Economy booming

[vtwahoo]

Economic policy is tricky and by the time we have solid indicators of recession or growth we've got a whole new set of variables. That being said, ucrzymofo87 has presented simplified argumetns and data up to this point and his interpretations are based on several analytical falacies.

So...without futher ado...Why The US Economy is in Trouble

First, Asian banks hold a large number of the treasury bills that Killfile mentioned. Should they decide to (a) cash them in (b) sell them off or (c) stop investing in the United States, we're in serious trouble. Why would they do those things, you may ask.

They can cash in their t-bills for...well...cash. Those funds can then be invested in infrastructure, technologies, or economic enterprises. They can build their economies on our dollars. Literally. The problem with this option is that we don't have the liquid funds to pay back those loans (see Killfile's info on the US currency supply). Threatening to dump t-bills could force the US to compromise on economic, political, or military issues in order to avoid economic collapse. Asian banks could also sell our t-bills to other countries making us indebted to people that we may not want to be indebted to. I'll leave those possibilities to your imaginations. Finally, they could stop investing in the US. This is by far the best option (for the US) of the three but it would mean that we'd have to raise money to...oh, I don't know...fight the war in Iraq...from somewhere else...possibly from tax hikes??? (not that I have a problem with taxes...they are, after all, the price we pay for living in a civilized society)

Second, the dollar is in serious trouble. It's value in global currency markets is (and has been) falling. Every time the dollar loses value against another currency we, as Americans, are poorer. A declining currency indicates structural economic problems. The US will find it increasingly difficult to attract foreign investors. Interest rates will have to go up (those of you without fixed rate morgages are going to be screwed).

Third, the rising price of gold is not good for America (though it's VERY good for Americans who invested in gold). Higher gold prices indicate a weaker dollar. See above for problems with that.

Fourth, we don't set economic, fiscal, or monetary polices based upon the whims of consumers for one very simple reason: consumers, driven by market incentives and self-interest, make unsustainable (read as bad in the long term) decisions. Therefore, measures of consumer confidence indicate little beyond the fact that consumers bought stuff and think that the economy is doing well. Consumers buy stuff. They don't (for the most part) hold degrees in economics. We don't listen to them nearly as much as the Consumer Confidence Index suggests that we do or should.

Fifth, Americans don't save NEARLY enough. Savings is the engine of economic growth because of the velocity of money. Most Americans have no savings. In fact, most of them are drowning in a sea of debt (remember what I said about increasing interest rates...think about what's going to happen when credit card interest rates double...and then look at the new legislation on personal bankruptcy). We need to save more so that our savings can be invested by entrepeneurs and expanding businesses for future productivity. Investment => jobs => economic growth.

I could go on for days (literally...this is what I do for a living...I do go on for days...). The point is that the economy is not nearly as stable or as robust as ucrzymofo87 wants to make it appear. The numbers he's quoted are either irrelevant (the consumer price index) or bad (the price of gold).

And since Killfile opened the can of worms that is outsourcing, I'll talk about that tomorrow.

I think that we should change the title of this thread to "US Economy in Tailspin"

[arke]

In fact, most of them are drowning in a sea of debt (remember what I said about increasing interest rates...think about what's going to happen when credit card interest rates double...and then look at the new legislation on personal bankruptcy).

Oh yes, and I love it. My job depends on our addiction to credit (or more broadly, our love of spending).

[Sortep]

there is not a single person in this forum who shouldn't be incorporated... there are too many advantages to list.. one of them being the fiscal shielding a corporation offers... hell you could start a new company every year if you wanted to and take advantages of numerous small business growth incentives meant for the 1st year, every year.... not that i do that...

[Quest]

there is not a single person in this forum who shouldn't be incorporated... there are too many advantages to list.. one of them being the fiscal shielding a corporation offers... hell you could start a new company every year if you wanted to and take advantages of numerous small business growth incentives meant for the 1st year, every year.... not that i do that...

seortep,
what would your corporation sell??
=)

And since Killfile opened the can of worms that is outsourcing, I'll talk about that tomorrow.

vtwahoo,
why didnt you continue about outsourcing???
i would have loved it if you did.
=)
tell us when outsourcing hurts the local economy and when it helps.

