US economic decline is looking terminal
84I love America but fear for its economic future
Author's note: I wrote this in September 2009. I have included some links to other people's analysis to expand on some the themes I have only touched upon.
Recovery ahead?
Mainstream opinion in the US seems to have declared the recession over and is preparing for a recovery. Doubts remain about the recovery's strength and durability, but the message is clear - the world's biggest and richest economy is getting back on track. The truth is very different: the economy hasn't really grown for years and may never do so again. Here is my past, present and future guide to the economic decline of the USA.
The US economy hasn't grown this century
Reported GDP grew from $9.8 trillion in the year 2000 to $14.3 trillion by the end of 2008 scoring an impressive 45% gain. But if you strip out the effects of population growth and inflation, the real gain on a per capita basis is more like 10%. Even this growth has to be measured against the increase in America's debts over the period:
In real terms, the US economy has grown a little over a trillion dollars during the first eight years of the century but at the same time its government, companies and households have racked up approximately 25 trillion dollars in debt. "Growth" resulting from taking on unaffordable debts is not genuine because it reverses when the debts are repaid or more usually lead to widespread defaults. The underlying truth is that the American economy stalled long before the current crisis and an illusion of growth has only been maintained by reckless borrowing which has taken total debt to over 350% of GDP.
Positive GDP growth means nothing if it's borrowed from the future
Although a return to positive GDP growth is widely expected during Q3 2009, this is again "borrowed from the future" growth, though this time it is the government sector that has been racking up the debts.
Expert link (article by Rolfe Winkler): US Government taking on a mountain of debt isn't the solution
The government has made up for a fall in demand as consumers and businesses tighten their belts (or go bust) by borrowing and spending record sums. The 2008 deficit was a record $450bn but the 2009 deficit is set to be 3-4 times as much. This, together with unparalleled low interest rates and "quantitative easing" (printing money), has unsurprisingly forced some life into the economy but again it's borrowed growth, which inevitably has to reverse at some point.
For real growth to return there needs to be a private sector revival but that is not going to happen while:
- households and businesses retrench and rebuild after the excesses of the boom. They are in no state to begin a new cycle of borrow, invest and consume.
- the government drags out the recession with bailouts and subsidies which slow the inevitable and necessary liquidation of bad investments and loans and a reduction of capacity to fit real demand.
- government spending continues to grow to unsustainable levels, diverting resources from the private sector.
The bailouts and subsidies are prolonging the recession
Could a change of policy see a return to growth?
Theoretically the government could set the scene for a real recovery by allowing the Amercian economy to purge the boom excesses and by taking an axe to public sector spending. But removing the stimulus of excessive government spending and removing props supporting weaker banks, companies and households would bring about a recession of such magnitude it would collapse both the banking system and the government finances.
This is a genuine Catch 22: struggle on with a flawed system with no hope of genuine recovery or strike out on a new path which would provoke depression-type conditions before a recovery begins. The politicians will chose propping up the current system with all means at their disposal until a change is forced upon them.
The road to collapse
I hope I've already shown that the government's attempt to borrow America to growth will fail but then what? Here's my guess (actually I'm pretty sure of what will happen; it's the timings that are a guess):
Now till mid-2010:
- phoney recovery as the government's extremely loose monetary and fiscal policies buy some headline GDP growth
Mid to late 2010:
- recovery stalls as stimulus effects wear off without a private sector revivial
- government heeds calls for more bail-outs and stimulus as Congressional elections loom
- dollar and government bonds rise for the last time as investors lose faith in the recovery and there is a flight from equities and risky assets
- world slips back into recession as trade volumes collapse
2011:
- government deficit worsens as unemployment rises again and new stimulus costs mount while tax revenues stagnate.
- confidence evaporates and there is panic in the markets as foreign investors dump Treasuries and the US dollar. Foreign governments meet to signal the end of the dollar's reign as world's reserve currency.
