What's Really Wrong

Discussion in 'Economy' started by EconAnalyst, Nov 28, 2012.

  1. EconAnalyst
    Offline

    EconAnalyst Rookie

    Joined:
    Nov 28, 2012
    Messages:
    2
    Thanks Received:
    2
    Trophy Points:
    1
    Ratings:
    +2
    What’s Really Wrong With The American Economy

    Most people think the big problem with the economy is the level of debt, or spending too much. Even though many economists agree, this is dead wrong. The primary problem is basically not a matter of money. Money is a means to influence what happens in the real world of production and distribution; a means to influence what people are actually doing. Money is not itself the real economy. We have somehow convinced ourselves that all that matters are these counters [dollars] which merely symbolize economic activity. It was once clearly articulated by economists that money is a veil through which we view the world of work and production. This is not to say money doesn’t play an important role. Because money represents a call on goods and services in the economy either now or in the future, it can allocate planned and actual resources among people and uses, i.e., it can influence how much of each thing is produced, for whom and when.
    Probably the most significant reason for the mistaken perception that money is the economy, or at least all that is worth thinking about from an economic policy perspective, is that a malfunctioning financial system (i.e. interruptions in the of the flow of money) often seriously disrupts the real economy. The real economy is composed of engineering-managerial-institutions and their relationships which result in the production and distribution of goods and services. Some economic dips in the last hundred years were primarily a result of non-monetary events, such as the two post-World-War recessions (the result of disruptive real-economy switch-backs from wartime production to peacetime production) and the recessions in the 1970’s (real-economy disruptions due to oil shocks). The Great Depression and the present Great Recession, however, were initiated primarily the result of disruptions in money flows in the economy.
    As awful as the two Great Depression/Recessions were, after the Keynesian analysis, the short term cure for an economy in trouble because of money and credit flow stoppages was obvious, i.e., restoration of the disrupted flow of funds by any available means, including the use of direct government purchases of goods and services if necessary. In the case of the Great Depression, Roosevelt’s New Deal initiatives from 1933 to 1937, although without this objective clearly in mind, had largely succeeded in restoring the flow of funds in the economy and with it, started a real economy rebound from the depression. The balanced budget initiative in his second term, however, almost reversed the process until gigantic defense spending in 1939-1941 got money flowing in a big way. In the case of the current recession, an early but modest stimulus program (modest in comparison to the scale of the monetary-flow/GDP fall) and Federal Reserve actions fended off the worst short-term real-world effects due to disrupted financial flows. As of the end of 2012, however, the flow of funds is still a problem compared to pre-Great Recession levels.
    Arguably, part of the stoppage of monetary flows and credit in both the Depression and Recession can be traced back to accumulating problems in the real economy. That is, unsustainable trends in real-world production and distribution built to the point that money and credit system players, finally recognizing unsustainable growth trends in some parts of the economy, ceased providing money and credit. It is critical to recognize, however, the Great Depression-era wholesale shut-down of the monetary system affected not only those relatively few parts of the real economy where overproduction or other unhealthy trends existed. Virtually the entire production system was affected. Instead of switches of production and distribution away from types of goods or services to others that were more needed (analogous to a switch from wartime to civilian production) which would cause only a minor drop in living standards while resources were redirected, the whole economy was unnecessarily affected by money and credit stoppages. With most of the economy involved, idle production across the board and wide-spread unemployment resulted in a serious drop in average living standards. In the case of the recent Great Recession, unsustainable overproduction in housing, commercial real estate, and financial services also almost led to a near-wholesale stoppage in the flow of money in the economy, but as noted previously was mitigated by a timely stimulus program and other actions.
    Once funds began flowing in the Depression economy, the engineering-managerial-institutional production economic engine could be started once again. So successful was the restart that production doubled in World War Two and was available to support unparalleled prosperity for a generation or more following the war. In today’s economy, however, the situation is vastly different. We have almost no production engine to start. America is not producing goods. We are distributing, but not many of these goods (and increasingly, services) originate in the USA. Officially only fifteen percent of the US economy is now devoted to manufacturing, and even this overstates the case in terms of the civilian economy because a large part of domestic production is devoted to defense and weapons.
