I submit this well thought out financial theory in response to your essay "What we need is a good recession". It appears your thinking is in agreement. The Dark Side of the Credit Boom.

Good analysis on china. I beg to differ on a small point. regulation and the costs associated with it, and we should negotiate accordingly, otherwise, it shifts manufacturing pollution to a different spot. some of the books you have recommended reading have mentioned that this type of damage is part of an implied contract, as well the US owners of IP should have to pay for environmental damage with some of there $180 retail price for the ipod.

After rereading your summary, this pyramid scheme is in for another correction, the more it is delayed, the more assets will be tied up in assets that are not tradeable on the world market, ie homes. by by equity. in the end, i am having my doubts this will cause that much of a problem, except for people who can't pay when it comes, just in like in the depression. this is why i feel that the depression was more about debt and the inability to pay it than anything else.

The subject of credit, debt, our modern banking system and a lot more, in your essay this week, is covered in heartbreaking detail in Maxed Out , a film and a book by James Scurlock; and The Two-Income Trap: Why Middle-Class Parents are Going Broke by Elizabeth Warren. Highly recommended reading. Mr. Scurlock suggests (maybe mischievously) but does not advocate, nothing less than a revolution to correct this mess.

He also suggests that our Government has abrogated its responsibility, governance or checks and balances to accommodate our banking, credit and finance industry. It is more likely, from the description given in the book, and as you illustrated with graphs in your essay, that our Government itself is the ultimate credit spender, at a level unprecedented in modern history, possibly in all of history. History also suggests very strongly that this will end badly. A bursting credit bubble will have life-changing consequences.

I don't think a politician can get elected on what a friend called an "eat your vegetables" economic platform. So although bankers may be pushing policy friendly to bankers, I don't think that's the only (or even the main) factor. For example, who is benefiting from ignoring the Social Security/Medicare debacle? No one, as far as I can see. We just don't want to hear it.

If poor people are a bad risk for loans, there wouldn't seem to be many answers:

1. don't loan them money -- this is the traditional approach, and led to pawn shops and loan sharks.

2. loan them money at high interest rates, to cover the large number of defaults. Pass laws to keep them from declaring bankruptcy, or shedding their debts when they do.

3. (the new answer) loan them money and securitize the debt, so that sucker investors take the hit, not the lender.

Got any other answers?

As for currency manipulation, I think the whole thing is bizarre. It would be one thing if the currency were continually dropping, to make Chinese exports cheaper and cheaper. But the yuan has been linked to the dollar for decades. So I don't see how you can even say the Chinese are manipulating the currency, when it never changes with respect to the dollar. They are taking a certain number of dollars for their product. Congress would like them to charge more, so they are easier to compete with (and screw WalMart shoppers who see a price increase.) It's Congress that wants to manipulate the currency, to force Chinese producers to raise their prices, regardless of where they think the market is.

As you point out, they can't shift the currency enough to make the economy respond. But more fundamentally, once the currency stabilizes again, I don't see why the Chinese would not just adjust their prices in dollars back to where they think the best price is. This is what happened with Japan. The dollar dropped against the yen in the 90's (Japanese real estate investors lost their shirts), but the price of Japanese cars in dollars didn't change at all.

While there is lots of money to be made fleecing poor people, no one is holding a gun to their head to borrow money. They borrowed it, they read the deal and they still signed up. Sorry, my give a damn is busted, you signed up, be a person of your word and pay it back. I wouldn't have signed it, but hey, free will.

BTW, there are two kinds of people: Those who understand interest and those who pay it.

I wanted to bring this small peice of mine to your attention, charles. Enjoying your blog. CHINA - AN HISTORIAN'S VIEW.

Goodfellow's story (from last week's Readers Journal)reminds me of the 1996 Italian film Lamerica

Are we going to end up like that?

Country of Lost Hope (film review from the S.F. Chronicle).

I was doing some work for a refiner last year and spent some time with their crude oil buyers. They basically told me that West Texas Intermediate really does not even exist anymore. When you purchase WTI you basically get an amalgamation of various products. This poses the refiners various problems because they use linear programming models to help them buy oil and maximize the output from the refinery. Refineries are built to run crude with certain characteristics. When the crude you purchase is different, yields are lower than what is planned. The refineries have started charging back the seller for failure to deliver the quality of crude purchased.

I look at our highways of today and think they will make nice bicycle paths in the future.

I was re-reading your post on the political elites, with the conclusion that in many respects, as bad as things are, the US is still better served than some of the other polities out there, and it reminded me of a post by Dmitry Orlov, called “Closing the Collapse Gap”, which I read on the Energy bulletin site a year or so ago. In that post, Orlov compares the collapse of the Soviet Union with a future American collapse, and his conclusions are not flattering to American ingenuity, whether the trigger is peak oil or some other economic degradation. I don’t know if you’ve seen the article, but I thought you might find it interesting, if you have not:

Closing the 'Collapse Gap': the USSR was better prepared for peak oil than the US.

1. My,oh my, what a cynic you have revealed yourself to be with your jeremiads of the last couple of weeks. Tsk, tsk. TPTB will come and take you away in the night sometime here soon I'm sure so you can't be spreading any more of such subversive ilk! Unfortunately for all of us, I have come also to think you are right about this, or at least pretty much in the ball park with it. I think the Founding Father would probably weep if they could see we have gone the route of every other republic in history despite their best efforts to prevent it.

2. At first I was somewhat skeptical of the new format with the separate page for reader's commentaries and essays, but I have concluded that if you can find the time to keep it current, you may actually be on your way to developing one of the best websites/blogs available for thoughtful commentary available today. I certainly hope so. Keep up the good work with it. Amid the claptrap of what passes for modern culture and thinking, we need places like your site all the more.

3. Lastly, I'm going to do like fellow contributor U. Doran and pass along a link. This is on the Prudent Bear website. It is Martin Hutchison's latest commentary on the end of the classless society. I think it fits very nicely into your themes of the last couple weeks. I thought you might want to consider passing it along to your other readers.

The end of the classless society.

Ok, so this isn’t fully fleshed out and I’m not sure I even believe it, but it’s an interesting thought. So what if the total flood of money into the system isn’t an accident but a salvo in the economic war against China.

I’ve seen other treaties where China looks long term, it’s an economic war, not a military one, etc, so what if while China is still weak, the western governments are flooding the system with money. China gets lots of it (see Shanghai stock market boom, total misallocation of capital, etc) and has really no where to invest it (there aren’t any good returns nowadays with total flooding of the markets with cash) and they can’t bring the boom down before the Beijing Olympics. (the olympic “put” if you will)

But what would happen if the western govt’s shut off the spigot?

Sure, the western economies would suffer, but China could easily collapse.

They have 1000’s of huge riots a year in these “good” times, what happens if the economy goes bust?????

Esp, if they timed it for late 2007, BEFORE the Beijing Olympics. Wouldn’t that be a nice story on world wide TV? Huge riots with the games. The more I flesh this out, the more interesting it becomes.

Interesting thought eh? (if completely and totally paranoid. :-)