Saturday, June 12, 2010

American Economic Situation

Many economists are suggesting that the American economy will experience a double dip depression. Quite a few Christian prophets have jumped on the same bandwagon, but I am not sure if this is wise. The American economy seems to be in a much better state than these pundits are suggesting.

The banking system seems to have come through the crisis quite well. Goldman Sachs and friends are getting a lot of stick, but they did America a favour by flogging off a large share of American subprime debt to European banks, without buying back any of the sovereign debt from Greece and Spain that the European banks are now choking on. Having written off their subprime debt, or better still flogged it off to the Fed, the larger banks are now reasonably sound.

Federal debt is a very serious long-term problem, but as long as the Fed is willing to engage in quantitative easing (printing money) the chickens will not come home to roost. In normal circumstance, printing money would cause the value of the dollar to collapse, but given that most countries are engaging in similar policies, there is no currency to devalue against. This pumping could trundle on for a several decades before the day of reckoning comes.

The households who poured their savings into houses they could not afford have lost their house and their savings, but the strength of the economy does not depend on them. There is a huge surplus of housing in many parts of the country, so the house building industry is not going to take off any time soon, but house building is not the heart of the economy.

The heart of the American economy is its ability to innovate and that is still very strong. As long as America can continue to develop new products like the iPhone and the iPad, which are wanted by people all over the world, it should not be written off. An economy that can produce robots that can saw through pipes a mile under the sea is not gong to go under any time soon.

Unemployment will continue to be a problem. However, provided the American people continue to be willing to send their young people to fight and die in futile foreign wars, surplus labour will not be a serious problem.

The stock market has run well ahead of the recovery and is due for a correction, but there is no fundamental reason for stock prices to collapse.

I am not expecting a double dip. Nor do I expect a rapid recovery. I expect that the American economy will trundle on at current levels. I will explain why in my next post.

4 comments:

Gene Redlin said...

I think you may have purchased a set of rose colored glasses, but I will see what you have to say. I see signs of weakness. Far too little productivity. We have a much too top heavy bureaucratic class. There is nothing holding this economy up.

I don't agree, but you are the economist, I'm just an amateur. Long time observer. A student of charts and graphs. A finger on a pulse I see every day.

I will see what you have to say about this.

I like rosy scenario but she can be a tough one to live with long term.

jg said...

Friend, the American eCONomy is toast.

The banks are not in good shape; the pace (dollar value) of bank closings is higher than in the S&L crisis, and we are just getting started, as the banks are only now starting to aggressively process defaults and foreclosures.

Things will take a sharp turn for the worse this fall, after the cumulative effect of falling tax revenues clips the wings of government spending.

All paper currencies are not falling against each other, but are falling against gold and silver; gold is at all time highs in dollar, Pound, and Euro terms.

I look forward to the fall of this corrupt Federal and these corrupt state and local governments. Bailing out banks, and to then allow them to pay out ridiculous bonuses when citizens are still guaranteeing their loans, is terrible. Paying firefighters and policemen over $100K per year -- sometimes over $150-200K per year -- as is done here in the large cities, is criminal.

May it all come crashing down, so we can start anew.

Keep up your fine daily work, sir; I find it highly instructional. But, you are wrong on the U.S. eCONomy.

Blessed Economist said...

JG
My comments refer to economic performance, not moral status. I agree with you that there is much that is rotten in the American economy, not to mention the rampant Caesar worship.

However, the fact that an economy is rotten does not mean that it is about to collapse. Rome was rotten, but it lasted 500 years. The Spanish empire was rotten, but it lasted several centuries. History is full of rotten empires, that went on for a long time. God is far more patient than we realise and not as quick to judgement as we are.

Many Christians are hoping that America will collapse and repent and come up smelling of roses, but that may be a false hope. I expect that America will get a lot more rotten and a lot more rogue, before it finally collapses.

Blessed Economist said...

Gene
The fact that the American economy can support a top-heavy bureaucratic class proves how stong it is.

America has chosen Caesar worship (Potus worship). A Caesar needs an even great retinue of courtiers and soldiers than a king. The American Caesars have only just started. You will be amazed out how many parasitic bureaucrats your economy can support when your Caesars really get up a head of steam.