Posted on 02/08/2006 10:53:43 PM PST by grey_whiskers
There has been a good deal of speculation about the state of the US economy lately. Which way are interest rates headed, now that Bernake has replaced Greenspan at the Fed? Will the housing bubble burst or just leak slowly? What will be the influence of the tensions in Iran? While all of these questions are challenging, and may present the opportunity for a quick strike, they are still among the easiest of all economic questions. Why? Because they are short term questions. If we just wait six months or a year, the answers will have already happened.
Instead of asking these conundrums du jour, I would like to focus everyone’s attention on a series of more important questions. These questions have to with long-term, or “secular” trends, the big picture. They can most easily be summarized as “Where in the world are we going? And why are we in this handbasket?”
The starting point for these questions deal with the United States and its place in the world. While the United States has long been accustomed to being the 800-pound economic gorilla, it seems that the times really are changing. From the burgeoning federal budget deficit, to the trade deficits with the Middle East and China; from the apparent hollowing out of our manufacturing capacity, to the problems of oursourcing; from the aging of the US workforce to the high US tax rate. All of these trends promise to exert powerful influences on the US, for good or for ill.
But at the same time, as hinted at above, the United States does not rise or fall by itself. More and more, the country is linked to the economic fortunes of other countries—by trade, by demographic trends, by laws, by transport of people. The fortunes of the United States are no longer solely a matter of our own say-so, but are also a reflection of how well we chart the course in an increasingly interconnected world.
Let us try to unravel some of these threads one at a time. First, let us take the Federal Budget deficit. Right now the United States Government is gushing red ink at the mind-boggling rate of $357 billion in fiscal 2007. (By contrast, according to the Congressional Budget Office, the ENTIRE BUDGET in 1981 was roughly $580 billion. Our deficit alone is roughly 2/3 of ALL U.S. government spending when the Reagan Revolution was beginning). That money has to be paid back, somehow.
The deficit is financed mainly by foreign purchases of treasury securities – and the foreign purchases are financed by the trade deficit. (China’s trade surplus relative to the United States was $200 billion). This is a double edged-sword. There is an old saying that “If you owe the bank $2,000, then the bank has you over a barrel; but if you owe the bank $20,000,000, you have the bank over a barrel.” China could in theory switch to another reserve currency—but then they would devalue their own dollar holdings.
Speaking of trade deficits, it appears that not only China, not only the “Asian tigers”, but – well, pretty much everybody is trying to make their money selling goods and services to the United States. From appliances and electronics in the Far East, to back-office offshoring in India, to migrant labor from Mexico, and (of course) the Middle East’s oil : everyone is selling to Uncle Sap Sam. And that’s us. Various prognosticators, including “Jeremy Siegel, PhD” on Yahoo.com, are confidently predicting that India and China, due to their growing economies, vibrant workforce, and demographics, are set to supplant the United States as the economic superpower of the world in 20 or 30 years. Even the oh-so-precious at Davos, Switzerland believe this. Business week quoted one unnamed lawyer from Davos as sniffing words to the effect that “No-one is discussing the United States anymore”. And the United States workforce is aging, with not enough money saved for their retirement. So we have demographics working “on both ends of the clock” against the United States.
But along with demographics come two other points, both from the root word demos, “people.” First is people: not only are they a source of willing workers, but work has to be found for them. President Bush was quoted the other day (I’m sorry, but I can’t find the source at the moment) as hand-wringing over China: “Do you realize they have to find 25 million new jobs a year just to keep up?” That’s right, and India has the same problem. So between the two of them, China and India could engulf the entire working population of the United States, and take all of our jobs, in less than 10 years. Except, of course, those lawn maintenance, agricultural, and custodial jobs which “Americans won’t do” and for which we need worker amnesty. And the other point coming from the overflow of people is resources: towns in India are already complaining that they are being drained of water by Coca-Cola which taps their aquifers for bottled water; China is rapidly surpassing the old Soviet block in pollution (recall their recent benzene spill in Harbin?).
So put all of these competing claims together. The United States is still currently the consumer of last resort for most of the world; many other economies are built around export to the US consumer. In their haste to sell to the United States, the robber barons around the world are behaving…like capitalists, denuding the natural resources that they need to survive. Remedial measures are apparently insufficient. But the US economy is being undercut by the loss of its manufacturing base, and the wholesale export of jobs overseas, and import of foreign labor here. And at the same time, much of the skilled US workforce is retiring, without having saved any money for their old age. And the US government, which has already racked up a huge debt (much of it financed overseas), cannot step in and increase US taxes, or go further into debt.
The question then becomes, what will happen when all of these competing claims hit the fan simultaneously? As the US workforce retires, without sufficient money, the spending of the US will slow down drastically. Typically, that means prices in the United States will drop, since you cannot charge people a lot of money when they don’t have it to begin with. But, counteracting this, the United States will at that time have a lot of bills (for today’s spending) coming due, and no way to pay. The classical expedient for that situation is to print paper money, and let inflation render the existing debt insignificant. But can the US government afford to do that, when so much of its debt is owned by other nations? And speaking of other nations, what will they do when the US consumer, the engine of their economic growth, starts to cough and sputter? In hopes of holding onto their share of a shrinking market, will the foreign companies have their own “race to the bottom” in the form of lower prices? If everyone is trying to sell to the same shrinking group of US consumers, it will be a classic case of “too many goods chasing too few dollars”. And that is Deflationary. And given the corruption endemic in many other countries, will those countries too face internal strife and unrest as their governments failed to plan and save for a rainy day?
I really don’t know what is most likely to happen. Maybe we can piece together an answer working together. I invite your comments.
But I was serious about making a vanity post out of yours!
Cheers!
I think likeminded folks like yourself and me could discuss this as a vanity post; but I suspect more than likely it would engender a great deal more negativity, and thereby instead of being as a positive, it would be used as fodder food for the local Seymours to spew. I read this morning that some cynicism is quite healthy. :)
Sorry, I don't know of any Seymours except Seymour Cray (RIP).
Can you tell me who you mean?
Cheers!
lol! You are determined we have this discussion over that past subject in post, eh?
And if not for the 63-seat shellacking in Nov.2010, it would've continued, even accelerated.
Consider yourself highly commended.
Cheers!
LOL Well, thank you. How long ago?
I remember reading Kurt Vonnegut over 20 years ago about the “money river” and how some folks teach their children and perhaps a few lucky others how to “dip into the money river” but one needs to “surp quietly” because if the peasants learn about it they will stampede and run it dry. Sometimes old Kurt could have great insight.
I went back and read post 16 again today. I don’t see anything in the last year that has changed one iota. Do you?
I think we're going to have inflation in commodities (have-to-have) and deflation in luxuries (in an attempt to spur sales), followed by massive stagflation.
We've got the stag, just waiting for the flation.
Then Sarah Palin's Reaganesque landslide.
Pray that *this* time, she picks a conservative VP.
Cheers!
There was lots of 'good luck' to go around on that one...
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