    Even if money and credit were flowing as freely as before the recession began in 2007, due to the lack of an appreciable production component of the economy, it is virtually certain that unemployment would remain high and living standards further stagnate or fall. Before Great Recession officially began, inflation-adjusted wages had been stagnant for a generation. The percentage of the employed population in the US had been falling for seven years before the onset of the financial crisis. With services, including financial services, comprising most of the US economy one might ask how an economy can function without much in the way of actual goods production. The answer is that it functions by importing things from other nations. Manufacturing, mining, farming, and other US production activities have been declining as a percent of the economy for decades. Imports have exceeded exports by a large margin for most of latter part of the 20th Century and all of the 21st to date. Normally the expectation in international trade is that any temporary excesses or deficits run by any nation will tend over time to even out and that one nation cannot run a permanent deficit or surplus. The US, however, has run a trade deficit in goods so large and for so long that it almost looks like a permanent condition.
    Running such an international trade deficit as the US has done and is continuing to do is possible only under very special conditions. Instead of trading US goods and services for an equal value of goods from other nations, the US for decades has been able to exchange IOUs (i.e. dollars, US securities and paper assets) for physical production from other countries. Unlike the US, other nations find this continued borrowing impossible to do for any length of time. A stack of accumulated IOUs, unable to be exchanged for desirable goods in the issuing country, would quickly become worthless. More IOUs would not be accepted. Why have other nations throughout the world continued to accept dollars, when they do not want to exchange them for US goods of equivalent dollar value? Foreigners continue to accept dollars (or government securities and other assets that can be readily turned into dollars) in otherwise unequal trade simply because the US dollar is not only the US national currency, but it is (largely though accidents of history) the defacto world currency. It is not the world currency primarily for the reasons usually given; i.e., that the US is a safe haven and has a stable open democratic system. These reasons may have some subsidiary validity, but the main reason is historical. The US after World War Two constituted the biggest part of the world economy, and as such the dollar began to be accepted everywhere. This acceptance everywhere continues despite the fact that the US economy is now a relatively small portion of the world economy, especially in terms of the production of goods. Universal acceptance for the dollar continues not just out of habit, but because of the international convenience of a single currency combined with lack of international agreement on another unit as the international medium of exchange. The important point to grasp is that there is no insurmountable barrier to the replacement of the dollar as the world’s international (i.e. reserve) currency.
    Growth of the world economy and trade, besides motivating foreigners to accept far more US trade debt over a longer period than would otherwise be the case, and hold greater and greater amounts of dollar-denominated assets, also results in a ‘stronger’ dollar than would be the case based purely on its value in trade for US goods and services. That is, a dollar will buy more foreign goods and services (and more of other currencies) than would be justified purely by its value in trade for US goods and services.
    Despite its apparent success as the world monetary standard since World War Two, the dollar has considerable disadvantages to foreigners as a world currency. Probably the biggest disadvantage is that they “pay” for the continued use of dollars for non-US commerce by having to pay in real goods for increasing amounts of US IOUs. Another very significant disadvantage is that the US manages the size and growth rate of its money supply (of dollars) based mostly on prevailing domestic economic conditions, not economic conditions in the world as a whole. US boom and bust cycles are therefore transmitted to the whole world economy by US domestic monetary policy even though the US now constitutes only about twenty percent of the total and on a downward path. The (from the world perspective) ill-timed tightening or loosening of the international monetary supply frequently damages otherwise healthy economies and makes planning for the future almost futile.
    There are ill-effects on the US economy as well. The almost permanent trade imbalance (enabled by almost unlimited borrowing ability), cheap foreign goods (due to the strong-dollar), and US goods made expensive to foreigners (due to the strong dollar), has driven most US manufacturing and other productive activities out of business or to moving production offshore. High US labor costs, environmental and other regulatory requirements, and harder working or more skilled foreign workforces are the usual reasons given for US manufacturing and trade difficulties leading to offshoring or going out of business. These factors, however, are very minor compared to the continuous economic headwind faced by US business in dealing with an overvalued currency and the almost free credit granted by our trading partners.
    The US reserve currency status once served a useful purpose for the US and the world at large. It is now, however, more a detriment to US and world prosperity than help. There are good reasons to think a root cause of the world real estate boom and subsequent financial crisis of 2007-8 was in large part related to an unbalanced US economy, unbalanced US trade, and consequently a world awash in dollars.
     
