2009/02/25

The extent of the economical problem - because some don't get it

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This is no text for reading pleasure, it's rather meant to break mislead attitudes and beliefs. It won't be comfortable, especially not for U.S. American (or British) readers.
It's certainly a poor tactical decision of mine considering how many new readers I've gained recently. Well, this blog sometimes addresses the harsh sides of life.

I will inevitably make some readers think "anti-American", "he hates America" and other nonsense.
Seriously, free your mind first and let the numbers have their due effect. Feel free to check the sources, too.

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Sometimes it feels like (military-interested) U.S.Americans don't understand the (inter)national scope of the economic problems.
Old recipes (more consumption, cheap money) are still getting promoted, and the economic illness is often considered to be merely a problem of incompetent management or companies.

Bad news: The whole U.S.American economy was crap for many years - not just Wall Street.

Let's take the 2008 figures:

CIA World Factbook:
GDP:
$14.58 trillion (2008 est.)
GDP - composition by sector:
agriculture: 1.2%
industry: 19.6%
services: 79.2% (2008 est.)

$14.58 trillion times (19.6%+1.2%) means an
industrial & agricultural production of $3.03264 trillion

U.S.Bureau of Economic Analysis
(= U.S. Department of Commerce):

U.S. trade balance 2008 = $ -0.677099 trillion
(goods about -0.821, services about +0.144)

Total services export in 2008 was $ 0.551 trillion - you cannot double that quickly. There's no demand for such an expansion in the world. It's obvious that the U.S. can't balance this trade deficit with an expansion of services exports.

Exchange rate changes won't help at the necessary scale as well - one becomes always more expensive when exchange rates change; either export or imports. The crisis is global anyway - the countries can't simply pull each other out of the mess.

It's about goods; industrial products mostly (the U.S. won't be able to export an additional several hundred billion $ worth of raw materials or agricultural goods).

The industrial output is the key here.

Now let's look at the figures again; the deficit of 2008 was about 22.33 % as large as the U.S. industrial & agricultural production of 2008.

Well, it doesn't look like the U.S. industry will soon begin to expand much (albeit it will recover from the ongoing crash somehow, sometime).

Now let's look at the dimension of the problem:

The population of the USA PRODUCED ABOUT 18.25 % LESS GOODS THAN IT CONSUMED AND INVESTED in 2008.
(consumption + investment = production of 3.3264 trillion plus net import of 0.677099 trillion (and I used trade balance instead of goods trade balance - minimally less accurate, but more meaningful). 0.677099 trillion / 3.709739 trillion = .182519. I also kept the marginal carry over effects out; this is no dissertation.)

I didn't cherry-pick the sources; both are official U.S. sources (selected for convenient access for the readers). Go and check the links if you don't believe me.
It's not anti-American spin - it's official U.S. statistics (and pre-2008 statistics didn't look much different).

There's simply not enough national income to afford private consumption, public consumption and investment at the old (or even desired) levels. A compromise is necessary.

You cannot reduce the consumption of raw materials and half-finished products much without a further reduction of industrial output.
You cannot easily reduce public consumption of industrial goods for infrastructure purposes (most of them weren't imported anyway).
You cannot reduce recapitalization in the economy (that would strangle the industrial output in the medium and long term).
You CAN reduce private consumption and some public consumption, though.

In the end, we're likely talking about a reduction of about ONE FIFTH in consumption - unless an industrial miracle happens (massive expansion of U.S. industrial output) and/or a world trade miracle happens (which would be necessary to sustain the trade deficit for more than at most a few more years).

"Stimulus packages" won't help much (if at all). They can AT BEST reduce the loss of industrial output. There's not even talk about raising it beyond 2007 levels with stimulus policy.

***U.S.American readers only***
Imagine this: You can expect to buy one seventh to a quarter less in stores in 2015 than in 2007.
Something feels wrong? You're right, the U.S. economy of the past was wrong, very wrong. To borrow isn't the same as to earn - it never was.
***done***

Meanwhile, I still see discussions about how many expensive warships to buy, how many expensive fighters to buy and similar military expenses.

I have bad news for the U.S.Americans: You cannot afford it. You weren't able to afford your military/lifestyle for many, many years.

Do you want to reduce private consumption by even more than a fifth in favor of stable or rising government consumption (military spending is consumption in macro-economical terms, no matter what right-wing nuts might tell you about its economical effects)?
No? Then don't spend insanely on the military!

