Posted on 09/29/2009 5:27:17 AM PDT by Shane
With large continuing trade deficits, declining manufacturing and rising public debt, we cannot expect a recovery. Worse, we can expect economic conditions to deteriorate until we face the prospect of a total collapse in the United States economy. Here is why.
We all know that our trade deficits are through the roof. We import a great deal and we manufacture less and less to export. The services of our service economy are not really exportable like manufactured goods. The result of the continuing trade deficits is huge foreign debt to China and other countries. Well, so what, you might say. The answer is that until those deficits are substantially reduced, we can expect the recession to continue and actually get worse. That is, we cannot expect a recovery and we can expect the stock market to trend lower.
The problem is too many Keynesians are not paying attention to what Keynes said or indeed to what is going on. Consider this: in The General Theory of Employment Interest and Money, Keynes predicted what would happen to a country that allowed its trade deficits to persist:
[A] favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression.
As a young man, Keynes favored open free trade. However, from studying the real world, he came to realize that countries can gain an advantage by adopting strategies designed to develop trade surpluses. The problem is that countries that trade with such surplus countries themselves wind up running serious trade deficits. If and as those deficits continue, according to Keynes, they typically result in a persistent depression in the deficit countries. Aggregate demand is reduced because people have to finance and repay deficits related debt and eventually financial crises ensue which are caused by too much borrowing from abroad, according to Keynes. Sound familiar?
So how did we get to this point? A bit of history tells us. Keynes had a plan for what became the Bretton Woods system of institutions and trading rules after WW II. Both the IMF and the WTO were founded based upon Keynes’ advice, but not all of Keynes’ recommendations were adopted. One omission was crucial. The institutions and rules Keynes sought would have disallowed serious trade imbalances. There would have been very different requirements for trade surplus and trade deficit countries, not the one size fits all policies now applied by the IMF and WTO. Specifically, Keynes proposed institutions and trading rules that would have required trade surplus countries to take down their trade barriers, while it would let trade deficit countries use export subsidies and tariff barriers for a while to bring trade into balance.
Our big surplus trading partner, China, is doing exactly the opposite of what Keynes proposed surplus countries should be required to do, thereby seriously worsening the economic situation of the United States. China has dramatically increased large export oriented subsidies, created as many sub rosa import restrictions as it can, developed import licensing, delays for imports including much red tape, and is engaged in currency manipulation to keep the price of the renminbi down relative to the dollar. It is making our trade deficit and indebtedness to China greater and China’s trade surplus and IOUs from us larger. (Could it be that some smart Chinese Keynesians have figured out how to put China at the top of the world economic heap and have the United States sink into the sea, economically, all without firing a shot?)
In a nutshell, that is the historical backdrop to our present situation.
Others agree with the notion that until we correct our trade deficits and the growing debt attending them, the recession or an ensuing depression will persist and there is nothing we can do about it. William White, a former chief economist at the Bank for International Settlements, predicts the Great Recession won’t end because the world’s governments are not addressing the trade imbalances, which caused it.
Richard Duncan agrees and, worse, predicts the United States is likely headed for a “Fall of Rome” type of scenario, which he explained in a recent interview in Hong Kong. Before I address that, we need to consider who Richard Duncan is. He is a financial analyst and economist. Previously, he worked for both the International Monetary Fund and the World Bank in Washington DC as a Financial Sector Specialist. It is moderately rare to have a good economist also be a financial sector expert.
Duncan has an excellent track record in predicting economic events. In 1993, Duncan warned of the impending collapse of the Thai economy and the Thai stock market. That was four years before it all happened. Subsequently, in 2003, he wrote a book entitled, The Dollar Crisis: Causes, Consequences, Cures in which he argued that the persistent current account deficits of the U.S. were creating an unsustainable boom in global credit that was destined to break down and crash, resulting in a worldwide recession. He was correct there, too. Next, well before it became obvious to the rest of us and it happened, Duncan also accurately predicted the course of present day Fed policy, i.e., that the Fed would be forced to make massive loans to the banks and other financial institutions to keep them afloat and not have a major depression. One result that he foresaw from that would be a massive rise in federal debt. That is now a part of the basis for his present predictions about our future.
Duncan argues U.S. budget and trade deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that is likely to result in a major economic collapse. The U.S. has little chance of resolving its deteriorating financial position because trade deficits and internal debt continue to grow and the US manufacturing industry continues to shrink.
The bad news is, in the next 10 years, we're still not going to have fixed these problems, and as Keynes, White, Duncan and others argue, the recession or worse will persist. Instead of fixing our problems, we are only trying to prop up aggregate demand. For example, the federal budget deficit will total $1.6 trillion this year, while the combined budgetary shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office. The U.S. has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of U.S. debt has propped up the dollar and allowed a credit-fueled spending boom by the nation's consumers, according to Duncan.
