Is the U.S. economy on the verge of collapse?

Great Debates
1

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.

2

Yes! Yes!!! We are all DOOOOMMMMMMEEEEEDDDDD!!! runs shrieking from the room

I read an article in Wired (I think it was last month) discussing many of these issues. They weren’t nearly so bleak about the predictions. One thing that struck me though was, to paraphrase “US workers are addicted to their high salaries. The reality is that the current salaries of US workers, when compared to equal work being done in other nations, is unsustainably high. US workers are going to have to get used to being payed less…or get used to no jobs at all.” How that plays into what you are saying I’m unsure but thought I’d toss that out.

I don’t see the US economy collapsing as you seem to be suggesting (though I think some of the things you predict could certainly come to pass). If there is a reversal and the US dollar goes into free fall due to other nations not being willing to invest in the US anymore, that will be a double edged sword…in other words, it will certainly have a down side, but it will have an upside as well, as US manufactured goods will be easier to export. As for China finding other markets than the US…well, I’m sure they already are. But there just isn’t any potential future market in the near term like the US consummer market…so I think it will remain in their best interest to keep propping up the dollar. Personally I kind of wish they would stop doing it and let the dollar find its natural level…I think the US will adjust to higher costs for consummer goods and that over all it will be a good thing for both the US and for the rest of the world.

-XT

3

is there going to be a collapse or would be more acurate to say that U.S. will no longer be THEE econmic super power do to slow decline?

4

Are you saying that China is simply going to stop making money hand over fist by ceasing to produce items that are sold on US shores? That’s silly.

Or are you suggesting that China will sell off its dollar reserves because they don’t need them anymore, leading to a devaluation of the dollar? Why would China sell its currency reserves in such quantities as to cause a collapse of the US dollar? That makes about as much sense for China (provided that we don’t go to war or something) as the US trading all the gold in Fort Knox for a big stack of donuts.

5

No. Yes, the budget deficit is worrisome but we’ve had defecits in the past and survived (although painfully). The countries buying our debt go beyond China and Japan (who are going through their own economic issues). We are buying other country’s debt too. That’s how the world works. No one country can sabotage our economy. China’s growth is not financed by buying our debt, BTW. China’s growth is due to its large population and the US buying up their cheap products. Can you provide a cite that China is hoarding dollars? That doesn’t make sense considering how the doallr is doing in the market.
The dollar is not “falling”. It has depreciated over the past couple of months. It appreciated after the EU France vote.
A couple tips:

  • Educate yourself. Learn about the role of central banks, find out what the foreign exchange market really is.
  • Economists come from schools of thought and some have axes to grind. So, there’s no chance on grasping economic situations from reading just one economist. Is James Fallows a Monetarist or Keynesian? Does he agree with the Cato Institute that we should peg the dollar to a gold standard?
  • Cites are nice tools to back up Doomsday scenarios :wink: Comme ca:

http://www.nytimes.com/2005/06/09/business/09cnd-fed.html?hp&ex=1118376000&en=fa6ef3450138bd80&ei=5094&partner=homepage (registration required)

6

I’m not saying that China will attempt to sabotage our economy. Simply put, the government spends money through tax revenues and debt issuances. Debt issuances have to pay out interest. In order for us to preserve our nation’s current socio-economic standards, the government will have to spend at a pace and growth rate that tax revenues will be unable to support. Eventually, we won’t be able to issue debt as cheaply as we do now. There just isn’t any way out of this downward spiral. I read Greenspan’s comments too. Has he, or anyone, been able to explain just how the spending/tax/national debt issue could possibly be fixed?

AmericanMaid, thanks for the advice, except that I’m already quite knowledgeable in the role of central banks, F/X, etc. I do this kind of work for a living. And I only referenced Fallows because I think he did the best job in summarizing the problems. The Atlantic is a subscription magazine, so I can’t link to a cite.

7

I think it’s safe to say that the U.S. will no longer be THEE economic superpower in a few decades. We’d probably fall to 3rd at best. But it seems to me that conditions point to a collapse, and not a slow decline. Either way, it’s not going to be easy for the people of this country to handle the downfall.

8

Well, I don’t pretend to be knowledgeable about central banks, foreign exchange markets, and so forth. But I’m pretty sure that if we don’t get both public and private debt under control and become a lot more competitive in international markets, sooner or later we’re going to have another economic dislocation on the order of the Great Depression. And it ain’t gonna be pretty.

