Elephants in the Living Room: Possibilities for Economic Peril

[Coryoth]

The United States is facing the possibility of a severe economic correction. Yet most of the causes of such a correction are, for the most part, being completely ignored in preference to partisan bickering. It is the proverbial elephant in the living room - except it is not just one, but several elephants that everyone is doing their best to ignore. While the likelihood that any of these issues could result in disaster is low, these are issues worth taking the time to discuss.

The first elephant is debt. There are 3 kinds of debt that are of concern: Household debt, the budget deficit, and the current account or trade deficit. Of those three, it is only the budget deficit that gets any real attention, and even then it is often brushed aside.

The current US budget deficit stands at $413,000,000,000 in the 2004 fiscal year. This is a record deficit. To put it in perspective, that's 3.6% of the Gross Domestic Product, almost a quarter of total federal spending, or 80% of the total receipts from Federal income taxes. Clearly such a situation is not good. But there are deeper implications for such a large fiscal gap. Some economists argue that such large deficits are detrimental to private investment. The deficit effectively soaks up a large portion of the US's savings, which would otherwise be invested back into the private sector. There is historical precedent for this - investment fell to record lows during the previous record budget deficits under President Reagan. But there is something else to consider as well. This debt is managed by selling Government bonds. These bonds can be, and often are, sold overseas.

Currently, the two largest foreign owners of US Government debt are Japan and China. Japan had an economic boom, but collapsed in the 90s and has been struggling since. The Japanese government is very conservative, and has been remarkably slow to introduce reforms that are seen by many as necessary to stimulate the Japanese economy. Recently however, the Japanese Prime Minister, Junichiro Koizumi, has been fighting to push through the necessary reforms, with some success. In the last couple of years the Japanese economy has shown signs of improvement. Meanwhile, the Chinese economy is strong, and only getting stronger. Why is this important? Because as both of these economies gear up there will be far less interest in investing overseas, and much greater emphasis in investing the the local growing economy. This would essentially amount to a mass sell off of US debt in the form of government bonds, something that would almost certainly fuel higher inflation in the US, putting pressure on the Federal Reserve to take action by increasing interest rates. That is to say, it would almost certainly lead to a large scale recession in the US.

The US current account deficit stood at $530,668,000,000 in 2003 and $313,341,000,000 for just the first two quarters of the 2004 financial year. That's a record figure for each of the first two quarters of 2004. This could represent a country living beyond its means, or it could represent an economic power attracting large amounts of foreign investment. Certainly as long as the US remains a significant economic powerhouse it can sustain high current account deficits. That is, as long as the US remains an attractive place for foreigners to invest, an imbalance is of limited concern. Whether such a high current account deficit is sustainable is a complicated issue affected by many factors. A reasonably coherent explanation of some of those factors can be found in a 2002 paper by Catherine Mann. In rough précis, the current account deficit is balanced by private savings, but widened by budget deficits, yet at the same time is driven by the attractiveness of US investments to foreigners. Should the current account grow too large, the perception of the ability of the US to repay the investment may decrease, causing an economic correction. In the conclusion of her paper Mann indicates that a change in trajectory (from growing to shrinking) is inevitable, and the concern is whether this will occur through slow structural and policy changes, or whether it will be caused by a sharp correction in overseas investment. Two of the major requirements she lists for structural change are greater fiscal discipline (resulting in budget surpluses) and increased personal savings. Since the paper was published in 2002 we have seen massive increases in the budget deficit, as just discussed. At the same time, the prospects for increased personal savings are very limited (which I will touch on in a moment). Add to that the beginnings of resurgent Asian economies attracting investment, and the risk of a sharp correction is certainly much greater. The consequences of a sudden shift in global investment away from the US would be extremely rapid depreciation of the US dollar, most certainly resulting in considerable economic hardship in the US.

US household debt stood at $8,454,400,000,000 in 2002, and has grown since. A quick look at the associated chart shows just how serious the upward trend in household debt is. This debt is driven both by mortgages, and by credit card debt in an increasingly consumerist society. Do you recall the "Shop for America" campaigns following September 11? It is exactly that kind of thinking that helps to drive the consumer society even further into debt. In 2004 household debt increased 4 times faster than the economy, and average credit card debt for households with at least 1 credit card increased 300%, to over $9000. Of course this is not necessarily crippling, as a recent speech by Alan Greenspan points out. It is, however, trending in the wrong direction, and getting worse fast. It is certainly far from the increase in household and personal savings required to help curb the current account deficit.

The concern about debt for the US is, in the end, quite simple. US debt, in all three forms, is huge, and it is only getting larger. All three forms of debt, while different, are connected in that both household debt and government debt have a significant influence of the sustainability of such a large (and growing) current account deficit. At the same time, either the current account deficit or the budget deficit, if they continue to grow, could easily trigger a rapid and severe depreciation of the US dollar. Which brings us to our next elephant.