U.S. workers are now likely to face more unemployment and declining wages and that may create a political backlash against free-trade policies, he said. The nation's jobless rate jumped to a 26-year high of 9.7 percent in August. As unemployment remains at or above 10 percent well into the foreseeable future and wages slip, it won't be long before Americans start voting for protectionism, Duncan said. That's going to be bad because protectionism will mean world trade will diminish and that will reduce overall global prosperity.
Once the U.S. debt burden becomes too large and the government can no longer sell the debt it needs to sell, the Federal Reserve will likely step in and monetize the debt, resulting eventually in high levels of inflation, Duncan explained in his interview.
The real problem at that point becomes the possible confluence of many adverse economic circumstances that can create the economic perfect storm. The high levels of inflation or hyperinflation, the continuing recession or worse, depression, continuing and likely growing unemployment, with ensuing protectionism, declining wages and reduced international trade, and public discontent and unrest will all likely lead the United States to great instability and to a point of “irreparable damage” and collapse -- “a kind of Fall of Rome scenario,” as Duncan and others of us see it. This prospect is too likely. Already, people at public meetings are shouting and behaving badly.
For those who don't know or recall, the fall of Rome was accompanied by high inflation, much hoarding of money (gold and coin), a fall in the velocity of circulation of money and high trade deficits with the eastern parts of the Empire and beyond. Some argue these were the real reasons Rome fell. Invading barbarians from the north simply took advantage of the economic decline and chaos they observed and helped it along by raids and stealing gold from the Roman treasury. What ensued was the Dark Ages where warring groups roamed the land stealing from each other and much more primitive forms of living arose.
We can certainly hope our situation in the United States does not come to this, but the elements are slipping slowly into place and too few seem to be noticing, much less having us do something about them.
Against this background of progressive declining economic conditions, it is not unreasonable to expect the stock market generally to drift lower steadily on a seasonally adjusted trend line, but perhaps gain a bit of a respite if the rate of inflation rises a little, the dollar slips and exports improve somewhat. Gold and precious metals, along with their mining stocks, could be expected to trend up significantly. The Dow at its present level, inching up toward 10,000, assumes a strong and quick recovery, but it is not going to happen that way and at some point a serious correction is inevitable.
It will take time for the realization of no real economic recovery to sink in and be realized in the stock market, but that realization will be aided if unemployment remains high or grows, and bad numbers on the economy and poor earnings continue to be reported. It would not surprise me, too, if there were no substantial recovery from any October or November correction. This is not a happy situation.
The question is what can be done to prevent this prospective situation. I will try to address that and a brief intellectual history of how we got here and why so many economists and others miss understanding what is happening in future articles.
“The services of our service economy are not really exportable like manufactured goods.”
But they do harm our economy when we send these jobs overseas, for these reasons:
1. Higher unemployment (anyone who still believes that those who lose these jobs in America will simply find another, BETTER job needs to put the crack pipe down).
2. It’s US dollars that are sent out to be converted into other currencies, where that money is sent to generate activities in those countries (anyone who believes that this is good for America because that money comes back to America by the purchase of our goods and services needs to go and study the TRADE DEFICIT. That money is NOT coming back to America because we do not have the manufacturing capacity combined with exports that we once had. It will, of course, if we are all willing to adopt the standard-of-living of third-world countries. Then and only then will manufacturing come back to America.)
“So how did we get to this point? A bit of history tells us. Keynes had a plan for what became the Bretton Woods system of institutions and trading rules after WW II. Both the IMF and the WTO were founded based upon Keynes’ advice, but not all of Keynes’ recommendations were adopted. One omission was crucial. The institutions and rules Keynes sought would have disallowed serious trade imbalances. There would have been very different requirements for trade surplus and trade deficit countries, not the one size fits all policies now applied by the IMF and WTO. Specifically, Keynes proposed institutions and trading rules that would have required trade surplus countries to take down their trade barriers, while it would let trade deficit countries use export subsidies and tariff barriers for a while to bring trade into balance.”
And this is why Keynes is one of the biggest Intellectual Morons of the 20th century. This would require the central control of production, its costs and its prices, as well, eventually, of wage controls. All of these, as the Austrian school has pointed out so very well for decades, leads to dismal economic failure.
Real wealth is created by production and without production a country cannot survive.
America has severely penalized production since the 1970’s.
There can be no recovery with over 10% unemployment and that unemployment is not going down until there is more demand for housing and all the things associated with that market and I think real estate hasn’t really bottomed out yet.
On a related subject, where in the heck can you find 9mm or .380 ammo? Even Cabela’s is consistently out of it.
While I agree with the author’s thesis, I question his reference to the “thinkers” whose overall theories led to this problem. He makes it sound like this crisis happened IN SPITE of their theories. That is incorrect. This crisis happened BECAUSE of their theories.
This is a credit-based recession. All other recessions between now and the Great Depressions were inventory-based recessions. Trade deficits can be caused by either type. But that is of less concern to the effect of the trade deficit. In this crisis, the trade deficit is causing an inventory recession in those nations that rely on exporting to us, and they are causing (insanely) a credit-recession in America, since we have become 70% a consumer-based economy. I say “insanely” because a large portion of the purchasing power that America and Americans have has come from BORROWING (credit) funds from those manufacturing nations that are exporting us (China). We have a snake-eating-itself scenario with massive interest rates accumulating.