9

We had big deficits in the 1940s and tremendous growth in the 1950s. We had deficits in the 1980s and growth from the 1980s to the end of the 1990s. We’ve just come off the shortest recession, we’ve had big growth for several quarters in a row, unemployment is down, inflation is down.

The kind of problems cited in the OP all have their natural corrections. If the Chinese sell too many dollars, the price goes down and Soros buys lots of them.

Maybe if we’re really unlucky, we’ll have a recession that brings us all the way back to the standard of living of 1996 or so. I’m not too worried. Except for my checking account all of my money is in the stock market now.

10

You are saying that it is no longer fiscally possible to balance the Federal budget? Your claim here seems to go far beyond “those fatcats in Washington don’t have the guts to balance the budget.” By my reading, you seem to be saying that it is simply impossible to balance the budget.

That is absolute nonsense. The only thing preventing an increase in taxes and a decrease in spending is politics, not economics.

11

Well, the Fed has been increasing the federal fund rate by quarter percentage points to combat inflation and yet commercial banks haven’t followed this rate hike. This situation is stumping Greenspan.
The roles of the central bank, Congress, and the treasury on the US economy are completely separate. The Fed has two assets on their balance sheet (in a very simple model): discount loans and government securities. Discount loans are the reserves of commercial banks. Government securities are issued by the Treasury. If the Fed purchases a government security, the money supply increases. If Congress is strapped for cash, the Treasury can issue bonds to raise cash. But with a market bond dump like that, bond prices would plummet and interest rates would rise. So, The Fed can buy those bonds thus supplying the government with money and increasing the money supply. Your concern about a second Depression is not focusing on the main factors of the first Depression. You should focus on the amount of deposits in the banking system, the currency ratio, and the excess reserve ratio. If the amount of currency rises, national money supply will plummet. That rise means people are pulling out money from deposit accounts. Another factor in the first Depression was imperfect information thus bank panics. Nowadays, thanks to all the wonderful technology market information is fast and accurate. But, you probably already understand this.

12

I’ve heard this claim and I’ve also heard that it is the French and other Europeans with their 35 hour weeks and many weeks of vacation that are in trouble.

I can remember reading dire predictions in the 60’s. Then in the 70’s we had the oil crisises and worry about the cost of the Vietnam War. As we approached the 80’s Jimmy introduced us to high inflation and 20+% interest rates. Reagan came along and cut taxes, which everyone said was going to send us to the poor house. There have been many more since and during those times claiming this or that was going to do us in. Each time I worried and still worry about them but hardly any have come even partly true. It has always been something that we didn’t see coming that slowed things down.

For the immediate future, I don’t see any country including China doing anything to seriously harm our economy because as the United States goes so goes the world. That may seem familiar to some people since it is what they used to say back in the 50’s, 60’s and 70’s about General Motors influencing our economy. Today General Motors is in trouble and the same will some day happen to the United States, but it was only recently that Walmart took over as the largest corporation in the world.

13

The only way I see the U.S. economy collapsing is if there is a trigger like a terrorist strike of enormous magnitude (say, a nuclear bomb or three) or if peak oil really does end up biting us in the ass in a bad way.

14

Wow. Gloom and doom about the economy. We’ve never heard that before.

Let’s put it perspective, shall we? Look at these basic economic indicators:

GDP Growth: 3.5%
Unemployment: 5.1%
Federal Funds Rate: 3%
Inflation: 3%
Deficit as % of GDP: 3%

Historically, those are very good numbers. Let’s compare to 1983:

GDP Growth: 4%
Unemployment: 10.1%
Federal Funds Rate: 9.1%
Inflation: 4%
Deficit as % of GDP: 6%

In 1983, the deficit was twice as high relative to GDP, unemployment was twice as high, interest rates were three times as high, inflation was higher, and there was a cold war going on.

And if you go back just a couple of years from that, you’ll see some truly scary numbers. In 1981, the fed rate was 16.3%, and the economy was in a recession. Most of the young people on this board probably don’t remember what it was like when mortgage rates were close to 20%, 10% of the public was out of a job, and inflation was 13%. THOSE were scary numbers.

The worst numbers today are the cumulative debt/GDP ratio, which is approaching new highs, the deficit, which is fairly high but scheduled to fall dramatically, and the current account deficit, which is really the result of weak economies in Europe and elsewhere, and the subsequent huge trade gap the U.S. has. Simply put, Americans are doing much better than other countries, and are buying up foreign goods faster than the foreigners can buy American goods. Sort of a double-edged sword.