    • Thank You! Thank You! x 2
  2. CrusaderFrank
    Offline

    CrusaderFrank Diamond Member

    Joined:
    May 20, 2009
    Messages:
    81,277
    Thanks Received:
    14,924
    Trophy Points:
    2,210
    Ratings:
    +37,090
    I'm so sick and tired of the Big Progressive Lies about FDR. It's 2012, the information available on Al Gore's Internet has totally destroyed the fictional narrative of FDR's New Deal rescuing the economy and that the 1937 Depression within the Depression was caused by "trying to balance the budget"

    In addition, unemployment average 20% from FDR's inauguration until Hitler conquered France in 1940, what alternative universe do you have to live in to crow about those results?

    Here's part of what happened in 1937, "Without informing the Treasury, the Federal
    Reserve increased reserve requirements for member banks from 13 percent to 19.5 percent in
    August 1936. In December 1936 the Treasury announced that it would begin sterilizing all
    changes to U.S. gold reserves, whether they arise from gold inflows or domestic production. In
    January 1937, the Federal Reserve announced that reserve requirements would be further
    increased in March and May of that year, to 22.75 percent and then to 26 percent. Thus, between
    August 1936 and May 1937, reserve requirements for member banks were doubled"

    http://www.dartmouth.edu/~dirwin/1937.pdf

    The same Fed that tanked the economy for Hoover, tanked it again for FDR.

    Also, April 1937 SCOTUS upheld the Wagner Act, part of FDR's jihad on American enterprise
     
    Last edited: Nov 28, 2012
  3. CrusaderFrank
    Offline

    CrusaderFrank Diamond Member

    Joined:
    May 20, 2009
    Messages:
    81,277
    Thanks Received:
    14,924
    Trophy Points:
    2,210
    Ratings:
    +37,090
    "The important point to grasp is that there is no insurmountable barrier to the replacement of the dollar as the world’s international (i.e. reserve) currency."

    That will happen under Obama and it will not be pretty.
     
  4. tjvh
    Offline

    tjvh Senior Member

    Joined:
    May 10, 2012
    Messages:
    6,893
    Thanks Received:
    916
    Trophy Points:
    48
    Ratings:
    +916
    What’s Really Wrong With The American Economy?
    Nearly 50% have chosen to opt out of the work force effectively living off of the hard work of the other 50% who still do contribute, and somehow people have been convinced that this redistribution of wealth is sustainable.
     
  5. EconAnalyst
    Offline

    EconAnalyst Rookie

    Joined:
    Nov 28, 2012
    Messages:
    2
    Thanks Received:
    2
    Trophy Points:
    1
    Ratings:
    +2
    Re Crusader - Yeah, good points. But what should we do now? I think:

    The almost permanent trade imbalance (enabled by almost unlimited borrowing ability), cheap foreign goods (due to the strong-dollar), and US goods made expensive to foreigners (due to the strong dollar), has driven most US manufacturing and other productive activities out of business or to moving production offshore. High US labor costs, environmental and other regulatory requirements, and harder working or more skilled foreign workforces are the usual reasons given for US manufacturing and trade difficulties leading to offshoring or going out of business. These factors, however, are very minor compared to the continuous economic headwind faced by US business in contending with an overvalued currency and almost free credit granted by our trading partners.
    For the US, reestablishing the production component of the economy is vital if the population is not to face a continued decline in average living standards and with it a continued decline the place of the US among nations. The existing US standard of living is currently subsidized to a large degree by the unequal trade balance that presently exists between the US and its trade partners. Officially, the goods and services trade imbalance is only 3.7 percent of GDP (as of 2011). This figure, however, does not adjust for the reserve-currency-overvalued dollar, (i.e. is not PPP adjusted) so that the actual trade imbalance is much higher in terms of the real economy. No flat-screen TVs are made in the US, but if they were, the cost would be many times the $1,000 they now cost. Furthermore, goods are exportable to a greater extent than services, so even a 3.7 percent of GDP trade deficit indicates that on a net basis about twenty-five percent of all goods are imported. If the current reserve-currency-subsidy were to suddenly end (if, for instance the world were to rapidly go off the dollar standard) US consumer prices have to rise and/or incomes drop enough to compensate for the suddenly non-existent subsidy. In addition, termination of the once-available US option of borrowing more from other nations to pay interest on prior lending for goods and services would mean additional hardship.
    Without a serious, sustained and painful resurrection of the production sector of the economy, taking advantage of reserve currency status while it lasts, Americans are likely to find themselves faced with a permanent drop in living standards of about 30 percent (half of the drop due and end to net imports, half due to an end to borrowing to pay interest on foreign-owned securities and other assets). Such a drop could occur rapidly and unexpectedly. Needless to say, such a situation could tear the society apart. The experience of European countries after World War Two, Japan, and the ‘Asian Tigers’ shows that over the course of ten to fifteen years, an intelligently managed public-private development program can bring forth a world-class manufacturing/ production sector even if it started with virtually nothing. Right now the US, using its reserve currency status, can borrow at low rates and purchase hardware and software for rebuilding the productive sector. When the reserve currency ‘subsidy’ ends however, it may be too late to build a viable economy, i.e., an economy that can export enough and minimize imports enough to achieve a balance in trade and payments without making literally unbearable domestic sacrifices (on the order of what Greece and Spain are experiencing currently).
    China will soon be the largest economy in the world, and is already the largest economy in terms of production. It has publically stated its preference for an end to special status for the dollar. The Euro zone, taken together is about the size of the US economy. Key European monetary system policymakers have also called for ending the US reserve currency status, as have others in Asia and Latin America. Before the current Euro crisis, the Euro was well on its way to substituting for the dollar in international trade. International purchases in Middle East oil, by agreement since the 1970’s, has been exclusively in dollars, but some Middle East states have recently opted out of the dollar-requirement system. International advocacy for ending the dollar’s status were especially loud after the world-wide crash in 2007-8, in part because there were good reasons to think a root cause of the world real estate boom and subsequent financial crisis was the unbalanced US economy, unbalanced US trade and consequently a world awash in dollars.
    The place of the dollar as the reserve currency will end, together with the implicit subsidy to US living standards, either abruptly or in a managed transition. There is no insurmountable barrier to the replacement of the dollar as the world’s basic currency. The two main barriers to replacement of the reserve-currency dollar by a new international monetary standard are (1) the simple inertia of large systems (i.e., institutional habits plus changeover costs) and (2) US opposition, both overt and enshrined in the various international monetary institutions shaped by the US since 1945. These factors will almost certainly continue to operate until some future economic crisis forces a sudden abandonment of the dollar standard unless the US takes a proactive stance in favor of a gradual phase-in of a new system.
    Obviously, the adoption and long-term pursuit of such a policy by any Administration (or Administrations) would be politically difficult in the extreme. It would entail ending both general and special interest benefits now enjoyed (whether they realize it or not) by huge numbers of Americans. Pursuing the policy would result in a large-scale and painful reorganization of the economy, reversing more than forty-years of decline and out-sourcing of the production-oriented parts of the economy. But the choice is stark—a painful course of adjustment, or abrupt society-threatening economic crisis.
     
  6. EdwardBaiamonte
    Offline

    EdwardBaiamonte Gold Member

    Joined:
    Nov 23, 2011
    Messages:
    27,636
    Thanks Received:
    1,133
    Trophy Points:
    205
    Ratings:
    +3,067
    well there are only and exactly two possibilities: capitalism or socialism.

    Obviously, socialism is whats wrong with the American economy.

    Socialism discourages productive people with theft and unproductive people with welfare.

    Anyone disagree??
     

Share This Page