The second elephant is the US Dollar. At the time of writing, the US Dollar is running at about 0.77 Euros to the Dollar. One could claim that this is simply due to a strong Euro, but in reality most world currencies, including the Japanese yen and the Great British pound are trading strongly against the US Dollar. A quick look at the historical record of the US Dollar against the Euro, the yen, and the pound shows a distinct downward trend over the last two years in all cases. Of course this need not be seen as a bad thing, certainly it is beneficial to US exports, an increase in which would be highly beneficial for the current account deficit. There are potential issues however. The US dollar has, to some extent, remained as strong as it has due its position as the de facto global currency, in which most major commodities, including oil and gold, are traded. The Federal Reserve estimated that in 2003 around $400 billion of the $680 billion US dollars in circulation were held outside the United States. This high demand for US Dollars overseas is an effective prop for the US Dollar, meaning it is unlikely to ever fall too low too quickly. This prop could, however, disappear. The possibility of the Euro becoming a new alternative global currency is increasing.

In 2001 Alan Greenspan gave a cogent speech on the possibilities of the Euro as a global currency. The first salient point is the fact that a global currency tends toward a natural monopoly - as use increases, it becomes an increasingly attractive currency to hold, while the decreasing liquidity of competing currencies makes them less and less desirable as a global currency. Transitions can of course be slow, for example the transition from the Pound Sterling to the US Dollar between the world wars, but once it begins it becomes inevitable. Greenspan then notes that, at least on the surface, the Euro possesses all the traits required of a global currency (a stable currency based in a strong economy with a well developed financial system and deep, liquid financial markets). Greenspan continues by discussing reasons why the US Dollar remained so dominant after the introduction of the Euro. He cites the strength of the US Dollar against the Euro (the Euro depreciated against the US Dollar in its first two years after introduction), the strength of the US economy on comparison to the EU, and the Euro's apparent inability to expand into foreign equity markets. As already noted, the strength of the US dollar against the Euro, and in fact most world currencies, has been in decline. On the other hand, while the relative strength of the EU economy to that of the US has increased during the US recession, the US economy is beginning to show signs of increasing growth. Lastly, however, the Euro is now beginning to extend into foreign equity markets, most notably oil. An increasing amount of Middle Eastern oil is being traded in Euros, and while the US Dollar remains dominant, both Iran and Saudi Arabia have flirted with the idea of completely converting to Euros. Equally significantly, Russia, the second largest oil producer in the world, has expressed serious interest in trading their oil in Euros instead of US Dollars, though it has not yet embarked on such an en masse conversion. For now the US dollar comfortably remains the dominant player, but there are enough signs for concern, and as Alan Greenspan pointed out, a transition will have a tipping point, after which it will be carried by its own momentum.

The threat to the US economy is that this transition, if it occurs, may not be slow. Because the strength of the US dollar is currently supported in part by its position as a global currency, a shift toward the Euro could trigger further collapse of a weakening dollar initiating a panic driven feedback cycle resulting in an almost complete collapse of the US dollar from its current point of strength.

Such a collapse will only be compounded by the fact that the US currently repays its debt in US Dollars - the only country in the world that is granted the privilege of paying off debt in its home currency. Should the US Dollar destabilise significantly (or the Euro establish itself as the global currency) many debt holders could choose to request payment in Euros. This would force the US to purchase Euros (at a markup) to service its debt, both reinforcing the Euro as global currency, an inflating US debt. Such a situation would only serve to exacerbate the US Dollar's collapse.

Of course ideally such a collapse would be halted by the closing current account deficit as the price of imports skyrockets, and US exports become ever more attractive. The US populace is, however, a heavily addicted consumer, more than willing to spend its way into increasing household debt (as already noted). Worse still, US exports have been on the decline despite the recent weakness of the US dollar. Increasingly, the US is importing goods from China, and services from India. Which leads us to another elephant.

The third elephant is the rise of India and China. Both the Indian and Chinese economies are growing very rapidly. These are the two most populous nations on earth, so they should not be taken lightly. Both countries are filled with young and talented people eager to make the most of their education and climb the global economic ladder. In the case of India this has taken the form of, for example, outsourced IT jobs from the US. Increasingly US companies are importing their IT service from India, where there is a vast pool of highly capable people who do not face the vast cost of living that their counterparts in the US do. In many ways this can simply be seen as globalization and free trade beginning to more evenly distribute the wealth of the world, and is not a threat as long as the US continues to innovate and create new industries for itself. There is a question as to whether this actually occurring however.