[Author update (6 Oct '09): I told you my timing could be off. Looks like foreign governments have already met to end the dollar's reign as world's reserve currency. See link:
- import costs rise and inflation takes hold as the Fed is forced to print money to buy the Treasuries the market doesn't want.
- higher costs and interest rates are the final straw to many heavily indebted banks, states, corporations and households.
Expert link: why the US dollar and Treasury markets will collapse
After the collapse: chaos and stagnation or reform and recovery?
If I am right and 2011 is the year when the US financial system, government bond market and the dollar collapse, what then? Will a phoenix rise from the ashes? Often currency and debt crises are followed by reform and recovery. Whether the US will rebuild depends on the response of the political system to the collapse.
The presidential elections of 2012 will feature much talk of fiscal responsibility, restoring the value of the dollar and a fresh start but whether this will convert to action depends on the willingness of America's political elite to put country before special interests and discipline before political expedience. I have my doubts. Argentina's long history of inflation and hyperinflation, reforms blocked by entrenched interests, deficits and currency crises, political cronyism and industrial decline is more likely to offer the model for post-collapse America.
Expert link (Eric Janszen) : USA could suffer same fate as Argentina in 2001
The US faces a collapse at least as severe as Argentina in 2001
The US will need to overcome massive twin challenges to grow long term
After the collapse, the long term threats to a resumption of US growth will be the imminent challenges of an ageing population and an end to cheap energy. This is a big topic and I have only space to touch upon it but:
Energy While I don't believe there is an insoluble energy crisis waiting to plunge America back to the Dark Ages, there are looming problems and the solutions will be enormously expensive with massive investments required in infrastructure, new technologies and generating capacity.
Population The US has a younger population profile than many Western countries but nevertheless the number of retirees is projected to increase by 56% and the number of over-85 year olds by 134% by 2050. This will impose a massive strain on America because it is unprepared - its citizens haven't saved enough and the government has made unaffordable promises on health and social security.
Meeting both challenges will require a high level of forward planning, discipline and sacrifice from a country which has indulged itself in the present by pillaging the future for four decades or more. As the Argentinian experience has shown, a dollar collapse will not automatically promote good leadership and effective policy. Even if the task of economic rebuilding is faced with a new resolve and competence, the energy and population challenges will make a return to rapid growth a tall order indeed.
Conclusion
I am not American but I know the country very well and have studied its political economy since the early 1980s. It gives me no pleasure to say this, because I love the country, but America is in irreversible decline. if it's any comfort to American readers, the problems in other countries like mine (Britain) are similar or worse and the outcome could be much the same. We will all have to get used to lower living standards.
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Hey....I got your message via the other writing site. I thought I would take a look at your hub! Great information. Wonderful details!
"Very thought-provoking stuff. Expert links were good too"
Interesting stuff.
Hope advoco will be writing more articles like this. Would be interested to know what he would do if he were in charge.
Excellent article on the decline of America (and Capitalism as we know it?) and forwarded a link to my brother Dr.Tom Kando who runs http://european-americanblog.blogspot.com/ to try and encourage him to join hub pages and respond.
Great article on economic collapse in America. Great information and so true.
Very good article, while focussing on the American economy sounds as though could apply equally to any western capitalist country. All caused by people's desire to borrow in order to live beyond their means and being encouraged to do so by Western financial institutions. As stated in your last paragraph this all has to be repaid, resulting in future generations borrowing less and accepting a lower standard of living. The greatest tragedy of this economic downturn is those who lose their jobs, in most instances through little fault of their own, while those most responsible for causing the situation are generally less affected and wish to continue as previously.
Thanks for all your comments. It feels good having written a piece and got a reaction. On specific points:
Jenny - I believe sound money to be a fundamental pre-requisite for healthy economic progress and thus I would not have allowed the money supply and associated debt bubble to grow like it did in the first place. I think a lot of people saw the housing and other booms of the last few years were unsustainable and brewing up trouble. Perhaps, as Ian said, the people profiting from the boom directly or indirectly (by getting votes) chose not to see how dangerous it was. Key to future success is to return to sound money and market-set interest rates plus deep cuts in public spending to restore confidence in the govt finances.
