I’m talking about the US, as we currently know it. I’m becoming more and more convinced that we’re in for an economic collapse of historical magnitude. I’ve always been skeptical of doomsday scenarios that some crackpot economists frequently illustrate. But there are too many signs that seem to point in that direction; far too many to ignore. James Fallows, in the July/August Atlantic Monthly (no link), has done the best job in consolidating the potential economic problems, IMHO. The bottom line is that our current “comfortable” economic position is being held together by a delicate mix of unsustainable circumstances.
Here’s how I think the collapse will occur:
Our government is spending much more than it is receiving in tax income. This means that in order to spend money on military spending, healthcare costs, social security, highway maintenance, security, etc., the government must borrow money. So who’s lending us the large chunk of this?: foreign countries, especially China and Japan. They are buying US government bonds, which keeps domestic interest rates relatively low. This allows China to sell cheap products to Americans. This is not sustainable. Once China has invested in its infrastructure, and can sell to the rest of the world, it will have no reason to hoard US dollars.
As the dollar begins to fall, the investment dollars of other nations will also stop coming in. Who would want to invest in a depreciating commodity? At this point, the US will have to issue debt with higher and higher interest rates. If it didn’t, no one would buy the bonds. This is when the real estate bubble will burst (if not earlier). The value of real estate will plummet since fewer potential home buyers will be able to afford the interest rates. Higher interest rates will also force corporations to stop investing in themselves, hindering their ability to grow. Corporate income will start to fall. Fewer jobs will be created and salaries and wages will decrease. Unemployment will grow and people will be forced to take jobs with lower and lower pay. This will cause the government to receive even less in tax revenues.
What will the government be forced to do at this point? Well, personal and corporate income tax rates will have to rise to support government spending. Additionally, the government won’t be able to spend as much. We’ll experience decreases in education spending, infrastructure spending, Medicare, etc. States, counties and municipalities will be forced to spend less on roads, police and fire. Crime will go up due to desperation as well as police decreases. Class warfare will begin since poor people won’t be able to pay for food and healthcare. The middle class will default on personal debt. Meanwhile, oil and gas prices will continue to rise, as will the prices of products dependent on oil.
I’ve only outlined a few of the problems. But the point is that there doesn’t seem to be a way to stop a collapse from occurring. My radical long-term prediction is that in 2 decades, China and India will be outsourcing jobs to the US to take advantage of our cheap labor.