The most common statistic for measuring economic strength, Gross Domestic Product (GDP), shows the US economy to be in good shape. Current US GDP is between 10 and 11 trillion US dollars depending on whether you measure by Purchasing Power Parity (PPP) or Current Exchange Rate (CER). GDP does have problems, the most important to consider here being its ability to include work that produces no net gain, and its lack of consideration for negative externalities. It is worth considering how much work in the US is included in the GDP that has very minimal net gain. For those familiar with the SCO Group versus IBM court case, its worth noting that tens of millions of dollars have been spent, all counted toward GDP, and yet most observers would point out that, in comparison to the money spent, the gains are negligible if they exist at all. This is common to a surprisingly large number of other court cases in an increasingly litigious country. All of it counts toward GDP, much of it returns little if any gain. A more debatable issue is the current costs of management, particularly in larger corporations that have exceptionally high salaries for the many tiers of upper management - is the net gain provided by management actually comparable to the money being spent. It is certain that management provides significant value, what is unclear is exactly how much value, and how that compares to the salaries involved. As stated, this is a point for debate. The fear is that if, in fact, US GDP is inflated by such issues, the economy could find itself hollow when it comes time to compete in earnest.

Currently India is exporting low and mid level IT services to the US, but given current Indian growth, it is only a matter of time before India is in a position to cease selling its services piecemeal, and instead sell complete packages. At present, while a certain amount of work is being outsourced to India as their economy grows, management and the corporations have remained in the US. Given the growing number of capable and experienced IT workers in India however, it is inevitable that new companies will arise in India taking advantage of the considerably lower cost of living to compete head to head with US corporations for complete solutions. Again we have to question the ability of the US to forge ahead into new industries. It could be argued that ambition for education, science, and research is lower for the current youth of the US than for their would be competitors in India, China, Korea and Japan. While there is involvement from the US in the very ambitious fusion reactor project, it will most likely be sited in Europe, and if not there, then Japan. On the other hand it was a US based company, Scaled Composites, that recently won the Ansari X-Prize and looks to be at the forefront of commercial spaceflight. The future remains uncertain, but this is certainly an issue for concern.

Finally, the rapid growth in India and China is having other visible effects. China, in particular, with its rapidly growing manufacturing sector, has had an an equally rapid increase in its demand for oil, adding a new element to the global oil market. While China is currently trying to slow its economic growth to more sustainable levels, the growth in its hunger for oil is not expected to be similarly dampened. Oil prices are already being driven ever higher, and unlike the crises in the 1970's, it is not due to disruptions in supply, but instead simply due to demand. That this is detrimental to the worlds largest oil user, the US, is obvious. Of more concern is that with increasing Chinese oil needs stretching current oil production capacity to its limits, a disruption in supply now could be catastrophic. This issue is discussed in detail in an article by Paul Krugman. In the wake of ever higher oil prices, alternative energy sources may prove to be one of the most significant new industries in the coming decade. With this in mind, the question must be asked: Which countries are going to be at the leading edge of research in alternative energy sources?

There remains one significant issue to discuss: the domino effect. This is the fact that the three major issues so far discussed are all interconnected. Increasing strength in the Chinese and Indian economies, providing goods and services to consumption addicted Americans willing to go into personal debt to maintain their standard of living, could easily lead to a widening of the US current account deficit. If the current account deficit grows too large it could easily trigger significant depreciation of the US Dollar. Should the US Dollar start too look too volatile, or become a significant financial risk to hold (due to depreciation), global markets could easily start to embrace the far more stable Euro, potentially sending the US Dollar into free fall. During a period of such extreme uncertainty in the US Dollar, foreign investors may well seek to diversify their investments away from the US towards rapidly growing countries such as India or China. That is to say, any one of these issues could trigger the others, to a devastating end.

Much of what has been discussed is speculative. Far from being probable, the potentially disastrous outcomes outlined are somewhat unlikely. Furthermore, even if the worst did come to pass the US would rebound, and may well come back stronger than ever. The reason to consider these issues, despite the low probabilities, despite the eventual recovery, is that the possible effects could be so pernicious during the time required for such an economic correction to shake itself out. The severity of the possible outcome demands our attention. These are issues that US politicians should be discussing instead of quoting the standard divisive talking points about the usual false dichotomies. You won't hear these issues raised, however, because with these issues politicians can't give a soundbite as to how they'll spend some money, or make a law that will fix the problem. Ignoring the problem won't make it go away, and just because there are no easy solutions doesn't mean that nothing can be done. What is certain is that nothing will be done if people aren't aware of the problems.

[ayeshahaqqiqa]

1. Gold is trading at $450 an oz

today, as reported in the NYTimes. I'd say a lot of folks have read this analysis and agree with it.

[papau]

2. 455 in Hong Kong & EU now near 1.34 before backing down a bit - Bush Plan

is working -

And our Media reports little.

[Jon8503]

3. Thanks for posting this article. Very Important. I think the ending

is right on target which applies to the elephant in the corner syndrome....

