The China-Prostitute Recession Theory

I sometimes try to understand the economy. I don't try too hard because it just plain hurts my brain. I know I should care more and try harder but I just can't. Our friend, Scott, tries and tries to get me to care and engage and even offers up podcasts that are supposed to be really user friendly. It wasn't until I hit him with an amusing email that was sent to me that we finally found a breaking ground for my understanding of the recession. Now, I know I've already lost some of you (April!), but I did my best to get some of you hooked with the title of this post. So, here goes, the "China-Prositute Recession Theory".

It is a slow day in the East Texas town of Madisonville. It is raining, and the little town looks totally deserted. Times are tough, everybody is in debt and everybody lives on credit.

On this particular day a rich tourist from the East is driving through town. He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.

As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to pay his debt to the pig farmer.

The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel.

The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her "services" on credit.

The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor, paying for the rooms that she had rented when she brought clients to that establishment.

The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything. At that moment the traveler from the East walks back down the stairs, after inspecting the rooms. He picks up the $100 bill and states that the rooms are not satisfactory...... Pockets the money and walks out the door and leaves town.

No one earned anything. However the whole town is now out of debt, and looks to the future with a lot of optimism. That, ladies and gentlemen, is how the United States Government is conducting business today.

I sent the above silly analgy to Scott and he responded by saying that none of those people really had reason to be worried unless they feared that one of them would not come through on their debt. It was a circular debt, which I can actually picture, which meant that their balance sheet actually came out to zero. (Those were Scott's words, not mine!) But then Scott took it a step further, because that's what he does, and this is where the breakthrough is made for me...

"We have one guy with a ton of money, who lends to the hotel proprieter, the the butcher, the pig farmer, the supplier, and the prostitute...

This man has a lot of money for lending, but he decides to save and lend his money rather than spend it on himself. He lives a poor miserly existence, but he has access to all the cash...

And the folks in town are dependent on loans from this man and are afraid that he'll stop lending or will raise the interest rates...

Well, this rich man is China and the borrowers are the US...

There's a ton more to the story...

But the bottom line is China has flooded our markets with cheap cash that they've gotten from us buying all of the goods they manufacture on our behalf. But instead of pumping that money back into our markets by buying our goods... They save it and lend it back to us...

Its a global trade imbalance that had a lot to do with our current recession. And a recovery depends largely on our ability to correct that imbalance.

Get that miserly hoarder to service that prostitute darn it.. :-) (j/k)."

And that folks, is the China-Prostitute Recession Theory.

Oh, we're such a riot, aren't we? I'll assume Scott doesn't mind me pulling all of this out of the comment section of his blog and reposting it. It was just way too insightful for me to let go. Plus, I love me a good theory.