My Thoughts on American Debt, the European Financial Crisis, and the Global Financial System

It was an interesting week on Wall Street to say the least, as the Stock Market gyrated wildly in response to things like the S&P downgrade of the U.S. (and some U.S. entities like Fannie Mae and Freddie Mac), the debt issues in Europe, rumors of problems in both the American and European banking sectors, and a purported slow down of the U.S. economy.  If you turned your dial to any of the news channels this week, you would have been inundated by a parade of pundits and experts who posited their opinions on these topics.  I am not one of these experts and cannot provide in depth analyses about any of these "crises."  However, I, like most Americans and many Europeans and Asians, will be impacted by these events in some way in the near to medium future.  At the same time, I will soon be tasked with trying to decide which politicians are best adept at handling these economic/financial issues.  Therefore, I think it might be valuable to me (and perhaps to readers) to posit some takeaways from what I have seen play out this week.  These are probably some of the same thoughts that are going through the minds of "average men and women" in the U.S. and in other parts of the world.

What would happen to the U.S. economy if China suddenly decided not to buy any more of our debt?  Although none of the articles or T.V. reports brought up this question, I think it is a valid one.  China buys a significant amount of U.S. debt and is one of our largest creditors.  For the time being (from what I can gather), it has to undertake this strategy in order to keep the yuan from rising too much vis-a-vis the dollar.  If it were to suddenly stop buying U.S. bonds, the yuan would shoot to the sky (versus the dollar), which would severely impact its export trade.  While that may true, one would assume that China's economy won't always be tied to exports.  Also, China may one day decide to use its creditor status as a leverage to obtain a important concession from the U.S. (say over Taiwan).  Of course, the U.S. may eventually be able to decrease its need to issue more debt, thereby making this topic moot...The situation is worth watching and pondering.

Does anyone, or even any group of people, possess a strong understanding of the financial "crises" which are making headlines?  From what I can gather, the answer to this question is no.  Even if someone could comprehend the overall structure of the global financial structure and discern the interconnections between the various players (which include financial institutions, hedge funds, other investors, large corporations, countries and their treasuries, and a host of other entities), he/she would find it impossible to trace the flow of money across institutions and between countries.  Many of these financial transactions likely do not appear on anyone's radar.  This state of affairs is worrisome. If economists and other experts have a limited understanding of the current financial issues in Europe and in the U.S., they will be hard pressed to identify potential black swan events.  They may also underestimate the severity of some of the current problems.  That leaves the U.S. and other countries open to another "2008" type of shock. 

Is it becoming more difficult for economists and other experts to understand the economies of the developed countries?  From a non-expert's view, it appears that the techniques economists use to help them understand economic issues and denote trends do not work as well now as they did in the past.  Assuming my observation is valid (no guarantees on that one), perhaps it is due to the fact that economies in the developed world are shifting from a manufacturing bases to ones which rely on service/financial/technology.  It may be more difficult to map changes in services, in money flows, and in technological trends than it is to trace the paths of goods and services.



  1. Hi Anthony! You have raised a vital question that really (nobody did). I appreciate your prognosis for the same. Yes, what would happen to the economy if China, to be a bit specific - Bank of China (BOC) stops buying any more US government bonds and moreover, what intentions might compel them do so? It’s true that the yuan would shoot to the sky (versus the dollar). But the US govt. would hardly allow that. They would instantly start printing dollars in order to bring back the bonds. Obviously these are mere assumptions, yet the situation is something that really needs some unaltering attention.

  2. Hi Marc...Thanks for your comments. I'm glad you found the article worth reading. I hope that you stop by the blog again soon.