Some interesting points, good to keep us all on our toes and not to get too complacent about the UK economy recovery as well
Maybe you should submit this Information to the Liberal Democrats who have a stranglehold on our Government over here . But very Informative hub, nice work .
Good hub....It doesn't look like the dollar can stay the standard. It may not stay at all?
Tony/Tom - really appreciate your comments on my first hub of any significance. I think you touched on one of its failings - it doesn't really deal with the reserve currency issue. A lot of people think its status as reserve currency will act as a protective shield against the collapse I am thinking will happen. My view is that the dollar's status has delayed the inevitable but will make it worse when it happens. We've all heard about "too big to fail" before and it's a dangerous thing to live by. By the way I'm no fan of the way the Ds have been tackling the crisis but politicians on both sides made it.
The politicians, Republican and Democrat have gotten in the bad habit of throwing money at problems. It's kind of like tossing a thousand bucks to a teenager and hoping they spend it wisely. Until we remove incompetence and greed from the system, it will only get worse. We are in very serious trouble here.....I just hope that the political mouse doesn't scare the populous elephant into a rage.
Nothing is going to get better until the Central Banks are removed and "Real" money is back in circulation. The United States has done nothing but take from future earnings of the Tax Payer and redistribute to the wealthy. They should have let the risk takers eat their risk and move on. Yes more jobs would have been lost short term. Yes people would have suffered. But the only thing that has happened to date is the inevitable has been put on temporary delay.
You have to understand how a fractional reserve banking system works to understand why you can not "spend your way out of recession".
We have reached the time in American History where the debt created by the Central Bank can not be paid back ...
The future is very bleak. This is not pessimism it's simply analysis of a broken system and a whole lot of denial.
This is NOT a Republican or Democrat issue. People who can not see the real issue - The Central Bank are easily distracted. To understand the problem you have to understand the money supply.
I think that the economy will never be ok until the people stop taking risks without thinking of the consequences at stake. People nowadays are much to fast to get a mortgage on a house that they can't even afford with their own income. I can only pray that people will start realizing their limitations and taking risks that others will have to pay for.
Very true and informative article. Thanks.
Nice and informative Hub
I just read a story on yahoo today about gold prices soaring in reaction to middle-eastern talks of no longer accepting the US dollar for oil payment as they believe it is no longer stable and in danger of collapse, maybe your predictions are off by about a year.This recession has left me jobless, here where I live the economy continues to plummet and fall without an end in sight. I feel the auto and banking industries should have been allowed to crumble or take drastic measures to become profitable again, but instead they have been given a stay of execution to continue on in their inability to manage money and take advantage of the lower classes. Funny how mismanagement and overspending caused this but the ones paying the real price are at the bottom while those at the top continue to carry on in wealth and splendor.
Scott is right about the middle eastern talks echoing one of my predictions but much sooner than anticipated. I've added a link to the article that broke the news (if it's true, it is disputed) as an author's note to the prediction section.
Good assessment of America's current situation. IMO, I don't see the economy getting better, at least not for too long. Once the massive government spending has had its impact we're done as a power. As our economy collapses other nations that have an axe to grind will likely grind away.
I don't have any major disagreement with the information in this hub, I don't think it targets the real problem in America.
That problem is the size of the government which is at least double the size that it should be. The population increased in the past 30 years from around two hundred million to over three hundred and forty million.
The Government Federal, State and Local increased during the 80's and 90's and keeps growing even today. At the same time, the private sector has lost tens of millions of jobs. Each government employee is an economic liability to the country. They can retire earlier than those on Social Security, at least ten or more years earlier. The tax payers have to then continue to pay for their retirement while hiring a new government worker to replace that position. The benefits these workers receive is better than most in the private sector. Private sector employers can't afford to pay these benefits to their workers but we the people apparently think we can afford to pay these benefits for government workers.
Benefits such as medical, retirement, vacation and sick leave, other kinds of leaves, education and other benefits.