The Afghan cavemen and North Korean starving children won't invade you, I guarantee for that! You're allied with many of the major military spenders and military powers of the world - seriously, there's no need for going broke (even more) by spending more on the military than all other countries together!

The "can do" attitude won't help much, at least not until the problem is understood and the worthlessness of many old recipes recognized.


Maybe I should rather cry about this than to be fascinated and amused by pointless discussions - my country is in huge troubles as well due to stupid economic policies (the other extreme; too much export, not enough domestic consumption) and our public didn't get it yet, too.
Well, at least we're creditors, not debtors. That feels a bit better. For now.



I believed that I had covered the issue of economic sustainability of military power well enough in 2007, twice.
The pattern of denial made me wonder - and write again about it. Seriously, such economical matters are relevant for military affairs, much more than most discussions about the military are!

Maybe this text helps some readers to avoid wasting attention and time on future military spending fantasies. We've got real, really important challenges to address.

Sven Ortmann

7 comments:

  1. I'm glad to have found a military blog that doesn't put everything through a conservative filter. We definitely need to trim down military spending, the United States could halve its military spending with no real loss of security. It would be nice to see an international movement to lower military spending to cope with the worldwide economic downturn, although it would be a double-edged sword, adding to the unemployment problem. And by the way to say "seit vielen Jahren" you say "for many years" rather than "since many years". Apparently you still type with a german accent.

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  2. Thanks, I fixed the 'since'. It was indeed a direct translation, although "for many years" was already in my passive vocabulary.

    I wrote earlier about the Munich conference - calls for partial disarmament aren't rare, and many nations already did it (intentionally or due to fiscal problems like Russia).

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  3. "unless an industrial miracle happens (massive expansion of U.S. industrial output)"

    And Unicorns will frolic on the Whitehouse lawn. My fellow Americans are children when it comes to economics and we're about to see what it's like to not make anything that others need. We have killed our industrial base, which can actually produce something that someone wants. I have no idea what a post industrial American economic recovery looks like... although, Zimbabwe might be a great example.

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  4. Unfortunately, you happen to be entirely correct on this post. I have often wondered why my economics classes did not address this voodoo math of consumption, I myself am guilty of simply ignoring it and assuming that we can just keep borrowing forever.

    In terms of military spending, I think we Americans have just gotten used to spending $500 billion dollars and ignoring the fact that our DOD budget is 5x larger than the next competitor. The military industrial complex has become institutionalized, it seems unbelievable that a century ago, we had only 15000 men under arms before WWI. Our (justified) extreme distaste for casualties may be another reason why we prefer to spend lots of money as opposed to lots of blood on our wars. Or perhaps we're gearing up to fight a war with the Martians.

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  5. Ending the war in Afghanistan could offer the chance for a peace dividend to scale the military budget back to the Clinton era amount. But as long as there's a war not only conducted with drones that could be political suicide.

    That would be an interesting question, does economic power equal military power via the ability to build and finance weapons? Would it benefit the US to develop dual use systems for military and civilian use? Seriously, the US is as renown for bad cars and good weapons as the Russians, but the later have a much better price.

    Another post in this blog mentioned Russians and Wehrmacht developing new weapons systems. Well, America is safe for now and could take her time to thoroughly test and develop new ideas and equipment that also fulfills economic requirements.

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  6. The Wehrmacht developes new weapon systems? I think you mixed something up.

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  7. Sure, that was badly phrased. I hope this attempt is better.

    The Reichswehr and Wehrmacht had been developing new weapon systems prior to WWII with the ruling Nazis and Conservatives intent on producing and using these compareably modern weapons in an attempted European conflict.

    Similarly the Russians kept a low profile after the fall of the Soviet Union while, as you mentioned, developing their arms to higher sophistication. A later widespread introduction of new weapon systems under improved economic and financial conditions can have been coincidence or part of a long term plan. During the vulnerable time with little effective armament a defensive military posture towards a possible armed peer-conflict had to be maintained. That doesn't exclude swashbuckling as long as you bluff.

    The same intent is possibly also true for the Chinese PLA that bids time until the Four Modernizations have established the necessary base for an even more influential global role.

    The US is currently massively investing into hardware that outclasses enemy capabilities by far, but I have doubts this build up will be sustainable in comparison to emerging peer competitors on the long run. An armament reflecting the current threat environment with more funds for economic and technological development would be the wiser choice in my opinion for maintaining global influence as a major power.

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