"You won't hear these issues raised, however, because with these issues politicians can't give a soundbite as to how they'll spend some money, or make a law that will fix the problem. Ignoring the problem won't make it go away, and just because there are no easy solutions doesn't mean that nothing can be done. What is certain is that nothing will be done if people aren't aware of the problems."

I know we are trying to figure out how to survive through the period of economic instability. We will make the turnaround but it seems just like a freighttrain out of control right now and it is soon going to hit something.

I think the only thing you can do is save what you can and invest wisely which actually is what you should always do anyway. We may go to a higher percentage in cash.

Recommend this for front page reading.

[tk2kewl]

4. Your theories are fairly well documented

I am curios as to how you document your conclusion that should this "Economic Armageddon" occur that eventually all will be fine:

Furthermore, even if the worst did come to pass the US would rebound, and may well come back stronger than ever.

[Coryoth]

6. Why the US will recover

The US is a large country, with lots f natural resources, and a traditionally hard working and productive population. Such a country can't be kept down forever.

As the Dollar falls, exports from the US become more and more profitable. In due course, if things fell low enough, manufacturing would move back to the US providing new growth and new jobs, and providing a means for recovery. Equally, an economic collapse would likely rouse the American public from their complacency, and that, again, would raise their will to compete and succeed. The US has the capacity (in resources, in its populace) to succeed, so eventually it will.

Any such recovery could be anything from 5 to 50 years out however, depending on how long it takes for the entire US economy to reconfigure itself to the new conditions and rebuild. Even a 5 year option is far from a pleasant one.

[indigobusiness]

10. The exploitation of resources that fuel the American fantasy

is what looms as the engine of our downfall.

We must learn to live within sustainable means, and not beyond our organic needs - or perish. It's only a matter of time.

[Demeter]

12. Sorry, But I Don't Agree

The GOP has no intention of ever letting America off its knees. The only reason South America is getting anywhere is Bush is tied up in the Middle East.

[Coryoth]

13. Your thinking too partisan

If the US suffers an economic collapse on the scale of the Great Depression some time in the next 4 years, do you really expect the Republicans to get re-elected with a majority? Do you expect them to have much power at all?

[Demeter]

15. Right Now, I'd Say YES

Anyone foolish enough to vote for Bush this time will continue to be foolish, even when his children and pssessions are flung out on the street by the sherrif.

[Coryoth]

16. Now you're just being pessimistic

Given the potential scale of the crisis we could be facing the complete destruction of both of the major parties. At the very least many people will rapidly become very disillusioned with the current regime, regardless of how much of a hand they've actually had in this (which is actually surprisingly little - big deficits, and poor foreign relations (which pushes away foreign investors - check this chart), and a general lack of knowledge or will to do anything to correct the problems) they will cop the blame for it.

[mhr]

17. Unemployed 54 Months - Over 2,500 Resumes Out The Door

CV Includes
15+ years of professional work experience
BSEE
MBA
Commercial Pilot
Honorably Discharged Naval Officer

How much less pessimistic can one be in the face of a poorly performing labor market?

Many credible economists agree that had the last recession and "recovery" been nominal, we should have seen the creation of 7 to 9 million net new jobs.

With the Bush administration's handling of the economy, we still have a net loss of jobs over the last 3 and 1/2 years. Think about that; we have fewer people working today than when Bush entered office.

I think you are a Pollyanna. I live on Main Street not Wall Street. As such my shoe heels are worn and soles have become all to holey.

[Coryoth]

18. I understand your frustration

And I agree that in terms of the local job market Bush has indeed been quite a blight.

Statistically, however, the US is not that badly off in terms of unemployment. Yes, it is badly off, but compared to what could potentially occur, it is quite well off. Yes there are stories, such as your own, of people who have been shafted by the likes of the current regime, but when stories like yours are true of 30% or 40% of the population, rather than 5% to 10% you may see a willingness to effect change.

[mhr]

19. Your Comments Are Most Insensitive To Those Of Us That Are Unemployed

You cite the standard unemployment numbers when the unofficial - non massaged - unemployment numbers range between 10% to 15%.

How would you like knowing that you did everything that society asked you to do and now find that society is saying you are worthless?

How would you like seeing all your hard fought retirement consumed with survival necessities?

How would you like knowing that you will have to work until you die thanks to the suffering caused by Bush and the Republicans?

How would you like living in a world were all your hopes and dreams have vanished?

How would you like being too old to start over after the rug was whisked from your feet?

By cavalierly dismissing the real pain and suffering of humans, you have identified yourself with those that speculate in exploitation. The economy is not flesh and blood to you, merely a collection of numbers to be chatted about over supper. Too bad if real people lose their homes, their families, their savings, their livelihoods, their self worth.

