1. Uncle B July 27, 2008 @ 10:45 am

    When the uber-rich Americans are all safely in Dubai and the Cayman Islands or private castle in Europe, the common folk, the foot-soldiers of the Americas will be left holding the bag. We will be left with a polluted, resource raped shell of a country tied by red tape bureaucratic laws that favor the now departed uber-rich. Our now burned out workforce with its out-dated and poorly maintained factories will pay the price in unemployment, rushed jobs, low productivity and shawdy workmanship. Our infrastructure in a shambles, repossessed homes deteriorating to rubble, and our burned out automotive fleets will be patched together third world style until, like Cuba, we give them up entirely. Anarchy will emerge, as it has in the Detroit slums. Aids will run rampant, as will diseases of malnutrition like rickets. Diseases of the soul, despair and depression will overtake this abused workforce and they will turn to drug addiction, sexual perversion and alcoholism for relief. Public school systems, sewage and sanitation, food distribution and factory farming will deteriorate and eventually disappear. Government organizations like the FDA, FBI and CIA will deteriorate in corruption and bureaucratic folly to the point where masses of people will die before simple problems like salmonella outbreaks can be stopped by overpaid, under-educated but well entrenched bureaucrats. Huge armies will be extracted from the families of the poor and uneducated, and mostly the unemployed or immigrant population, to fight wars for foreign Princes, not as mercenaries, but as serfs, to be returned, injured and broken to their impoverished families for care. All this to pay off favors promised behind closed doors of the uber-rich. America will never pay off the debts it has incurred, and it will gradually over three generations fade away. The Chinese, a now very prosperous lot, will send their convicts to pick over the bones of the dead civilization once known proudly as the U.S.A.

  2. Ben July 28, 2008 @ 10:47 pm

    Uncle B, look on the bright side, the world might end in 2012!

  3. Anonymous July 29, 2008 @ 7:05 am

    maybe the world would end in 2012, by them i hope that we havent destroyed it yet. just living is depessing nowadays, the world moves to fast but at the same time it stands still…we have reach the end of the line for this way of life. what’s left for us is to understand our mistakes and perhaps do some clean up before everything falls to pieces

  4. Anonymous August 5, 2008 @ 12:56 am

    “… the current debt of Americans surpasses the value of the goods they hold”

    So wrong it’s not funny.

  5. Franklin August 5, 2008 @ 1:08 am

    You may have to prove the statement is wrong. Here, a couple of reality bites for you: individual savings is negative, country savings are negative, foreign governments are buying core US enterprises.
    Of course, an anonymous post that offhandedly tries to negate reality is something I should not care about, and yet…

  6. Kim August 5, 2008 @ 7:14 am

    Generalising – from a European perspective : the USA is a nation that is so far from reality that it doesn’t have a clue what reality is . A nation that desperately needs to get back to the basics of business and the basics of morality – in application to itself – not to others . Unfortunately experience tells me that the nation is going to have to crash hard before it actually does anything sufficient . The USA has been , for a long time , marketing on reputation – not on fact . Other nations will step into the breach – whether it’s decent films and TV to replace the crap that comes out of Hollywood – or whether it’s manufactured goods or technology . The USA will lose a lot of it’s talent and with it their associated earnings . It all looks pretty grim sorry to say .

  7. FITX August 5, 2008 @ 9:12 am

    It will become buoyent again, like a shelving ice sheet that goes under, it will come back up, maybe not to it’s original height, but it will emerge.
    One assumption for this conclusion is that the ice cold water after the plunge(reality)awakens the American people from their idealogically induced matrix of excess without means.

  8. Wowser September 15, 2008 @ 10:59 pm

    I have seen the enemy and IT IS US!!!

    Simply blaming the politicos is missing the point….WE VOTED THEM IN THERE!!!!

    We go used the handouts, the bailouts and the “freebies”. Now we want “free” healthcare and a bailout for buying homes we know we couldn’t affort. We maxed ourselves out with personal debt and asked the government to do the same.

    We only have ourselves to blame.

  9. Ben September 16, 2008 @ 11:34 am

    This is when every democracy dies. When the people figure out they can vote them selves “free” money.

  10. Vince Delmonte April 14, 2009 @ 3:56 pm

    I read your posts for quite a long time and should tell that your articles are always valuable to readers.

  11. Franklin April 22, 2009 @ 12:37 am

    Thanks for the kind words Vince. I haven’t been able to write much lately.

  12. geonsurse July 10, 2009 @ 7:57 pm

    He put his eye to the hole. He just managed to spy some people sitting in deckchairs chanting, before a finger came out of nowhere and poked him in the eye. As he staggered back, the people started chanting, “Fourteen, fourteen, fourteen…”

A Streetcar Named Wishful Economic Thinking

Economics, Economy, Thoughts Comments (12)

We are broke. We may have a couple more months of sustained living if the Fed keeps injecting liquidity into the system, but to all intents and purposes, America is broke.

For the past 50 years we have been sustaining low unemployment rates (albeit not as low as the official figures show), based on a formula devised by John Maynard Keynes nearly a century ago. The formula says that if you increase public consumption, you reduce the amount of money that companies need to invest in production. In a way, you buy your way out of unemployment.

