Monday, November 24, 2008

$700 Billion...Yeah...Right

Found this link on Vox Day's blog:
The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
Lot's of big numbers in this piece, some of them dumb, like $38 trillion in value of world stock markets destroyed in the last month. No, once again, the value was destroyed a long time ago when people wasted perfectly good raw materials and labor producing something stupid, usually as a result of government policy. The world only realized how stupid over the last month or so, so prices fell. The big lesson here: never, ever believe the first estimate given by a bunch of politicians for how much some program would cost. They'll always low-ball it. I actually guessed $2-3 trillion some time ago, but it seems even I came up way too short. Vox also has a very good analysis of how far GDP will fall in his weekly column. I like the logic he uses. I still think such an analysis is still very much a shot in the dark, if an educated one, and I also question just how valid a number like GDP is anyway. We can produce lots of things, but if we are not satisfying consumer demand, we're wasting our time. After all, our GDP has been growing since 2001, but the truth is we were still poorer for it because it was all skewed towards things we didn't need. We were (and are) burning capital. And as bad as a 29% drop in GDP sounds, how much worse is it of what we are producing is not needed. Another thing folks must understand: globalization, much of which has been phony due to mercantilism on the part of many countries and the use of the dollar as the world reserve currency, has made the US a very specialized economy. We don't have anywhere near the heavy industry and basic manufacturing we once did, and not nearly enough to satisfy domestic demand. Should the US decide to stiff its creditors through inflation (it will), I expect the forces of globalization will unwind quite quickly as other nations find that they don't like financing the American lifestyle. We will not be able to afford imports anymore without the aid of willing financiers. The US will be forced to re-industrialize, after decades of de-industrialization, at least if it wants to have goods on store shelves. In the meantime, we will have to pay top dollar for basic necessities. In the long run, expect to see a lot more "Made in the USA." Expect more manual labor, more factory work, fewer cushy financial and service jobs. The US has been very spoiled for a very long time. Our subsidies are now disappearing. We have moved almost all the "dirty work" overseas, and will find ourselves having to do it once again. We will not be able to afford a lot of the regulations that have been passed. This work is dirty and unsafe. Will we have the political will to make the changes? Will we have the "stuff" to become an industrial economy once again, or will we enter an economic death spiral, refusing to face reality, clinging to the wealth and comfort of our imagining, and burning up the capital left in our country in an attempt to sustain an unsustainable lifestyle? Do we have it in us anymore? Do we have what it takes to be great? Or at least normal? I'm not so sure... Of course, all of this hinges on countries like China showing good economic sense, growing their economies, and leaving their yuan/dollar games behind them. Not necessarily a sure bet, but more likely to happen than not, in my estimation.

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