Once again, you sound like an ivory tower economist suffering from hypoxia. Your brain has seized on the last bit of analysis and visceral suffering is now beyond your grasp.

[Coryoth]

20. Please, I am not dismissing your suffering

I am trying to say that, unless people start paying attention to what is going on, and what is not being discussed, the pain and suffering you are undergoing now will applied to many many millions more people.

I am saying that if almost half the country is in the same position as you are now, the probabilities of the Republicans being voted back in are very low.

I am saying that a great many people are selfish. As long as it wasn't effecting them - as long as it was you suffering and not them - they were quite happy to vote for Bush and the Republicans. If they start to suffer however, I am suggesting that they may change their minds rapidly.

Please don't misinterpret me.

[area51]

34. Chances of republinazis being voted back in

Actually, you're forgetting that republinazis control the companies that make electronic voting machines. That's how they'll be voted back in, even if the repub press admits we never had a recovery. Why do people think that Bush won when chances are that Kerry won? Because the republinazis control the electronic voting machines & tampered with the votes.

[Coryoth]

35. Be a defeatist then

The certainty that belectorinic voting was tampered with just doesn't exist yet. It is possible, but I wouldn't say there's anything conclusive, or even much showing it was at all likely. And even if it were the case, what's to say it won't be uncovered and corrected before the next election? If you choose to take a defeatist point of view that the Republicans must necessarily win you can always find diaboloical conspiracies that will assure them victory. If you choose to step into reality and work with what is known... then their odds don't look quite as good.

Jedidiah.

[cpalson]

32. Unemployment not that bad in US?

Unemployment not that bad in US? The facts speak otherwise. It really hovers around 10% - roughly the same as Europe. The latter's unemployment stats are more truthful because they include discouraged workers.

The groups hardest hit here are kids just entering the labor market, especially those in the inner city, and older workers, particularly above 55.

Did you think the great runup in the bubble of the late nineties was great for everyone. Think again. The number of discouraged workers in those groups markedly increased, even when official employment hovered around 2%.

It's time we look carefully at the EU. Germany would have been doing much better if it hadn't chosen to absorb East Germany - the equivalent of the US absorbing Mexico. France understood that as economies modernize by automating, it is more rational to reduce official work weeks to address unemployment. Employers at first thought it would be terrible, especially since the wages stayed the same as before. But now they give rave reviews because they are finding that people working an hour less per day are actually more productive.

This and much more is in Jeremey Rifkin's new book, "The European Dream."

As to those who think the US will recover, try to figure out how it will be able to emerge from a $51 trillion debt load. Lowering the dollar might increase exports for a while, but the EU, one of our biggest markets, would not be able export its way out of their recession because the greatly appreciated Euro would greatly cut into their exports. This in turn would mean they would buy less from us.

On the larger picture, the US is behaving just like the Spanish, Dutch and British empire acted after they had past their peaks. Yale historian Paul Kennedy describes this. The parallels are amazing for their similarity to our situation.

[sendero]

31. I think you are being naive...

... the US has built itself not just on the ingenuity and resourcefulness of it's population. It has achieved its success by exploiting other nations for labor and resources.

This is about to come to an end. Much of the third world will soon be in a position to work for themselves, not their foreign masters. They will be competing for raw materials (oil, steel) and America will no longer get them on the cheap.

China is currently buying up our country with cheap manufactured goods. Do you really think we can have these huge trade imbalances forever? Do you think that the Chinese or more correctly their govt will allow the emerging Chinese middle class to buy stuff from us?

No, I see a world full of countries that see a wounded animal who once threatened them who is running with a limp. And our own leaders are not working on healing the leg, they are just running.

[elsiesummers]

33. Interesting and readable essay - some points

which aren't covered - outsourcing will be reduced by substantial dollar devaluation - but only if dollar devalues in relation to asian currencies since India and China seem to be a major recipient of outsourced jobs/industries. The current Chinese factory worker (I read this somewhere - I think Mauldin's "Outside the Box" letter) makes between 600 and 1500 US dollars a year. I have also read that Indian telemarketers make 12,000 US dollars a year. It is interesting to speculate how far the dollar would have to fall against the Asian currencies (with the yuan currently pegged at 8.3 per dollar I believe) to stop/slow outsourcing.

Another thought - the US greatest intrinsic assets, IMO, are its high functioning infrastructure (although this is petroleum based) and its political stability and lack of terrorism (despite Bush terrorism hype). Political instability and law and order, especially in terms of street violence and small crime, might increase substantially under an economic crash scenario.

A third issue is health care costs and pension benefits: Much of the inability of US labor forces to compete in a third world dominated labor market is a result of these expenses. Whether companies will simply stop paying benefits (all health care privately purchased) or the US government may start funding these portions of the balance sheets, or perhaps benefits and their costs increase in Asia - for American labor to compete on the world market something will have to give.