We cannot continue to have the size of the government workers increase, while the private sector continues to lose businesses and workers. And those private sector workers that still have jobs, don't have many benefits.
Each of these government workers has to be paid from the tax revenues. When the size of government increases while the private sector shrinks and the price of goods goes up, where do we get the revenue to balance the overstuffed government?
Now the government is considering a VAT tax on top of increase Income Taxes and Sales Taxes.
Do the math, it doesn't balance. ------
Bailouts and Subsidies prolong the recession? Bank bailouts probably saved the US from riots and social disintegration on a thirties scale. People won't sit quietly by while there savings are wiped out, their wages go unpaid and they cannot buy the essentials of life. A wave of bank closures was a very close indeed.
Better a recession than a full blown depression. Economics can seem pretty esoteric with lots of nice equations and graphs but as soon as real people are involved it gets very messy and unpredictable.
opinion duck - totally agree with your view; my article does put debt at centre stage but does not discount the problem of government growth which is described as "excessive" and "unsustainable" at different points.
The last commenter questions my view that bailouts prolong the recession but I stand by it. The government should ensure depositors are protected but this could have been achieved without throwing trillions at the banks. The stimulus bill, housing subisidies, cash for clunkers and the rest of it are just plain misguided.
Yes I think same you.
I think you covered it very fairly and correctly. As an American this is not the country it was and I think we are doomed at times.
advoco
I also agree with you comment on the bailouts prolonging recession. The government bailed out the financial sector which were the bad guys creating the economic problem. At the same time they refused to do the same for the auto industry. The auto industry was just caught in the financial implosion but they were not bad guys, just bad at their business.
The Congress literally threw trillions in the bailouts and got a penny or less on each dollar. Today, we still don't know where the money went and how it was used.
We do know that hundreds of millions went to executive bonuses. These executives were running the failed businesses and they got rewarded for their incompetence and greed.
BTW, oil prices today are around $70 a barrel. Just before the economic bubble burst, oil was heading for a high of $60 and that was about double what it should have been then. Now after the bubble burst and in the worst recession or economic collapse in modern times, oil prices are rising.
The opinion duck believes that the US Government is the biggest user of oil in the US, if not the world. They don't pay taxes on it, while the domestic consumers pay about 50 cents a gallon in taxes. Almost every industry is adversely affected by higher fuel and energy costs.
At the end of the recession, the payback of these ridiculous bailouts will hit the taxpayer with very high taxes. Robbing Peter to pay Paul, not a great strategy.
Yes, it is terrible. I have been trying to get a home loan and a small business loan for several years now so I can get a family farm started and no one wants to take the risk because of the economy.
The problem with economics (either throw money at it economics, or let it fail economics) is that there's always a fatal flaw in the mathematics behind it - so these models are never going to be accurate and there's always some factor or other that cannot be predicted. There's no economic model in the world that could have predicted the widespread fraud in the financial markets (madoff etc.). Thus I never really pay any attention to economic forecasts these days.
Having said that - you're hub does have a lot of good information - however as long as those in power are aware of the same information, then you'd hope that they will do something about it. As has been seen, the demise of the US as a power economy will kill the entire world economy...
Sir, I beg to differ. You are so negative in your illustration, analysis and the conclusion reached. I beg to differ from your oversimplification of a complex economic situation.
First, America is engaged in two wars simultaneously. Mr. Bush administration was emerssed in the Iraq war on one hand and Afghanistan war on the other to the total neglect of everything else, including deriment to the American national economy.
The national asset and treasure of a country, is the brain, skill and positive mental attitude of its citizens. If properly harnessed and utilized the economy will bounce back. The demargoguery and ideology of Republican Party is not helping matters.
The proper application of fiscal and monetary policy plus creative entrepreneurial ingenuity will lift our economy. The Chinese are doing it. Why not America? I am optimistically positive of better tomorrow.
