Hold your horses, as this is an economy post.
Two years ago, however, if anyone shouted US Housing Bubble Collapse, they were a libertarian, and were labeled something akin to a conspiracy theorist.
Here is a recent video interview of Ron Paul worth watching, where some stupid-sounding TV people give him credit for what is essentially a brilliant word for word prediction of the current economic meltdown. I was impressed, and I liked Ron Paul already.
The next immediate threat, and it also appears briefly in the above video is the possibility of the collapse of the US Dollar. This is too big a topic to explain thoroughly, but I will try to summarize. We have been on an unsustainable path for quite some time. By being the largest country, and with the US dollar being the major reserve currency of the world, we were allowed special status in the world. As a country, we have been running a trade deficit for decades. As individuals, in 2006, our country's savings rate was -0.6%. Our historical savings rate had been in the teens, and East Asian savings rates loiter as high as 30-50%. This means that as a country, we spent more money than we created. This is essentially unprecedented, and has been very much unsustainable. Our federal deficit, while a sore topic for discussion, is similarly contributing to our woes.
The thing is, all of this is only really possible because the US dollar is so important in the world. Had Russia engaged in activities similar to ours, the rouble would have been devalued many times over and Russia's external investment would have dried up.
The US dollar is a essentially a made up piece of paper. It has no inherent value. Owning a dollar is almost like owning a share of the US Government, and it is sustained by the belief that the Government will make good on its debts, that it will not continue borrowing indefinitely, and, very importantly, as a result of all the previous factors, that it will not have to resort to printing currency to make up the budget difference.
The collapse will happen the moment that foreign countries decided our government won't pay back the debts. The US government will have to start printing trillions of dollars to balance our overspending, and the poor dollar will fall in value, exacerbating its status as the world's reserve currency forever.
More recent evidence involves strong words from China and a shift in foreign currency reserves. The scariest evidence I have seen, though, was a decrease in our credit worthiness as determined by insurance companies. The US still maintains its AAA credit rating, but we had a brief moment where insurance rates backing US debt had a higher cost than that of MacDonalds. MacDonalds briefly had a higher credit worthiness than our whole country. Crazy - no?
Even Obama's on board, though he has to use softer words about the dangers, or his statements alone could cause a US dollar collapse.
In some ways, a weaker dollar is already hitting me personally. My current foreign trip is costing me 10% more than it would have a few months ago.
For more evidence, just read any of the dozens of posts that come up when you google US Dollar Collapse. This one has a good step by step explanation of possible causes of a dollar collapse.
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"Two years ago, however, if anyone shouted US Housing Bubble Collapse, they were a libertarian.."
ReplyDeleteUm, what? Paul Krugman predicted this crisis way back in 2005. Why do you think I'm always citing him? He also predicted the Asian financial bubble well before it hit.
There was a really good Op-Ed in the Times addressing the threat of the US $ collapse and it definitely is a possibility, though over the next decade. It's a good read:
http://www.nytimes.com/2009/05/14/opinion/14Roubini.html?ref=opinion
"Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs."
Your point about the weaker dollar hitting you personally already doesn't make any sense though. The crisis has hit Europe pretty hard as well.
ReplyDeleteIt's been fluctuating quite a bit over the last few months. Sure, it would have been 10% cheaper 3 months ago... but it would have been 10% more expensive 5 months ago.
Both your responses seem to be skirting the core issue... but I'll respond anyhow
ReplyDeleteKudos to Paul Krugman! Granted, it didn't take a noble laureate to know that we had a bubble and that it was eventually gonna 'burst' (and if they thought about it for 5 mins harder, that foreclosures would happen). Everyone with Econ 101 has been talking about it in the streets since 2003-4. I looked for examples of Krugman saying something more detailed, but as far as I can tell, that's as much as he said: housing crisis, with compounding credit issues. Do you have something you're thinking of that I can't find? If you do not, compare that to Ron Paul's word for word prediction.
Still, the dollar collapse is not a libertarian-only issue by any stretch of the imagination, and the chain of events I have displayed are pretty much common sense. I think that the libertarians are the only ones worried enough about it to make it a core policy. Here is an example of Krugman swiping the deficit issue under the rug: http://www.nytimes.com/2008/12/01/opinion/01krugman.html?_r=1&ref=opinion
Mainstream international trade claims that these things will always balance out, and I think that Krugman believes in a much smaller amount of upcoming pain than I am suggesting.
Regarding the dollar dropping lately...
It -was- 10% higher 6 months ago. What I believe (read somewhere) was that as the crisis started hitting hard, countries jumped for their default reserve currency - USD. This pushed the dollar up by that 10%. That was a one-time thing, and temporary. The current 10% drop is from a real drop of confidence in the US Government's ability to make good on its loans, which is nearly unprecedented.
Sal, I don’t understand your response. Skirting the issue? The article I linked above (“The Almighty Renminbi?”) addresses the “core issue” we’re talking about here, dead-on. I pasted the conclusion of the article in my response above, which talks about what we now need to do to slow down the decline – as in, ways to confront the problem you’re discussing.
ReplyDeleteYou first argue that anyone who talked about the housing bubble two years ago was a libertarian. Then when I point out that’s not true, you respond that it was actually common sense and everyone with econ 101 was talking about it. What is the point you’re trying to make here?
Then you go on to say, actually, it is only the libertarians who are worried about it enough to make it core policy. And you link a Krugman article where you say he’s “sweeping it under the rug.”
How? He’s in complete agreement with you about the severity of the crisis, but he’s addressing it with the common sense that Ron Paul and your libertarian faction are leaving out. You have to confront the deficit after tackling the recession. You can’t do it the other way around. I’ll summarize:
Yes, the deficit is a problem we need to confront. But we can’t confront the deficit until we first get back on the road to economic recovery. If we tried fiscal austerity now, we would exacerbate the crisis and reduce investment (see historical examples). The only way to initiate economic recovery is through large fiscal expansion, which should take the form of public investment to benefit us for the long-term. We can only reduce government spending after the current shortfalls in private spending are eliminated.
And this was back in December. He’s been highly skeptical of the approaches that have been taken since and continually warned that the measures being taken were not adequate, criticisms I reflected in my “100 days” post.