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The Risk of Economic Collapse and the Presidential Elections

NEW YORK ( TheStreet) -- The global economy is teetering on collapse and the presidential election may well decide whether another Great Depression is avoided.

For nearly two decades, China and the U.S. have been locked into a dangerous growth paradigm. Beijing undervalues the yuan to boost export, limit imports, and accommodate migration from farms to cities.

With dollars earned from trade surpluses, Beijing subsidizes imports of key raw materials like oil and credit to state-owned enterprises and provincial governments to accelerate industrialization and infrastructure investments. And Beijing buys U.S. private sector bonds and Treasury securities.

The annual U.S. trade deficit with China is about $345 billion -- and that represents a huge drain on demand for U.S. goods and services and the principal reason the American economy is growing slowly.

Until 2008, Americans avoided recession by consuming more than they produced -- homeowners borrowed ever large amounts to finance a spending binge. Led by China, foreign investors provided the funds by buying U.S. securities, and Wall Street banks recycled this money by underwriting "creative mortgage products."

When the Ponzi scheme collapsed, Washington bailed out the banks and the Obama Administration engineered a weak recovery by running up federal spending and deficits.

In China, the largest beneficiaries of modernization have been the families of communist party officials and U.S. multinationals -- such as Caterpillar (CAT) and General Motors (GM) -- who have located operations in the Middle Kingdom.

The iron alliance of conservative interests within the Communist Party and politically influential U.S. multinationals precludes radical changes in Beijing's growth strategy or pressure from the Obama administration to instigate needed changes in Chinese policies.

Meanwhile, Wall Street financiers block genuine bank reforms that would free up lending to U.S. small businesses and continue to pay themselves ever larger bonuses.

Europe suffers from similar dysfunctions.

For many years, the euro has been undervalued for Germany and other northern states, making their exports artificially cheap, and overvalued for Spain, Italy and Greece, making their economies uncompetitive. The latter piled up trade deficits, financed by the Spaniards borrowing against their homes and the Italian and Greek governments borrowing from German and other northern-European banks.
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