The formula seems to have worked pretty well for America’s economy for the past 50 years. However, during the past 10 years we have not been able to keep ourselves out of unemployment by spending, but, instead, we started borrowing to keep up with the pace of our spending. As we borrowed money to buy the goods that allowed “entrepreneurs” (the quaint word used by Keynes) to give us a job, our real economic capacity shrank at the pace of our increased debt. This goes beyond the simple fact that we have less Disposable Personal Income to keep us employed (by means of increasing consume expenses) but the reality is that we are fast approaching the eleventh hour.

I am told that houses that should have been under foreclosure month ago are not being claimed by the banks. The reality is that the most banks do not want, and can’t hold any more real estate in their books. The solution they found is not to foreclose on the properties. They have the liability of the unpaid loan, and they are making the big write-offs we are learning about daily in the news, but if they took into their books all the houses whose loans defaulted, they would not be liquid enough to remain in business.

This makes a lot of sense, because the savings rate of the American public is close to zero, or perhaps even negative (we need to wait for the new numbers) and the goods they own are worth less than the money the owe for them. Do you see the problem here?

If you know something about economics you can skip the next paragraph.

Normally, when you take out a loan, the lender requests some kind of collateral for that loan. For instance, you take out a loan to buy a car, and if you don’t pay, the repo guys knock at your door and take the car, same with furniture and with real estate. The risk of the lender is that the goods he sold to you are going to be worth less than when he sold them to you, and thus the interest rate he would charge you will be aligned with the amount of risk of you not repaying the loan. That way, when he repossesses the goods he sold to you with a loan, the amount you paid in interest will compensate and provide some gain for the lost value of the goods. However, what happens when he lent you money for you to buy a Lexus, and all of the sudden your Lexus became a Kia? You can’t sell the Kia to exit the loan, and he can’t sell the Kia to recoup the money you did not pay. Not only are you broke, but he is also broke because he can’t pay to the Lexus manufacturer, and thus all the way back to you.

As the current debt of Americans surpasses the value of the goods they hold, the American economy is living on borrowed time. It is indeed puzzling that the American economy does not stop to a sudden halt.

In fact, the only difference between today and 1930-1941 is the elasticity of current money. In 1930, you had to have gold in order to print money and to create Keynesian inflation; nowadays, you don’t need anything, and it is possible to create liquidity for as long as somebody is willing to lend you money.

The kindness of strangers

So far, we are seeing that some foreign powers are willing to lend us money. The oil-exporting countries are financing our current economy, albeit requesting a higher return for their borrowed goods, thus the price of oil keeps rising. You may think that rising oil prices are good for oil exporting countries, but the truth is that there is a limit to how much they can squeeze out of us before we are unable to buy anymore. If we can’t afford buying their goods, it is not good for them, so they have a vested interest in trying to actually lower the price of oil.

The problem is that they have not been able to do this yet . We may expect new measures by the OPEC in terms of increased production to try and avoid squeezing the global economy out of business, and that may give us a respite.

China and Japan also have vested interests in keeping our interest rates low so we can keep buying their goods and keep their economies running. However, as we borrow more, the Dollars we paid them for their goods lose value, and their prices increase.

A quick look at the 2007 CIA fact book will give you a clear idea of how America is indebted to China, and the oil exporting countries. The following chart shows the current account balance of all the countries in the world, where China has the biggest surplus and the US the biggest deficit. I will copy here those countries that are relevant to this article, and I am not even going to mention the irony that Iraq has a surplus, while the US is conducting the war on borrowed money.

1 China $ 363,300,000,000 2007 est.
2 Japan $ 195,900,000,000 2007 est.
4 Saudi Arabia $ 88,890,000,000 2007 est.
5 Russia $ 74,000,000,000 2007 est.
9 Kuwait $ 51,490,000,000 2007 est.
10 Singapore $ 41,390,000,000 2007 est.
11 United Arab Emirates $ 36,110,000,000 2007 est.
12 Algeria $ 31,500,000,000 2007 est.
14 Canada $ 28,460,000,000 2007 est.
18 Iran $ 19,000,000,000 2007 est.
19 Venezuela $ 17,020,000,000 2007 est.
20 Nigeria $ 14,610,000,000 2007 est.
21 Angola $ 13,640,000,000 2007 est.
31 Iraq $ 7,802,000,000 2007 est.
32 Qatar $ 7,733,000,000 2007 est.
33 Azerbaijan $ 7,535,000,000 2007 est.
164 United States $ -747,100,000,000 2007 est.

America the Broke is the biggest debtor in the world, carrying more than 1/4 of the total world debt, a debt that it has no means to pay.

At this point, if we increase the amount of money available for consumption, we are able to buy less goods, and if we don’t we are not able to buy at all. As I see it today, there is very little that we can do to get out this crisis, and most of it is not in our hands.

As you see, we are depending on the kindness of strangers and America’s economic power looks a lot like the faded glory of Blanche DuBois.

Franklin @ April 15, 2008

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