And all of this is only a small portion of the overall problem of this credit-based recession, which is the suicidally high percentage of deficit-spending to GDP. A little deficit spending is not a bad thing, in and by itself. When Reagan did it, it worked well, DESPITE the massive spending of the Democrat-controlled congress. And in that regard, it’s like you and me spending more than we earn for a couple of months on a credit card because we know we are going to pay it off when our bonus comes (risky, yes). By doing so, we acquire assets that we wouldn’t ordinarily be able to. When we pay them off, we have that much more real wealth.
The problem with this credit-based recession is that we never paid it off. We kept pushing the debt forward until we are where we are. So, in short, the reason that we are at the brink of economic collapse and pitching forward (not pulling back, as Obammie the Commie praises Himself for having caused) is that the government can not afford to pay for its liabilities, it does not have the manufacturing and export base to “produce” its way out of this recession, and it has destroyed its credit rating so that we can no longer “borrow” our way out of this recession. Oh, that last phrase may come as a shock. But essentially our “AAA” rating is gone and our economic credibility is living on vapors already. We’re just waiting for the formal “vote” from other nations that the tank is empty.
Our banking institutions BECAUSE THEY ARE A PART OF THE CENTRAL-BANKING MACHINE that Keynes and his ilk thought was the best way to manage an economy, is about to collapse. The Alt-A’s and Option-ARMs about to reset. Either of these will dwarf the Sub-Prime “crisis,” but they are both due to hit later this year and throughout 2010. Commercial real estate is also imploding as we speak. The signs are most visible in vacant office space and empty retail shops in strip malls, etc. This will soon work its way in to the major malls around you, which are going to become ghost towns for the most part. If you work in a cube-farm, get used to the idea of doubling or tripling up as landlords who own multiple buildings will seek to recoup these losses and will have no choice but to raise the rent on your employer.
In short, there is only way this recession/depression is going to end, since it is a credit-based economy. We must let all the banking and financial institutions that are essentially insolvent but who are currently hiding that fact FAIL. They must fail completely, their debt must be absorbed and their healthy assets taken over by stronger, better-managed institutions (less greedy institutions that do not over-leverage). We must bring manufacturing back to this country. We must pay off our personal, corporate, and national debt. And we must end the SOCIALIST programs that are destroying us.
Any idiot who says we need healthcare reform to HELP our economy needs to put the crack pipe down and sit down with a student of the Austrian school of economics.
“Real wealth is created by production and without production a country cannot survive.”
true.
“America has severely penalized production since the 1970’s.”
true again.
However, productivity can exist in any sector - and because productivity is often combined with innovation, it might even come in a market sector that has yet to be invented. It is the current heavy hand of a centrally planned government economy and unstable business environment that are diminishing the role of the innovator/producer and limiting our chance for recovery.
You’re correct. See my other posts.
Yes, the penalization of manufacturers (through punitive taxation, union-cronyism, and eco-punishment) have destroyed the ability of US manufacturing to compete with manufacturing in other nations. It has also greatly harmed the incentive of those who may have a better business plan to get started, thus increasing inefficiency in manufacturing.
Ya, there's going to be some pain, but reality has to set in if we are to survive.
The most damaging of all are the EPA and the Endangered Species Act.
We need to get rid of them totally and replace them with a government agency that restricts itself to clean air and water on a reasonable sensible basis.
It is wrong to dump poison in our rivers and lakes. On the other hand it is worse than dumb to declare the world is ending because we create carbon dioxide.
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If the self-proclaimed financial pundits and guru’s are bearish, then now is the time to buy equities.
Ammoman.com
CAN THERE BE ANY DOUBT THAT THESE IDIOTS IN CHARGE ARE TRYING TO COLLAPSE THE US GOVT???
TREASON
But don’t forget we are a “service economy” now.
All will be well....
Ahem...(sarc) if necessary.
Bttt
Check out the latest swindle.
We had them a bit fearful a year ago, but that passed.
There was an old joke that may not be considered permittable on FR, but here it goes: "If we ____ one Congressman at dawn for a week , the rest of them would change their tune pretty quickly." Truly, I don't want violence or death, but I want a sobering assessment of where we are headed, and the political games to cease. There is no free lunch.
Unfortunately unemployment is much higher than 10%. The headline unemployment number 9.7% is what we see when we read the paper. What we typically don’t see is the real number of unemployed. For instance, if someone has not actively looked for a job in the last four weeks, even if they want a job, they are not counted as unemployed. They are classified as a “marginally attached” or “discouraged worker”.
Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment).
And if you add those who are employed part-time for economic reasons (i.e., they can’t get full-time jobs) the unemployment number rises to 16.8%. (That is called U-6 unemployment.)
.380 seems to be the hardest to get.
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