We are in a structural Economic Recession that will be almost impossible to dig out of (loan, real estate)
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I am afraid that the average Americans day in the sun financially has come to an end for the foreseeable future. Our economy is heading for a serious fall. Energy costs are not going down and taxes have to go up to pay for the unfunded liabilities connected with our baby boom generation retiring. Wages will not be able to keep with with inflation due to the pressures of the global economy. Easy credit and living on home equity is no longer an option. The result will be long term economic problems and a lower standard of living for most middle class Americans. Agree or disagree?
There is an answer. Bring it home. Toyota manufacturers 85% of some of its vehicles in the US. Our American car companies have less domestic content than many of the foreign manufacturers who are relocated here.
With a falling dollar imports are becoming increasingly more expensive. Now is the time to reinvest in our own country.
Tax incentives should be offered to manufacturing companies that build plants here and manufacturer products here not just assemble them from primarily foreign-made components.
It's more than bring it home. Buy, buy, buy has been driving the economy. What happens when we stop buying ? We have offshored most of our producing capabilities and have to import and buy to keep our economy running.
High debt has been driving the economy as businesses and banks make money off the interest.
I think the US is in for some big changes. I just hope we can adjust to them in a civilized manner.
consumer spending is 72% of GDP, so your right, cutting back on spending will really change things here. I think this is why you hear people like Obama talking up making alternative fuel our major export in the coming years. They know something has to give.
No doubt that the "golden age" of the middle class is over and that general standards of living will come down as compared to 1950s-1980s levels.
However, I agree with posters like Lincolnian, that, with the right mix of policies, it is possible to restore balance between domestic production and consumption.
I think the tax side of fiscal policy is about right, the problem is monetary policy. The spending or tax side of fiscal policy could be tweaked or remixed to favor domestic manufacturing.
I don't think raising taxes to meet so-called unfunded medicare and social security "commitments" is a viable option: they are economically unrealistic and part of the coming to an end of the "golden age" middle class, whether we like it or not.
The value of those commitments has to be eroded, either through inflation and a reduction in the standard of living, or through high taxes and a reduction in the standard of living.
In my view, the preferable of the two options is continued low taxes and higher interest rates, the best way to restore balance between domestic production and consumption.
You see, worthwhile investments should be able to overcome some hurdles, like a higher interest rate. The problem with too low interest rates is that a lot of unworthy investments pass the hurdle, thus disasters like housing bubbles and bombs, not to mention unbridled consumption.
Higher taxes kill all kinds of investment opportunities, the good, the bad, and the ugly, like throwing the baby out with the bath water.
Low taxes and an equilibrium interest rate, then, maybe with some incentives for domestic manufacturing.
So, while the decline in "golden age" middle class standards of living is inevitable, there is no particular reason, except greed and stupidity, for the US economy not to remain fundamentally strong, provide for freedom of investment, and remain a global competitive force.
And bad policy mix may erode our economic freedoms and irreparably damage the economy's competitive base.
The biggest concern is that the current and upcoming crop of likely policymakers seem to have no clue.
People are simply going to have to get back to saving more and having less. That's the way it was and that's the way it's going to have to be again. We have been partying like there's no tomorrow, but now tomorrow's here and the hangover is horrible and going to get worse. But I don't think government bailouts and taking interest rates to near-zero is any kind of cure.
It seems like a lower standard of living is ahead for all but the very rich, but it's really more or less what it would have been if greed and easy money hadn't taken things to unsustainable heights. People were living an unrealistic dream and now it's time to wake up. The markets-- real estate, stock and financial-- would return to reality a lot faster if the government would realize that if you can't fix it, it's best to just get out of the way!
It's not going to be quick or painless, so let's just get it over with. Then everybody can pick up the pieces and rebuild. And those who didn't make greedy, selfish, stupid decisions can stop having to listen to those who did whine, moan, make excuses and pass the blame. It is what it is, we did what we did, so let's buck up and get past it so we can stop being the pin in the bubble of the global economy.
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Deflation....anyone?
We have two credit bubbles going on right now: a public credit bubble, and a private credit bubble.
Public credit bubbles is when the government is spending like a drunken sailor while cutting taxes (sounds familiar?). Public credit bubbles always end in inflation because governments can and does inflate the debt away instead of paying it down.
Private credit bubbles always end in deflation, because private borrowers can only go cold turkey, or default. They cannot inflate away from debt like the government can and does.
As the failure of the New Deal and the Japanese "lost decade" show, private credit bubbles are generally stronger than public credit bubbles.
Most of the money in circulation today is created by commercial banks by extending credit. When a loan is granted, money is created. As the borrower gradually pays back, money is gradually destroyed. So, when more money is being loaned out than is paid back, the money supply grows. When banks tighten lending, the money supply shrinks.
But if a borrower defaults, the money is destroyed. Moreover, each $1 that gets defaulted on reduces the bank's lending capacity by about $12 (this is a result of the fractional reserve system: banks can loan out 12x as much as they own). So, the money supply shrinks really fast in that scenario.
What I suspect is that Mr Bernanke is willing to nationalize the losses so that banks can continue lending. That would turn a private credit bubble into a public credit bubble.
1. that'd be a shining example of moral hazard and the best way to ensure a repeat a few years down the road
2. that'd be the end of the dollar as the world currency; America could no longer tax the rest of the world through inflation (which reduces the value of the dollars held overseas); moreover, foreign countries would dump their dollars on the US domestic market (hello hyperinflation!)
3. deflation or hyperinflation, the economy is screwed anyway.
Public credit bubbles is when the government is spending like a drunken sailor while cutting taxes (sounds familiar?). Public credit bubbles always end in inflation because governments can and does inflate the debt away instead of paying it down.
I agree with most of your post but I take issue with your definition of a public credit bubble. It does not come from tax cuts, per se. It simply comes from overspending. As the tax cuts of the 1960s and 1980s showed the reduction of tax rates can lead to increased revenue. The problem came when spending continued to outpace incoming tax revenue.
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