Giant In Decline

[Dover]

Jan 25, 2005


By Marshall Auerback

In his 1849 novel Les Guepes, Alphonse Karr penned the classic line: "The more things change, the more they stay the same." In the case of the United States in 2005, however, the opposite might be true: The more things stay the same, the more they are likely to change ... for the worse. In that regard, compiling a list of potential threats to the US this year has a strangely deja-vu-all-over-again feeling. After all, such a list would represent nothing more than a longstanding catalogue of economic policymaking run amok. Virtually the same list could have been drawn up in 2004, or 2003, or previous years.

Such threats would include: a persistent and increasing resort to debt-financed growth and a concomitant, growing imbalance in the trade deficit, leading the US ever further into financial dependency and so leaving it dangerously indebted to rival nations, which could (at least theoretically) pull the plug at any time. This, in turn, is occurring against the backdrop of an increasingly problematic, Vietnam-style quagmire in Iraq, against imperial overstretch, and against a related ongoing crisis in energy prices, itself spurring an ever more frantic competition for energy security, which will surely intensify existing global and regional rivalries.

Just as a haystack soaked in kerosene will appear relatively benign until somebody strikes a match, so too, although America's long-standing economic problems have not yet led to financial Armageddon, this in no way invalidates the threat ultimately posed. For economy watchers in 2005, the key, of course, is to imagine which event (or combination of them) might represent the match that could set this "haystack" alight - if there is indeed one "event" which has the capability of precipitating the bursting of a historically unprecedented credit bubble.

The odd thing about credit bubbles is that they have no determined resolution, nor is there anything about such a dynamic that specifies the path by which it will be reversed; nor is there some specific level of financial excess guaranteed to eventually put an end to it. The beginning of that end could potentially be set off at any level at any time. Nevertheless, it is possible to sketch out several scenarios that could conceivably, in the 11 months left to 2005, trigger such a reversal or even something approaching economic collapse.

Debt: A policy on steroids
The Achilles' heel of the US economy is certainly debt. It is generally assumed that increases in credit stimulate consumer demand. In the short run that is true, but the long run is another matter altogether. When debt levels are as high as those the United States is carrying today, further increases in debt created by credit expansion can come to act as a burden on demand. Signs of this are already in the air - or rather in what has been, by historic standards, only feeble economic growth in the US economy over President George W Bush's first term in office.

...cont'd

http://www.atimes.com/atimes/Global_Economy/GA25Dj01.html

[fairfaxvadem]

1. This is the stuff nightmares are made of.

At least, on my part.

I saw the earlier post from the asia times on the suspected "conspiracy" between the Bank of Japan and our Feds on the dollar and while that sounds a bit over the top, I think negligence and apathy are even worse than a conspiracy, and that's clearly what's going on with BushCo.

Duck and cover?

[cliss]

2. While the fools in Washington hunt for treasure in Iraq.....

the creative talent in the United States is dissipating very rapidly. There was an alarming article in the Harvard Business Review which I read recently(it comes to my office; no one else reads it except me).

It said that the US now has a net drain of creative talent; meaning software engineers, mathematicians, physicists, Ph. D. material. These bright lights are going elsewhere. They say the US has become a hostile place for innovation, studies, research & development and in general

These very talented people don't want to come here. They're opting in stead to study in India, Europe, even China & Japan. They say the climate has become hostile, Homeland Security and political issues. They make the students feel unwelcome, as if they're going to do some terrorist act.

Fools that they are, they don't realize a nation's true wealth is its people. As the US begins its slide into insolvency, they will never figure out what happened....

[patdem]

3. I too, like many DUers have read about the brain drain...and WE know

its ultimate implications...When America slides into insolvency...WE will know why, and frustratingly enough could do nothing to prevent it. :grr:

Edit for clarity