How an Economy Grows and Why It Crashes


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how an economy grows

H O W   A N   E C O N O M Y   G R O W S   A N D   W H Y   I T   C R A S H E S
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attempted. In the early days of his tenure, President Obama 
made a theatrical show of going through the $3 trillion federal 
budget “line by line” in order to fi nd “wasteful spending.” This 
resulted in a paltry $17 billion in savings, less than one-half 
of 1 percent of the budget. Even those proposed cuts elicited 
howls of protest by both Democrats and Republicans. 
If our government won’t impose fi nancial discipline, then our 
creditors, most notably China and Japan, eventually must. 
Although there are many forms in which this discipline could 
be delivered, the most likely method is that they simply stop 
buying our debt.
For now they have fallen into the same trap as the Sinopians.  
Once they realize that the continual extension of credit 
to a customer that can’t pay is a waste of resources, they 
will change course. At that point they will refocus their 
productivity on domestic consumers, who will then fully 
enjoy the fruits of their labor.
For now, despite increased grumbling and calls for 
international monetary reform, those nations have kept 
lending. But their stamina can’t be everlasting. 
With more than 50 percent of our government debt currently 
sold to foreign governments, who will pick up the slack when 
they stop buying? With very little domestic savings to tap into, 
Americans alone won’t be able to do it. 
When that day comes, we will have two choices: default or 
infl ation. Both options will violently force American living 
standards downward through lost purchasing power and 
higher interest rates.




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