Susmit Kumar, Ph.D.
Had Japan and China not financed Reaganomics, i.e. the U.S. debt, the economy, i.e. capitalism, would have collapsed before the collapse of Communism.
Reaganomics stands for limited government spending, deregulation of economy and reduced tax. Tea party activities and people like Ron Paul have similar ideas. These ideas are nothing but bogus economics (please see charts and tables below). For the economic boom during 1990s and 2000s (until 2008 economic downturn), conservatives are giving credit to Reaganomics. The truth is that due to the Reaganomics the country started to accumulate debt, which was first financed by Japan and then China (Please see the data in charts and tables). Now the debt has become unsustainable and an equivalent to terminal cancer.
As shown in Figure 1, federal debt was negligible before President Reagan took the oath of Office. Because of tax-cuts to rich, the debt started building up. As debt is not a good thing for a household or a business, Bush Sr. raised the taxes despite saying, “Read my lips, No new taxes,” because any reasonable person would have taken that step. President Clinton balanced the budget and even had budget surplus during his last two years of presidency. But Bush Jr. increased debt drastically, first due to tax-cuts to rich and unfunded Medicare Prescription Drug plan, and then because of two wars, one of which was unnecessary (the Iraq War). During 1980s and 1990s, it was mainly Japan who financing U.S. deficits and, during 2000s it is mainly China who is financing the deficits (see Table1).
During the Reagan period, the trade deficit (a major component of balance of payment) started to increase at a rate not seen in last 60-70 years. The administration then had to pressure Japan to sign the 1985 Plaza accord to devalue the U.S. dollar at the expense of Japanese Yen in order to increase U.S. exports. It helped U.S. exports but it also led to the lost decades of 1990s in Japan, and Japan has not been able to get out of it. Likewise, the administration is asking China to appreciate its currency as Japan did in 1985, but if you are a decision maker in China would you do it after witnessing the fate of Japan?
Unlike Chinese, who are interested in purchasing high-tech and commodity firms like 3COM, IBM’s laptop division, and Unocal, Japanese were purchasing trophies like Rockefeller Center, golf courses (like Pebble Beach, California), prime American hotels, office buildings and Hollywood studios (like Columbia Pictures). Had Japan not financed the deficits, the interest rates would have skyrocketed and the U.S. economy, which was based on “Reaganomics” at that time, would have collapsed.