[teryang]

5. I differ on the litigation issue

Litigation is a superior alternative to corruption and violence. Without litigation, this is what you get. Therefore, to say it has no productive value is nonsense. A sound legal system is what promotes commerce and trade.

This portion of the article should have been dedicated to the wasteful and exorbitant deficit spending on war and a cold war budget now at equal to peak Vietnam era levels. We all know what that brought on, an era of raging inflation and a stagnant economy while the nation tried to recover. It was the wars in Korea and Vietnam that made the Japanese economy the challenger to US supremacy in its day. A massive transfer of capital from the US to Japan took place in effort to carry on two indecisive conflicts.

Defense contractor and Pentagon expenditures on elective wars ostensibly favor limited sectors of the economy while dumping hundreds of billions of dollars overseas and into unproductive and useless defense programs. They add nothing to the infrastructure nor productivity are a major problem in this economy today.

[Coryoth]

7. Litigation is not utterly unhealthy

I am not trying to claim that litigation needs to be done away with, merely that unproductive lawsuits need to be done away with. The ones I am mostly pointing to are, for instance, the big multi million dollar lawsuits between corporations over Intellectual Property - which is often silly and pointless. Think of Amazon with its patents on one-click shopping, a small company called Eolas suing Microsoft for millions because they claimed to have a patent on "browser plug-ins", when in fact their patent was little better than Amazon's: a simple patent on an obvious idea.

I do agree that defense spending can definitely amount to more inflated GDP.

[teryang]

8. There are penalties for frivolous litigation

I prefer to let the courts make those decisions.

[Coryoth]

9. Fine, but they're not currently being enforced...

And regardless, it will still add to GDP. The point is not so much that litigation is bad, merely that it all gets added to GDP whether it is actually at all productive or not. If you have a frivolous lawsuit that costs $20 million, and then have the plaintiff charged with frivolous litigation, you've still added $20 million to GDP.

The issue is that GDP is a bad measure, and US GDP, while high, may not actually reflect the productivity of the country very well.

[Demeter]

11. What? NO Mention of the Mother (or rather, Father) of All Elephants?

Why not cut to the chase, and point out that the GOP, with the help of its corporate and entrenched (GReenspan) lackeys, has brought this whole thing to pass?

[Coryoth]

14. Because I'm trying to be non-partisan

I think this is a serious issue that both sides are neglecting to discuss, and that people need to be aware of the problems. I've published this essay elsewhere, including Free Republic. Had I simply blamed everything on Republicans I would have been shouted down and ignored instantly there. Instead, there was actually some discussion of the issues, and more than a few people were actually seriously concerned.

[indigobusiness]

21. The long and the short of it is that we can't consume our way to the

Promised Land. Nor can we exploit our way there. The myth of our economic prosperity is about to come starkly into focus. The era of manufacturing is over. No matter how many new types of widgets we devise or types of cars we introduce.

The resources that were used to build this Fantasyland are not infinite, and not renewable. Crunching numbers to try and rationalize that is preposterous.

A shift in mindset is called for that is oriented to organic needs of all, and not a mad scramble to out-luxurify the Joneses.

We are at the brink of a new era...and that is ALWAYS painful. Looking into the rear-view mirror will not guide us on the new road ahead.

We must simplify to survive. Technology won't save us, we are already having difficulty coping with the options.

[rustydad]

25. A good model

This Ausie has developed some good ideas on the simple life. One must ask what would happen if Americans went in this direction? Our economy is predicated on growth even though that is simply a dead end. Bob

http://www.arts.unsw.edu.au/tsw/12b-The-Alt-Sust-Soc-Lng.html

[rustydad]

26. Indeed

This is a non partison issue. In many ways the glories of the Clinton years exacperbated the problem by creating so much phony wealth which led to the excesses in life styles. As much as we like to think that politics is the realm of the evil ones, donkey or elephant, the truth is they take sues from us. We are the source of our own undoing and scapgoating others may feel good but in the end does no good. Bob

[Coryoth]

27. Thank you

I'm glad that someone here sees that just trying to blame it all on the Republicans is not an answer, its just a way to avoid having to face the issue. Even if Kerry had been elected, these would still be issues, and Kerry wasn't exactly providing a great deal of answers either. The first step is for people to bring these problems into public discourse. Make people aware of the issues, and then, and only then, are we likely to be able to see any change made.