There are a couple of new factors as well - what looks like an end to cheap oil, which could have an adverse reaction (but the projected increases are nowhere near the cost of, say, the peak cold war spending on the military), the retirement of the baby boom and the general worldwide demographic collapse (this could be a big problem - not so much in the U.S., but elsewhere), and a collapse of the global economy due to gross mismanagement in Europe.

Europe scares me the most. The major European countries are an economic mess. You can blame socialism for that. Short work weeks, excessive holidays, low productivity, insanely generous retirement packages… All of that adds up to a looming crisis. The U.S. debt is manageable because the U.S. economy is growing at 3-4% per year, which means it can grow itself out of its economic mess just by being slightly more fiscally responsible. But the major European countries like France and Germany have higher debts, higher deficits, and anemic growth. Their debt-GDP ratios are going to skyrocket. In addition, high immigration means the U.S. population is staying relatively young and vibrant, while Europe grows old and decadent.

If Europe becomes really sick, not only will it hammer the global economy, but you’re going to start seeing a lot of tension and conflict again. The EU is coming apart at the seams, and the worst is yet to come.

I’m bullish on North America, but Europe is scary.

15

And how did WIRED come to the concclusion that U.S. salaries are unsustainably high? Do they understand that salaries are not just the result of an individual’s labor, but of the infrastructure, markets, stability, and other environmental factors that the workers work in?

SOME salaries are too high - those salaries protected by tariffs, export controls, and closed shop unions. The rest of the salaries are where they are because that’s what American businesses have to pay to get the people they need. So why don’t they just move where the cheap labor is? Plenty of reasons: logistics, access to markets, shipping costs, political instability in other countries, unhealthy work forces, local laws that are anti-business, high taxation, you name it. Given an unfettered market, the capital will flow to where it can be used most efficiently, and the salaries of workers are just one part of the equation. That’s why most of the ‘outsourcing’ is in very labor intensive products like textiles and call centers.

16

Well…it was supposed to be a semi-joke when I wrote it (the OP just struck me as another chicken little sky falling thing so thought I’d go with the mood), though it really did say that in one of the wired articles I read last month. I’ll look up the article though and try and figure out what the guy was talking about. I didn’t mean for the comment to be taken seriously (though the guys who wrote it was probably serious enough).

-XT

17

I’ll take that bet. If anything, the gap between the U.S. and other countries will grow. The areas that are in real decline are Europe and Japan. China’s rapid growth will begin to level off just as South Korea’s did, and so will India’s at some point. 50 years from now, the big three players in the world are likely to be the U.S., China, and India in that order. Taken as a whole, the EU nations together might claw their way into 3rd place.

BTW, current projections show that in 50 years the U.S. will have a population over 400 million, while the EU and Japanese populations will actually decline from today’s levels. That’s a disaster for those countries, because their populations will be very old and non-productive, while the U.S. will put 100 million new workers into the work force over the same period. That’s going to significantly soften the Social Security and Medicare meltdowns in North America (Canada is growing too), but Europe’s in big trouble when the retirement cheques are due.

18

Ok, found it for anyone interested in my off color paraphrase (actually, I wasn’t really close in my quote…appologies I was at work and had only a vague memory):

Its from Wireds May 2005 addition, the article is Why The World Is Flat by Daniel H. Pink, and the guys interviewed is Thomas Friedman.

‘Americans have grown addicted to their high salaries, and now they’re going to have to earn them.’

‘Somebody said to me the other day that <snip> the entitlement we need to get rid of is our sense of entitlement.’

I thought this was the best line in the article:

‘When I was growing up, my parents told me, “Finish your dinner. People in China and India are starving.” I tell my daughters, "Finish your homework. People in India and China are starving for your jobs.’

Sorry about the misquote…I was just feeling whimsicle and should not have even posted that in this thread…especially not so badly and out of contexts. Mea Culpa.

-XT

19

What do you base that on? Just because the French and the Dutch rejected the proposed constitution? That just means the EU continues under its existing treaties. So far as I’ve heard, no state is clamoring to secede.

20

I don’t follow that either. Isn’t Europe admitting a lot of immigrants, just like the U.S.? And aren’t they going to stay there and have children, who (except for their religion) will become assimilated into the local culture, just like immigrants in the U.S.?