[vtwahoo]

vtwahoo,
why didnt you continue about outsourcing???
i would have loved it if you did.
=)
tell us when outsourcing hurts the local economy and when it helps.

Sorry about that...the thesis has taken over my life.

Open markets allow for specialization based on comparative advantage. This basically means that national economies produce what is most efficient and least expensive to produce (based on their natural, infrastructural, and human resources) and trade for what is least efficient and most expensive to produce.

Trade grounded in comparative advantage increases the choices available to consumers across open economies...and that's a good thing because it allows individuals to express values and preferences through economic decisions.

There are problems, however.

Some economies are labor intensive and some are capital intensive...as in some have an abudnace of labor and can produce labor intensive good more efficiently and some have an abundance of capital and can produce capital intensive goods more efficiently. In an open economy (one that allows for outsourcing) labor intensive jobs move from capital intensive economies to labor intensive economies. Wages in labor intensive economies rise as a result. And, becuase economics is all about balance, labor intensive wages in capital rich economies drop.

This is great for labor intensive economies (and I'll stop for a moment and say that labor intensive economies often have terrible labor and environmental conditions...I am not condoning that...on the contrary, government regulations that protect workers and provide collective goods HELP the economy).

It's not great for capital intensive economies.

This has been the problem with American outsourcing. Labor intensive jobs have left the United States and gone to Mexico, China, and other labor intensive economies. The logic of comparative advantage says that the American textile industry cannot compete intenternationally...and it shouldn't even try.

The key for capital intensive economies is to create new jobs that can't be outsourced...that require capital intensive skills, resources, and infrastructure.

That's why it doesn't matter that the United States is creating new jobs...we need to create BETTER jobs. My parents' generation was able to support a family, buy a home, and even put kids through college on a single income...they weren't wealthy and they had to be careful with money but they could be comfortable. Dad worked and we were lucky enough to have a stay-at-home mom. You can't do that anymore. Most families need two incomes. Most single parents have to work multiple jobs. There are massive social consequences for our children, our families, our economy, and our culture.

Outsourcing allows firms to take advantage of specialization and to maximize profts by minimizing the carrying costs of vertical integration. Losing a plant to outsourcing WILL hurt a local economy. But the key to economic competitiveness is then to focus job retraining and investment resources in that local community to create new jobs.

I know that it sounds easier than it is. I'm from Southwestern Virginia and I've watched coal, textile, and manufacturing communities literally disappear leaving abject poverty and social unrest. The point is, though, that outsourcing is not a bad thing even though it's execution can.

[Quest]

you are back, darling!
=)
thanks for responding with a beautiful writeup, drawing attention to the relationship between outsourcing and specialisation.

if american has comparative advantage in producing capital, then instead of whining about cheap produce and labour elsewhere, they should be concentrating on producing more capital(ie. printing more money) and expanding their capital markets.

it sounds like the greatest tradeoff of all. all they have to do is print more money to exchange for more goods.
to the extreme, america can be a nation of investors and traders of other national markets, allocating their money where it is efficient and cutting back where it is not.

in effect, the world(or developing world rather) will be paying america seigniorage with their goods and services and assets.

=)

[vtwahoo]

you are back, darling!
=)
thanks for responding with a beautiful writeup, drawing attention to the relationship between outsourcing and specialisation.

Awww...feels all loved.

if american has comparative advantage in producing capital, then instead of whining about cheap produce and labour elsewhere, they should be concentrating on producing more capital(ie. printing more money) and expanding their capital markets.

Not quite...different definition of capital.

Think of capital in terms of factors of production...of factories geard toward flexible production and machinery and infrastrucutre and technology...

The key is to create jobs in capital rich economies that cannot be outsourced becuase they require...well...capital. For example, textile jobs require very little skill and can be easily outsourced to a labor intensive economy (more interestingly, when a lot of the textile jobs went from the US to Mexico they didn't take their machinery...they took looms). On the other hand, manufacturing jobs that require specialized workers generally cannot be outsourced becuase those workers need to be trained in capital intensive production processes.