[rustydad]

28. Your welcome

This issue is soo big and so potentially devestating that most people will simply avoid it or go into denial. I live near a very progressive town in SoCal. where I participate in various environmental NGOs. Local politics is driven by environmental concerns to a significant degree. Yet the City Council has started construction on an 8 million dollar 4 story parking garage. And everybody is screaming to get the freeway enlarged to cut down on commuter grid lock at 8am and 5pm. Way to go, spend bucks on exactly the wrong thing. We do have a great fleet of electic buses and little rental electric cars.....for the tourists.....who drive from LA 100 miles to get here. Maddness. Bob

[rustydad]

22. Great Article, well sourced....but

It fails to mention the fourth elephant in the room. the black stinky one.....oil. Our economy is grossly dependent on cheap energy, especially transportation energy....oil. As we approach the peak of world production and demand outstrips supply the price will skyrocket. The nations that will be the most affected will be those like us, with dept going nowhere but up. As the efficient producer countries with trade surpluses like China, Japan, India, and others spend more on energy they will have less to invest back into the US. Without dollars coming back in the form of investment we will see prices for our imports also soar. In essence more and more of the worlds coinage will find it's way to the oil producing countries. And most of these countries have soaring birthrates and will spend their new wealth on improving the lifestyles of their populations.

We will find that we can no longer afford all the crap at Walmart nor to fill up the SUV at Exxon. The result will be hyper inflation and economic stagnation. Unemployment rampant, foreclosures and bankruptcies beyond imagination. Pensions evaporated along with Social Security. Vast layoffs in the public sectors as cities, counties and states see huge declines in revenue. The home finance bubble will come crashing down with million of people just walking away from mortgages they can no longer pay down. Banks will fail just as the Savings and Loans did only far worse because the Feds will not be able to bail them out.

The only question I have is whether or not the powers to be know all this or not. If they do, what are they planning on? Are they all preparing to cash out and flee to mountainous tropical islands? Are they gutting our economy, lining their own pockets eventually to flee like thieves in the night? Or are they truly stupid? W certainly is but is he even relevant other that a figurehead to TPTB?

Or our TPTB planning on taking on the world militarily and thumbing our noses at the economic system that supports our extravagant lifestyle? Can they really think this can work as we cannot even control a weak ME country called Iraq? Do TPTB really give a s*it about the average American? I doubt it. My best guess is they will grab as much wealth as they can and when TSHTF the will be gone. And those of us of the masses will be looking at a giant banana republic.

We are likely truly screwed but when it's all over we will at least be absent the bums. Bob

[Coryoth]

23. I touched on oil

But only briefly. Read the Paul Krugman article linked in the article - it goes into some detail about the problems, and how fragile the oil situation is currently.

Oil is a big issue, and if the Dollar depreciates and oil is priced in Euros then even a stable oil market (as far as the rest of the world is concerned) will be one of skyrocketing prices for the US as the Dollar continues to decline. Oil dependence is just one of the many features that will make the impact of the falling Dollar be felt widely. The lack of any effort to move away from oil are certainly problematic.

Another real problem, mentioned in the article, is that with rising oil prices new energy, both in generation, and efficiency of use, could rapidly become the new technology. This is a field that the US is woefully behind in - the US is essentially setting itself behind the game for the next big technology boom. To do so at a time when the economy is teetering it far from sensible.

[rustydad]

24. Which is why......

I think TPTB are not attempting any sort of realistic "fix" other than throwing a few billions at their cronies that are milking the "hydrogen economy" nonsense or ADM and the bio fuels ripoff. I think those in the power know there is no profit in fixing the system, at least not for them. So they will ruthlessly gut our system as fast as they can and take the money and run. Either that or they are insane. And by my standards they are both insane and ruthless.

As far as oil pricing goes whether it is priced in dollars or another currency, a devalued dollar will buy less per dollar as is the case today. Oil priced in Euros has gone up only slightly compared to the rise in dollar prices. While it is true that a weak dollar should curb imports and aid exports two things must be considered. One is that we have little that the world wants at this point no matter how cheap it becomes. Also our labor costs are simply too high for us to reduce production costs to those of China and India. And given that the average American is up to his/her eyeballs in dept any income reduction will bring on economic collapse. Second oil is an essential ingredient in our economy, cheap oil that is. We simple cannot do without it in the quantities we now use. Sure, raising the CAFE standards, shipping by rail, and other efficiencies could reduce our need for imports, a little perhaps. But it will take years to reshape our transportation system. It is highly unlikely we have the time this time around as we did in the late 70s early 80s. And remember the bush slogan 'our life style is not negotiable'? Most Americans buy the BS lock stock and barrel. So reducing our needs to a sustainable level is politically out of the question.

I truly hope that a "new technology" will come to the rescue. But I seriously doubt it will. Going from vacuum tubes to transistors to chips was an example of technology at work. With oil we simply have nothing even on the drawing boards that could replace it. We have burned half of the most valuable resource we were gifted on this planet in a century of so, most in the last few decades. Our children and grandchildren will never forgive us. Bob

[Petrodollar Warfare]

30. Bob, they are indeed "both insane and ruthless"

The Bush admistration the necocons are using the major card that we hold - US military power - as a "solution" to an economic and geostrategic challenges. They will ultimately fail, but they and their friends in the military-industrial-petroleum conglomerate will certainly enrich themselves in the process.