Hybrid: US GDP per head is about 45.000$ and China's less than 4.000$. They are starting from a low base and also save over 30% of their GDP so will of course continue to grow. The US has saved practically nothing for years and has a very high GDP to maintain despite a massive debt burden. I stand by the article - it hasn't managed to grow its economy for a decade and is unlikely to turn things around any time soon.
This is a fine article. I agree with you that we are in serious trouble. I see it as a problem of the heart. Greed, corruption, sloth, a poor work ethic, abortion (killing off the next generation). We are committing demographic suicide by not having children (1.6) and abandoning the traditional family, long the bedrock of our civilization. Thanks for the sobering read.
Brilliant analysis - you should write a book!
I found the predictions interesting - you are out on a limb with everyone saying the recession is over
I enjoy your "knowledgeable" economic articles - too many people have no understanding of it. A monetary system based on debt no longer backed by the gold standard simply can not work. Governments are TOO big --- it appears to me the only economy that makes sense for any individual is the underground...
Great hub and very much along the lines of my own thinking. When the bail outs started, realizing that it was that or an immediate depression, I wasn't sure I was ready for the second great depression. I had heard too much about the first from my father who lived through the 30's depression. That said, I agree that we've only prolonged the disaster, especially since the bail outs were handled so irresponsibly with no over sight on the banks whose greedy and unethical behavior caused much of the mess.
We certainly are in a mess and not apt to get out of it any time soon. My focus remains on becoming more self sustained, preparing for hyperinflation especially with energy, and getting used to a lower standard of living, which I think is inevitable.
Nice article. Schiff has predicted bad things in the past. So far though, we seem to be having a deflationary episode rather than inflationary. That could change but certainly asset inflation will not be good for a wage bound middle class. It could put them out of the middle class.
That is why I think we could end up more like Japan. We shall see.
Very interesting Hub and well-researched. Thanks.
I am no economist but I see the cause of all this chaos as being government and private sector inefficiency linked with corporate greed. The glorification of greed by the Thatchers and Reagans of this world has led to this situation. Then allow an inept person like Bush II into the picture and the rest is clear.
Deregulation is fine for the people at the top of the economic pile who will get more, but it's disaster for those at the bottom, who will be robbed of the little they have.
The bail-outs of the financial institutions remind me of the comment made some years ago (pre-1994) by a South African journalist about this country that it had "too much socialism for the rich and too little socialism for the poor", in other words the rich were getting benefits from government while the poor had to make do with the left-overs.
Corruption is robbery, and it was corruption in high places that has led to this current situation - Enron, Madoff, etc were only living up to the capitalist creed as promoted by the Thatchers and Reagans et al - take as much as you want, it's good to be greedy, etc. Government will give you tax breaks and bail outs if things go skew.
But if you're poor, forget it!
Looking at your article is scary and I wonder where we will end up.
Small farming, self-sufficiency and getting back to basics are what will, if allowed, bring sanity back. But since these values are inherently anti-capitalist I guess they don't stand a chance - no-one will be able to get rich on them!
Thanks for stimulating an interesting debate.
Love and peace
Tony
From: bea.gov>
To:Sent: Wednesday, March 11, 2009 1:58:04 PM
Subject: RE: BEA National Inquiry
Thank you for your inquiry.
BEA does not have an official definition for a depression. The National Bureau of Economic Research is the organization responsible for dating business cycles. They would be the group to contact for an official definition, if one exists. You can access their web site from the following link (To nber)
My reference textbook (Mankiw's Macroeconomics) defines it as a severe period of decline in real GDP. Duration and severity are criteria, but even the NBER site I referred you to may not have a definition in terms of a specific percent or length of time. They are definitely the group to consult on this though.
If you have further questions, please let me know.
Sincerely,
Name Omitted
Bureau of Economic Analysis
(202) 606-XXXX
Sign-up for email delivery of some of the Nation's most important economic indicators at...XXX
This reply was to a question about the definition of a "Depression"? In my old textbook, the "thumbnail definition" was "Four consequtive quarters of negative economic growth with 10% unemployment or more.
This answer may help explain why there's not a lot of "official" discussion about a depression?
