Excursion: The economic crisis in the USA

I thought for months about whether this blog is the right place to write about the economic crisis. Any relation to defense and freedom affairs would be more than a stretch. A first, incomplete attempt was made with earlier this month.
I can't hold it back any more. ;)

We've seen the mortgage debt crisis, the (prevented) insolvency of banks and a crash of intra-institutional trust on the financial market. The financial markets failed completely to allocate the resources efficiently, a major blow for economic theory and an even greater blow for the banks.
This failure wasn't prevented (but instead promoted) by active policy and would in itself have done a lot of damage.
That are only the most visible symptoms - not the real crisis, though.

The real crisis is a general mismatch of consumption/investment and income. The U.S. was simply living far beyond its means, enabled by cheap credit due to its leading currency, large economy and a lot of trust/goodwill.

This mismatch happened on the private level (mortgage, credit card and other debts = ultra-low savings rate), on the government level (record budget deficits by GWB, for example) and on the national, macro-economic level (long-time & huge trade balance deficit).

The real economy wasn't able to produce nearly as much goods as were consumed and invested - that is visible in the huge trade balance deficit which equaled 5% of the GNP.
The savings rate was also much too low for too long. Some claim that savings rate statistics are a bit misleading because of technicalities, but the savings rate was reported to be negative and certainly was close to zero for some years. For comparison: The German savings rate is around 10% of the GNP.

Such a situation was not sustainable, but the bubble kept growing for decades. It became a mantra that economic growth was to be attained by increased consumption instead of a focus on increased savings or investment - the foreigners did the saving for the Americans.
That, obviously, is about to end. Such an arrangement can only work for some time, not endlessly - and it breaks down once the trust in proper payback breaks down.
That is what the mortgage crisis really did to the U.S.; it ruined the trust.

Maybe the U.S. will be able to keep a net capital import for several years, but not on the old scale. It is necessary to either reduce consumption or increase industrial production or both.
More service economy won't help much. A rapid expansion of the industry is unlikely - it would likely take a decade to cover the trade balance deficit with it. That would have been a good idea before the crisis, now it's too late. Consumption needs to drop. Rapidly.

Consumption needs to drop in favor of savings - insecure consumers is sometimes a good thing (in macro-economy). It needs to drop to reduce import demand, too. Meanwhile, the industry will likely (actually, does) reduce production, and this means even less consumption is affordable.
10-20% less consumption for 'Joe Sixpack' in 5-10 years is realistic in my opinion. realistic and economically healthy. The next U.S.President has chosen a terrible time for a presidency.

Some countries might experience similar crisis symptoms in the medium term because of similar root problems liek trade balance deficit (Spain, UK, Italy), but others (Germany, South Korea, Japan) might even prosper because of an end of the capital drain. The PRC might go just about everywhere from extreme prosperity to an economic crash.

The U.S. economic policy needs to have these goals:

1) short term: To cure the financial markets. They don't need to be organized and work as before, though. Instead, they need to do their job.

2) medium term: To revive the industrial sector. A share of only about 20% of the GNP is obviously insufficient to meet the expectations for wealth. Globalization may be a good thing, but the past policies were obviously no good idea. NAFTA needs to be revisited, for example.

3) long term: Reduce vulnerability by a reduction of dependence. That's not about full self-reliance at all, but about reduction of systemic risks by diversification and substitution.

4) attitude: Welcome in the real world, where normal rules apply because you cannot excuse your actions by claiming you're "exceptional" when you're in fact just large and about to strike out with your actions. "Normal" causalities need to be accepted, and replace ideology and wishful thinking.

I was pleasantly surprised today when I wrote that the presidential candidate with the vastly better chances has actually understood the roots of the problem:

...He wants to launch an "Apollo project" to build a new alternative-energy economy. His rationale for doing so includes some hard truths about the current economic mess: "The engine of economic growth for the past 20 years is not going to be there for the next 20. That was consumer spending. Basically, we turbocharged this economy based on cheap credit." But the days of easy credit are over, Obama said, "because there is too much deleveraging taking place, too much debt." A new economic turbocharger is going to have to be found, ...

source, the bold emphasis was mine

We'll see whether he's able to use that insight. The next time when the Senate votes on a stimulus package is a good opportunity to observe him.
There's no better choice, though. McCain has obviously no clue about economics (and actually told the public so years ago)

This is a time for a paradigm change, not just some talking point change.
A whole nation needs to re-learn how to match income and expenditures.
This includes a 'defense' and other (para-)military budgets based on economic reality, not on fantasy land perceptions of American greatness. The Chinese, Japanese, South Koreans and Germans won't withhold their own consumption in favor of financing the U.S. military in 2015. The Saudis will probably do so, but that isn't even enough for the U.S. Coast Guard.


(I'm curious how well this economic opinion will stand the test of time.)

S O