So, while I appreciate all the information revealed in this original post, the issues of energy and currency are rarely discussed at the level needed to fully understand the scope of the issues that are driving the neocons to the current level of ruthlessness. On the otherhand, I do not blame them for this mess, as the dollar issues began under Lyndon Johnson and the Vietnam war, and "dealt with" by Nixon in 1971.

As for the slowlt unfolding US energy crisis, President Carter tried to inform/warn us, but we rejected his sombering lectures for Reagan's "morning in America" rhetoric. Sadly and tragically for the dead Americans and Iraqis over the past 19 months, we as a nation hit the "snooze button" from 1981 to the present day.

Well, here's 2 items to review for individuals such as yourself who are in the "reality-based community."

'The Real Reasons Why Iran is the Next Target:
The Emerging Euro-denominated International Oil Marker'
October 27, 2004
http://www.globalresearch.ca/articles/CLA410A.html

...and why the uniquely American development of "suburbia" is fundamentally flawed....

THE END OF SUBURBIA: Oil Depletion and the Collapse of The American Dream
http://www.endofsuburbia.com/

http://www.endofsuburbia.com/reviews.htm

...While you and I are currently in the minority, I predict the "reality-based community" will expand tremendously by the end of this decade...but I will not predict the outcome of this rude awakening.

[msgadget]

29. All I can say is, thanks

for the summary and for being cautiously optimistic. We all read so many sources about the many problem areas that it's hard to get one big picture of the problem and this pretty much pulled it all together.

[ooglymoogly]

36. imo there is a fourth elephant in the room

it is bushco, basing policies on the rosiest statistics and on a radical idiologic agenda and then predicting the rosiest outcomes but in fact thus far, who's outcomes have been without exception so far off the rosy predictions it is criminal. he is basing policy that profoundly affects the world on observations through rose colored glasses.

[Coryoth]

37. There was a reason such things weren't mentioned

And that, quite simply, is that this was an attempt at a non-partisan essay - one of its points is about the pointless partisan politics that is burying important issues. It's worth noting that I've published this on Free Republic as well, getting a similarly mixed reaction to what I got here.

One of the biggest concerns with regard to predicted outcomes is one that BOTH Kerry and Bush were guilty of: They both expected to halve the budget deficit in 5 years, but both assumed continuing, and in fact increasing growth to be able to do that. If the US slides back toward recession then any hopes of halving the budget deficit go out the window very quickly.

As to why a slide toward recession is possible: right now the US Dollar is falling, and that is driving inflation. The traditional response to rising inflation is for the Federal Reserve to raise interest rates. The problem is that consumer confidence has been low, and the economy is still very fragile - to raise interest rates new could strangle consumer growth. As the majority of the US economy is consumer driven, lack of consumer is simply something that you can't afford to have happen. This has left the Federal Reserve with a conundrum: rising inflation could tip the country back into recession, but raising interest rates to combat inflation could kill the recovery. They somehow have to walk a very fine line, and not tip either way. Things are very delicate right now.

Once things do tip, they could tip badly. If the US falls into recession the budget deficit is not going to shrink - it could in fact grow instead. At the same time, the US falling into recession is only going to fuel selling of the US Dollar, and make selling the deficit (via Bonds) to foreigners (the US usually sells mostly to Asia) almost impossible. From there things only get worse.

Jedidiah.

[ooglymoogly]

38. i do understand where you are coming from

and your efforts are indeed appreciated though i don't think they will be appreciated where they need to be. it is just so damned hard to watch this great country i have grown up in being tossed so cavalierly into the crapper by these idiots. and yes i'm busted. i am partisan but only since 2002. now it is my duty to fight the good fight.

[ramapo]

39. Neither Bush or Kerry were honest

Like you noted, both Kerry and Bush talked about halving the deficit in five years. Neither of them leveled with the American people. Kerry did point out more of the problems; outsourcing, lack of job growth, the middle-class squeeze, and to an extent deficit spending.

Bush was pretty much all happy talk but you can't expect him to talk about anything negative, hell then he might have to take responsibility for something.

I would've loved Kerry to have talked some straight, common sense, "we just can't go on this way forever". The country could use a sane, clear-thinking Ross Perot type.

What if he'd talked about how we can't keep spending more than we earn, we can't buy more than we make, and we can't let the rest of the world finance our debt.

No politician has the guts to level with the American people, hence we've had government-by-delusion since 1980.

Maybe Kerry would;ve been buried had he taken such an approach but at least he wouldn't have been pandering to the illusion that everything will be ok with just a bit of economic tinkering.