[lit-ideas] Re: Fukuyama and the End of... well...
- From: Teemu Pyyluoma <teme17@xxxxxxxxx>
- To: lit-ideas@xxxxxxxxxxxxx
- Date: Thu, 16 Mar 2006 07:37:48 -0800 (PST)
--- Andreas Ramos <andreas@xxxxxxxxxxx> wrote:
>
> However, at the time, the neocons didn't realize
> this, and with Bush Jr., they applied the
> cure 20X; now we have utterly spectacular debt. It's
> an entirely possible risk now that the
> USA may collapse. One reason for the massive current
> problems in the USA is Reagan's debt.
> Bush Jr grew this huge debt yet larger. With such
> massive debt ($2 trillion wasted in Iraq
> so far), there is no money to fix anything in the
> USA. A lousy $100 billion would fix the
> entire medical system and all schools in the USA and
> bring them up to European/Asian
> standards. That's 5% of what we've poured into the
> Iraqi sand. The Iraq War may end up
> costing the USA $5 trillion dollars.
>
This isn't quite right. The $2 trillion is the
projected total cost of war, that includes lost life
expectancy, lost productivity due injury, and so on.
The direct cost of running the military and so on, and
what is adding to federal debt is somewhere around
$100 billion a year (it is hard to get exact figures,
which is a scandal at itself.) The federal budget
deficit is however somewhere around $400 billion.
As such that would not be such a big worry, but when
you add the debt held by US consumers and the huge US
trade and current acount deficit, it is a huge
potential global problem (in case you are wondering
why someone on the other side of the globe gives a
damn.)
I think what is happening is fairly obvious, we are
experiencing fairly rapid productivity growth mostly
driven by technology, although emerging markets like
China play a small part. Productivity gains are ending
into higher end of income scale (think top 1%), that
is productivity gains are not translating into higher
real wages. So there is excess of capital and due to
stagnant incomes there is lack of demand (people with
lower incomes have quite obviously higher propensity
to consume rather than invest their income). See
corporations buying their own shares back which
basically means they are out of ideas on what to
invest in, and the record low interest rates.
What this leads to in Continental Europe is poor
domestic demand, which holds the economy back and
leads to unemployment. What is happening in USA (and
in UK to lesser extent) is that the excess capital is
being pushed into consumers who are willingly racking
up more depth in order to consume more. The Federal
Government (and States) are also piling up debt by
collecting far less in taxes than they spend. The
whole show is being financed mainly by foreign central
banks and other investors, which hold for example 60%
of federal debt (at $8 trillion and rising). China and
other Asian nations along with the Gulf oil states are
basically lending money to US consumers so they can
buy more oil and consumer goods from them.
Now from a business perspective, that your biggest
customer is buying almost solely on credit is not
good. And there is something perverse about developing
nations financing developed nations and not the other
way around, and also about borrowing to consume and
not to invest. The current situation can not go on for
ever and what can not go on forever will stop. The
question perplexing economists is when and how.
The following dialogue from Brad DeLong's blog is both
funny and to the point:
Agathon: Who look tired.
Kapelikos: Freshly back from the other coast. Airline
load factors are just too high.
Agathon: Who were you talking to?
Kapelikos: MegaBankCorp--their investors.
Agathon: What were you talking about?
Kapelikos: The usual--global imbalances.
Agathon: And what did you say?
Kapelikos: That the global economy is unbalanced--that
current patterns of trade are unsustainable--that
things that are unsustainable eventually, somehow,
stop. What else can you say?
Agathon: And the argument on the other side? I'm not
sure I understand it.
Kapelikos: I know I don't.
Agathon: Is it roughly this? "U.S. real GDP is growing
at about $400 billion a year. At a capital-output
ratio of 3.5-to-1, that means $1.4 trillion of new
America-located wealth each year. We can sell off $1
trillion of that every year to foreigners in order to
finance our import bill. And still be richer than we
were last year. What's unsustainable about that?" Is
that the argument?
Kapelikos: Could be. But that's incoherent--it misses
the difference between the trade deficit and the
current account. Ten years down the road the
current-account deficit is not $1 but $1.4
trillion--$1 trillion of net imports and $0.4 trillion
of interest, rent, and profits owed on foreign-owned
property here. To hold the annual current-account
deficit at $1 trillion requires that the trade deficit
shrink, which requires that the dollar decline, which
means that foreigners investing in America are making
bad decisions.
Agathon: And when do your models predict the dollar
will fall?
Kapelikos: 2003.
Agathon: Three years ago?
Kapelikos: Yep.
Agathon: But as long as people believe the argument on
the other side, the dollar doesn't decline, and the
argument looks correct?
Kapelikos: Yep--for one more year.
Agathon: How many more yars are you going to be
saying, "Wait just one more year"?
Kapelikos: Until I can say, "I told you so."
Agathon: Can't you be more specific than that?
Kapelikos: Ok. How about this. International financial
crises tend to come--currencies crash--when interest
rates rise in the world economy's core. The Bank of
Japan has just joined the ECB and the Federal Reserve
in raising interest rates.
Cheers,
Teemu
Helsinki, Finland
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