It's also easy to outsource manufacturing jobs but harder to outsource agriculture (which has become VERY capital intensive in the United States and could remain competitive in global markets even without subsidies), technology, or service industries. A lot of us complain about the move of customer call centers out of the United States because they find it difficult to communicate with non-native English speakers. Several companies are learning this lesson and bringing those jobs back...market pressures work.

The real key here is to make sure that service jobs pay enough money. We live in a consumer-driven economy and we want lower prices no matter what the cost. This is bad news...to lower prices on end goods or services firms cut wages. Then we complain that wages are too low. You can't have it both ways.

it sounds like the greatest tradeoff of all. all they have to do is print more money to exchange for more goods.
to the extreme, america can be a nation of investors and traders of other national markets, allocating their money where it is efficient and cutting back where it is not.

Luxemburg we are not.

It's also important to remember that economic competitiveness in global markets requires sectoral diversification...the production of goods and services across and within multiple economic sectors...and sectoral articulation...the transmission of advances in one economic sector to others. At the end of the day, most Americans have neither the skill nor the inclination to work in financial markets. And that's a good thing. Because we still need to eat.

[Quest]

yeah i enjoy reading your thoughts on economics a lot.
=)

if you refer capital = fixed assets, even those can be uprooted and re-planted into foreign soil, given time. i mean even here in singapore, hard-disk makers have been closing down factories to move to china where the cost of labour and cost of business are much cheaper.
i am sure electronics makers in america are doing the same as well. i read about how entire communities in america have been left for worse when their sole paymaster closes down to move to cheaper labour pastures.
so my point is be it labour or capital specialisation, america is uncompetitive in both.

so what is america so good at making? what is its competitive strength?

i think america is so powerful because they are also to exploit their reserve currency status. they can get away with overprinting US$(ie. go into extreme budget and trade deficits) because other nations keep and hold US currency or trade US$ amongst themselves without bringing it back to american soil.
so americans never will feel the ill effects of deficits(ie. inflation). foreign nations are absorbing this excess money.

the day foreign nations start returning all that US$ to america in exchange for american assets is the day the dollar will die.
thats what i believe.
=)

[vtwahoo]

so what is america so good at making? what is its competitive strength?

Research and Development.

the day foreign nations start returning all that US$ to america in exchange for american assets is the day the dollar will die.

Or the day that China starts cashing in their bonds.

That's going to be bad too.

[Quest]

http://www.boston.com/news/globe/editor ... ppen_here/

As for the Chinese, Clyde Prestowitz of the Economic Strategy Institute, formerly a senior trade negotiator in the Reagan administration, offers the following scenario: In a future crisis involving the tense China-Taiwan relationship, the Chinese ambassador suggests to Secretary of State Condoleezza Rice that maybe the United States would like to move its warships 500 miles away from Taiwan. Rice demurs. The next day, the Bank of China sells a few --just a very few to get our attention -- US Treasury securities. Money markets reel.

the above article is mroe than a year old but still relevant and reflects my opinions as well.
=)
china is building the perfect 'ultimate bomb' that can only be used against, and definately will destroy, the USA. and the world will definately feel its fallout.

edit: just researched and found that as of jan 2006 china, together with hongkong, owns about US$310 billion of US treasury securities. OPEC owns another US$77 billion.
too cheap a weapon of mass destruction?

[panasonic]

how much does hong kong own alone?

[Quest]

how much does hong kong own alone?

its about US$42 billion.

[Killfile]

how much does hong kong own alone?

its about US$42 billion.

I spend that much on breakfast.

[psi29a]

how much does hong kong own alone?

its about US$42 billion.

I spend that much on breakfast.

I spent that much on Berserk.

[Quest]

its about US$42 billion.

I spend that much on breakfast.

I spent that much on Berserk.

spammers!

[LordMune]

I spend that much on breakfast.

I spent that much on Berserk.

spammers!

I don't spend anything on spam.

[Quest]

this whole sub-forum is going to the dumps.