The Economic Future of the US

Steve Clemons has a really good article on his blog about the vulnerability of the US to international economics. Steve Clemons

In my view, we are about to be taught a lesson by a world that wants America to be tethered down. And the world is going to hit America where it has a serious blindspot at the moment -- on the economic front. We are on our way to becoming a much poorer, on relative terms, superpower with the Chinese, Japanese and Europeans using currency management and debt dependency to constrain our options.

How did we get here?

America cannot afford what it is buying from the rest of the world -- it's as simple as that. That is why the dollar is falling -- but with the Chinese yuan falling at a rate equal to the falling dollar, we can't but help keep buying from them, and the Chinese help financing our ability to buy their products. This can't continue -- and when it ends, the reality will be that Americans broadly will see their living standards fall.

The problem is very clear. Bush has rammed through four tax cuts and an avoidable war that it was said would pay for itself (Iraq got $5 billion a year from oil and could afford to pay for the invasion – we were told this during the arguments before the war, and the Bush administration refused to submit any estimates in advance.)

The result is a sharply increased government deficit, which is being financed by the Chinese who are the only net purchaser of American government bonds for the last couple of years. They can do this because they are selling a lot more to us than we are to them, so they have the dollars to lend.

Of course, that also means that our trade deficit is growing rapidly. Unfortunately, it is growing all over the world. That is why the dollar is dropping against the Euro.

The price of foreign goods is going up because the dollar is dropping. That is the main reason why the price of oil is going up. That increase in prices has a name. "Inflation." Which is why the federal reserve has started to increase the interest rates.

The US is going to crash much as Argentina and Mexico did in the 90's, and the US standard of living will drop - soon. Only the US is a lot larger economically. This is a direct result of the Bush mismanagement of the deficit.

The US standard of living will drop sharply. There is a trade-off between inflation and high interest rates, and the federal reserve will push the interest rates higher to prevent the inflation. Either is really bad for the economy, so jobs will decrease.

The US population will need government intervention to provide additional jobs. The Bush administration and the conservatives in general will not provide that. There is also going to be a need to reduce the deficit. This they will do, on the backs of the working people.

The economic future for America can easily be seen now. It ain't pretty.

November 28, 2004 added:

Steve Clemons yesterday wrote about the future of the US economy as described by Federal Reserve Board Deputy Governor Laurence Meyer

Today, with an unraveling dollar and other nations' central banks flirting with a reshuffle of their dollar-denominated holdings, America may be soon feeling the economic pain resulting from irresponsible economic policy management and the "dependence" part of global financial interdependence.

Bloomberg back on November 19th reported what Alan Greenspan said on the drop in value of the US dollar.

Nov. 19 (Bloomberg) -- The dollar fell to its lowest in more than four years against the yen and dropped versus the euro after Federal Reserve Chairman Alan Greenspan said foreign investors will tire of financing the record current-account deficit.

"A diminished appetite for adding to dollar balances must occur at some point,'' he said at the European Banking Congress in Frankfurt.

Oh, one other thing - It is my opinion that the Bush administration and the conservative Republicans think there is nothing that government can do about the economy and its' effects. It is my opinion that they will do nothing positive and may even take actions that make things worse.

As I wrote earlier someplace - we are in for interesting economic times. Soon. Fasten your seatbelt.