Nice article. As an engineer I can provide another view as to why the US will collapse and the reasons are.
The US is an empire that is getting corrupt. Very corrupt.
While other nations especially Asian nations are encouraging the development of research, development and manufacturing we are encouraging cleptocracy.
Hegemon nation will be the nation that promotes research development, manufacturing and promotes exporting and becomes self sufficient in its energy needs.
Living in the US for 40 years I have seen a shift where the best and brightest of Americans do not want to study science math or go into these fields.
And if they did study science they will find themselves underpaid or unemployed so I do not blame them.
They want to go to Wall Street where the easy money is without producing anything of tangible value but do anything to enrich themselves at the detriment of the Nation. They accomplish that by buying the politicians who are also evil, greedy, corrupt and ignorant at best.
The US became wealthy and powerful after the second world war. While the rest of the World was destroying itself the US stood by and was exporting to the rest of the world and thus enriching itself.
The Europeans seem learn their lessons and decided to unite
and they creates an economy larger than that of the US 18.5 trillion vs 14.5 Trillion. The Europeans however have also failed because they have not encouraged Research development and manufacturing.
The Japanese also rebuild and created a powerful economy and challenged the US in many areas especially automotive industries and consumer electronics.
The Koreans is another challenge becoming strong in electronics, automotive ship building another areas.
The Chinese wave and the Indian waves are coming and they will be humongus.
All realized that wealth comes from producing real tangible products and not make belief products such as legal, financial, bureaucracy and other services of no real value.
America lost its manufacturing industry, it is about to loose its research and development as it is moving overseas and if the government does nothing to reverse these trends the nation will slowly slip into the second tier nations.
The US will do nothing to reverse that because our leaders are not scientists engineers or even understand the value of technology and manufacturing. As Carl Sagan once said we are a highly technological nation ruled by technologically illiterate rulers.
FOR THESE REASONS THERE IS LITTLE HOPE AMERICA WILL EVER BE ABLE TO RECOVER ECONOMICALLY. THE ONLY WAY I SEE IS DOWNHILL.
Jeffries - I can see the truth in a lot of what you are saying : by hollowing out a lot of its technological and manufacturing capability the US has left itself vulnerable to competitive pressure and less able to lead on impending energy and environmental challenges. One thing in its favour though is that it is a very open economy and has always invited lots of foreign students, academics and technicians into its system.
re:"Now till mid-2010..." When is "now?" When was this article written? I'm guessing fall of '08. A date at the top of the page is essential for context and perspective.
Fair comment GJ - I have added the publication date (September 2009) to the author's note at the beginning.
A rebuff to all the people hoping that the green economy will ride to the rescue http://english.alrroya.com/content/beware-greens-b
Err, if your currency is worthless, how do you pay for things? try making and buying 20 million electric cars and the power plants to power them. I'd be brushing up on my primitive survival skills if i were you.
Hey Yanks, get off the dole(99ers on unemployment), head west to pick veggies, NW for apples, midwest to cut beef, norteast to cook and wash dishes and south to landscape and send the Mexicans home or go bankrupt.
advoco, Doesn't the fact that the U.S. operates under a
debt monetary system, which can only exist with continued borrowing, exacerbate any possibility of financial recovery?
I was informed by the treasury that the actual creation of money, (always) involves the extension of credit from
private commercial banks. This means interest bearing loans.
However, under this system, no money is created above or beyond the debt principal of any loan, to address the interest on any loans.
Doesn't that mean that we are always creating a debt greater than the debt money supply created?
Isn't the debt monetary system the main cause of all of our indebtedness?
Without borrowing, wouldn't we be without a medium of exchange?
Decisions we make today should result in a sustainable world for many generations into the future. Ensuring that decisions being made about our energy, water, and natural resources are sustainable is central to this belief. This also applies to political, economical and financial decision that affect/obligates current and future generations.
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A 2 years ago
STOP BEING GREEDY. I AM AN ASIAN, I SEE THIS GREED INCREASING IN ASIAN COUNTRIES AS WELL.