomes.

The authorities must also point out where recovery might reasonably come from, without being bombastic or overly optimistic. It is necessary to provide a compelling vision of the "new normality" that can be created, rather than pandering to the conservative wish that the "old normality" can be restored.

It's important to keep in mind that the present recession is entirely man-made: whatever factor is most to blame, it is the consequence of decisions and plans that were undertaken - and it is likewise possible for better plans and better decisions to un-make it.

The fifth cavalry, Chinese detachment

While there are policies that can be implemented in western economies to simulate domestic demand, the author feels it unlikely that governments will push them far enough to generate a full recovery. Essentially, the funds for the recovery must be melted from the glacier in which they have been amassed and frozen: Chinese savings.

From the western perspective, it doesn't matter whether the eastern savings are spent on imports, or they merely allow their currencies to rise to increase the cost of their exports to the point that domestic production in western nations becomes revitalized. The counter argument is that this would be bad for western economies, whose currencies would weaken and whose capacity to purchase cheap foreign goods would be diminished - but this =is only because their currencies are presently too strong and their indulgence in foreign goods too excessive. In essence, the western deficits are the cause of eastern surplus.

It is difficult to convince China that such a plan is in her own best interests - as they feel their massive surplus is simply a sign of superior culture and dismiss any connection to the western crises as "a ridiculous view." However, some Chinese leaders are beginning to recognize that their internal economy has become "dangerously unbalanced" and that their savings are in jeopardy if the west cannot repay its debt. Thus far, it has largely resulted in China demanding that the western economies put their own houses in order, and offering some concessions in exchange to encourage domestic consumption.

Aside of handing out cash to its citizens through entitlement programs, which the Chinese see as an irresponsible behavior that has caused the degradation of western economies, there can be other actions, such as:

In most of Asia, governments are in a strong financial position and have the means to spend liberally. This is also true of certain oil producing nations, as well as the governments of Germany, Switzerland, and Norway. However, the collective capacity of these nations is dwarfed by the immensity of the Chinese financial reserve.

The idea that the salvation of western economies lies in China may strike many people as absurd: but given that most of the merchandise westerners buy is made in China, much of their income is paid to Chinese manufacturers (and not domestic ones), and over time western money has accumulated in Chinese coffers. As such, China has been the cause of the problems in the west, and must also provide a solution.

This is not an unprecedented situation: China has always been the world's largest economy. The emergence of other economies has been the result of two factors: (1) The Industrial Revolution, from which the Chinese willfully sat out, preferring to supply materials rather than engaging in manufacturing, and (2) the era of Communism in China, in which private ownership of production was abolished. It is only in the last few decades that China has embraced industrialization and capitalism - and as a result has sucked the capital out of the west.

(EN: The author does not mention similar issues between the west and China that occurred prior to the industrial revolution - in the era in which China sucked so much gold out of Europe that nations had to change from a gold standard of currency to silver. In that sense the present problems with China are not new, but a return to "business as usual" the way it was in the late Middle Ages.)

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