In my last essay I tried to show that the US economy is actually almost completely dependent on government spending. While I may not like this situation, there is little or nothing that anyone, other than the legislators, can do about it. The great money engine of the 20th century, the manufacturing industry, has left America and possibly will never return; at least not in my life time. As long as the wage difference between the west and the east persists, manual jobs will gravitate to the east. To be sure, the folks in Shanghai are going to want more money for their labor as time goes by. Not to worry. There will be other folks from the interior who will work for the low wages. China alone has three times as many people as the US and only a tiny percentage of them are being paid well. With such a huge supply of cheap labor, it will take a very long time for wage increases in China to make a material difference in the prices of the goods they sell to us. I think we can consider this arrangement as a permanent one.
Don’t misunderstand me. America still has manufacturing companies but, the total number of them is greatly reduced from what it once was and many that do exist actually have their products made elsewhere. Given the highly competitive nature of world trade, the pressure will continue to be applied to any remaining manufacturers to move operations to China or India.
So, where does that leave America’s economy?
We are in trouble.
Ever since the 1980s, we have been living in a false economy driven by ever increasing debt and speculation of one kind or another. I am conservative by nature and would rather put a dollar into savings instead of eating out. But, my actions, emotions and motivations are a far cry from what most Americans have been doing for the past 30 years. It is not necessary to place a moral judgment on the actions of myself or others because the only things that are important are consequences. The consequences of our collective actions have been such that we are collectively bankrupt and scared. Note that this is a 30 year period of spending mania and a large percentage of the population remembers nothing but this time.
It was oh so tempting to buy a big house. Credit was available and everyone was doing it. And besides, house “values” were going up so fast that all you really needed to do was keep it for a couple of years and then sell it to some other fool for a huge profit. What could possibly go wrong? You could take out a second mortgage and use the house equity to buy all kinds of stuff that you have always wanted. You know, stuff like a 48 inch flat screen TV. Life was good.
But, the party ended and now people are trapped with mortgages that they cannot pay and they have run their credit cards to limit and many have lost their jobs. What do we do now? The president wants all American’s to start spending again. The trouble is that Americans do not have any money and their credit cards are at limit and they cannot afford the big house that they bought thinking they could “flip” it for a profit. The dilemma that President Obama is facing is simple this; people who can afford to borrow won’t and people who want to borrow can’t qualify. The result has been that private spending has fallen off a cliff. Automobile sales are down some 40% from the 2007 levels. The list of things not sold is quite long.
In order to keep the economy moving at least a little, both President Bush and President Obama have offered financial incentives, outright cash, and increasing government spending on “stimulus” projects. These did induce people to buy cars and houses but as soon as the government stops handing out “incentives” sales plunge.
Some say that we should get used to the new economy because from here on, we are all going to have to make do with less. We are now going to be forced to live on our income and not our home equity and credit cards. If that is true, and I believe it is, then there are going to be some major changes in how people live. I do not have a crystal ball that works so, I cannot predict what people will do. I will only say that each person will make their own adjustments as they see fit. However, I believe it is safe to say that the future will not be like the past. We will not continue business as usual.
It is my personal opinion that there is so much debt in the system that cannot be serviced that, it will have to be paid off or defaulted on before things get better. In recent times the federal government has passed laws making it difficult for individuals to declare bankruptcy and rid themselves of all debt. That means the debt must be paid off and that will take most people many years to accomplish. In the mean time, while the debt is being removed from the economy, I expect little or no real economic growth. Note I said “real economic growth” as opposed to debt driven growth.
Russia went through an economic collapse starting in the late 1980s. Dmetri Orlov sojourned in Russia before, during and after the collapse. His writings on the subject make for great reading. I recommend that all Americans read his story. You can find his articles on the net with ease.
Regards
