Everybody else gets to sound off about the global financial crisis without actually knowing much about it, so I was pleased when a reader invited me to take my turn:
What’s your take on the global financial crisis? You’ve never indicated you know anything whatsoever about finance, but you’re usually “pretty on the ball” about everything else, so I though maybe you’d feel like blogging on this.
Indeed I do not know a lot about economics. My knowledge pretty much stops at how tax brackets work, and that copper is not a precious metal. But since readers of this blog know pretty much everything, I presume there will soon be some +5 Insightful comments at the bottom of this page, correcting the ghastly errors I am surely about to make.
(Or maybe there’ll just be one guy saying that this is what we get for not listening to Lyndon LaRouche.)
I’ve no real opinion about what’s going to happen to the US and/or global economies in the short term. Fortunately for me, I’m in Australia, which doesn’t look like being squashed too hard. Australia has a healthy commodities sector, and major Australian financial institutions don’t seem to have much exposure to the US problems. Yet.
In the long term, though, the USA and countries that depend upon it economically - which means just about all of them - are going to have to feel a lot of economic pain.
Both Presidential candidates know this, on account of how they’re not idiots (so yes, I do suspect that only one of the vice-presidential candidates knows it too). But they wouldn’t say a word about it even if you tortured them, on account of the great American allergy to ever paying more than about half of the tax that people in much nicer countries seem quite happy to pay.
Because the USA is taking on such colossal government debt, for the war(s) and the various bailouts, it seems to me to have only three options.
1: Just keep doing what it’s doing, paying interest on the old debt by taking on new debt.
2: Jack up taxes and/or reduce spending so it doesn’t have to increase its level of indebtedness, or may actually be able to pay the debt down.
3: Say “screw it”, get drunk, and print more money.
The second approach is a sure-fire vote-loser. If it were me then I’d start out by taxing the absolute balls off the owners of any house of worship that seats more than a thousand people, but the USA is a country where 21% of the atheists apparently believe in God, so that probably wouldn’t work too well.
The third option is what people often seem to think the USA is doing now - “creating” new money to bail out the financial sector. It’s an awe-inspiringly dumb thing to do, though, and even the Bush administration isn’t stupid enough to try it. (Robert Mugabe seems just fine with it, though.)
What the USA is actually doing, and what I presume they’ll continue to do, is option 1, steady-as-she-goes. As long as people are reasonably confident that the government isn’t going to fall on its sword by refusing to pay up when bonds mature, and that inflation isn’t going to start running fast enough that a bond with a lousy 4% return will be worth less than you paid for it when it matures, then people will keep buying bonds, and the Treasury can just issue more and more of them and hope there’s enough of a market to get ‘em all sold. China is as addicted to selling stuff to Americans as Americans are addicted to buying it, so I presume it’ll keep that economic perpetual-motion machine rolling, even if inflation does make bonds lose real value over time.
The borrow-more-to-pay-your-loans-off approach is an obvious loser for normal personal finance, but I think whole countries - and businesses, for that matter - can actually make it work, if their increase in national productivity means that their debt is not increasing, proportionally speaking. If you used to owe a million dollars and make 20 million dollars, and now owe two million and make 50 million, then proportionally speaking you’ve reduced your debt. You should find it easier to service, or pay down, the second debt than the first one.
During the terms of Republican presidents since Reagan, though, the USA has been taking on debt much faster than it’s been increasing production, no matter which way you look at it (some people apparently regard this as a good thing).
The exact numbers are squirrelly - like unemployment statistics, they get harder and harder to measure the closer you look - but the cost of the wars and the 2008 bailouts will unquestionably greatly exceed Reagan’s Savings and Loan “jackpot“.
All of this has just got to shake through into a serious quality-of-life reduction for the average American some time soon. Either jacked-up taxes or a severely devalued currency, I think. The US national debt is overwhelmingly in US dollars, so if the $US drops to five Euro cents, it’ll be much easier to dig enough stuff out of the ground to pay off the debt. (But a Toyota Camry will cost half a million dollars.)
There are ways in which the USA could spectacularly reduce governmental spending and thus make the situation far easier to handle, but I strongly doubt the most obvious one - giant military cutbacks, including closing many of the USA’s more-than-700 military bases all over the world - has any chance of flying. The USA could cut
four 400 billion dollars out of its annual military budget and still be spending twice as much as anyone else, but this sort of thing is so far-out that you won’t even find the option to do it in “budget simulators“.
Sci-fi writer Charles Stross wrote a very interesting essay about the current situation the other day. I agree with him that the USA’s determination to not bend before the economic hurricane means we may see the world situation change far faster than anybody would have predicted only a few years ago.
(This Gawker piece is excellent, too.)