On the front of DKos MB cites Stephen Roach predicting a coming economic collapse. Something predicted for a few years by many, (including kossacks). Something poo pooed by reaganites and supply siders. Something read, digested and discarded by the average person. And they do this for one simple reason : It hasn't happened yet. And indeed we "doom and gloomers" simply refuse to cite a date certain.
This is why you should be worried. And why we wont cite a date.
While macroeconomics cant predict spikes in inflation, stock market dips et al that is not the purpose of macroeconomics.
The US has a 7.5 trillion current debt along with commitments in the 50 Trillion dollar range. Our yearly Deficit at the moment is around 350 billion dollars. What this really means in laymans terms is that the US has in effect mortgaged the house (the debt), is maxing out the credit cards (the deficits) and if it wants or needs to borrow more the only way to do so is at much much higher interest rates.
And therein is the trap. As we need to borrow more money (treasury bills) we must increase the rate of return. Not only on new money we borrow due to deficit spending, but to refinance the Old debt. Which increases the deficit further.
The effects of this cycle, when and if it hits are devastating. Interest rates go up in order to refinance. The rising interest rates have the dual effects of putting the brakes on the economy as well as creating inflation. Inflation quite simply makes life more expensive to live which creates a bigger need for people and businesses to borrow to maintain their current status or experience any growth. It is a vicious cycle that has destroyed governments.
Of course this sounds like gloom and doom talk of an inescapable nightmare. But the good news is that the economy normally easily offsets these pressures. Each year productivity increases. More good and services produced for the same amount of labor and materials means that inflation is offset. Expanded production means increased trade which increases tax revenues which offsets the pressure towards falling into the borrowing trap.
This is what's different this time.
The United States, despite hype to the contrary, is an industrial nation. We produce goods. That is what we do, what we have always done. In the beginning those goods were farm products. Later on that production began to move to raw materials such as steel and oil. And the last cycle, industrial production produced goods.
The new theory put forward is that America no longer needs be an industrial nation. That it can shift to a hypothetical "service economy". Supplying things like economic advise, engineering and technical services to the world and having most of its population work at walmart, at banks, become real estate agents, lawyers.. etc etc. Thus WTO, Gatt, Nafta, Outsourcing. A headlong rush to send american industry to cheap labor nations on the theory that the US would now be the nation providing those countries services. And would thus profit in the long run by outsourcing the industrial economy.
Two problems :
One, it is pure theory.
Two, It isnt working. And wont work. Our trade deficits are becoming simply staggering.
We cant borrow our way out of this one as we did during the depression. We cant produce our way out in fact if we could borrow. We sent our production overseas.
The likely end result is high interest rates, followed by inflation. If oil prices continue to rise and we dont replace oil with another cheap energy source the problem with begin to get much much worse (Oil is the power source of our economy, literally). Wages will continue to fall while prices begin to rise at a faster and faster rate. We go into recession, then depression.
And the only way out is hardship. And the group it will hit hardest are the very group who elected George Bush. Older, whiter retirees. People living on fixed government, retirement and investment incomes.
If it happens America will never again be the country you grew up in. And them, as my uncle used to day, is the facts folks.