Tuesday, July 04, 2006
In Which I Get a Little Panicky
From what I’ve been reading, the U.S. is running nasty and increasing deficits at the government level, the household level, and the international level. We owe more to other countries than we ever have, and much of that debt comes from selling government securities to foreign central banks (esp. in Asia). Household debt is skyrocketing, and the interest rate increases of the last year or two are poised to nab anybody stupid enough to have taken out an adjustable-rate mortgage in the great housing boom of the last five or six years. The national debt grows apace, and has been refinanced over the last few years to progressively shorter-term loans, meaning that higher interest rates will hurt badly and quickly. Think of it as putting the national debt on an ARM, then watching interest rates go up.
Since we import most of our oil, and the price of oil keeps going up, our trade deficit is likely to keep increasing. (The folks who study ‘peak oil’ are becoming increasingly convincing.) Plus we don’t manufacture very much, so we don’t export very much. We also borrow money for wars of choice, which themselves actually interrupt the flow of oil. We borrow money to pay for causing our own supply disruptions, which is uniquely stupid by any standard.
China is keeping its currency artificially low, to keep its exports cheap. Then it lends us the money to buy those exports. It underpays its own workers so that we can have cheap stuff. How long its own workers will stand for that is anybody’s guess. I know the Chinese government isn’t exactly a champion of civil liberties, but from what I’ve heard on Marketplace, riots are becoming markedly common. The fact that the Chinese government is as repressive as it is makes the outbreak of riots all the more impressive. If it makes concessions to its workers, we’ll feel immediate inflationary pressure.
Since there are so many U.S. dollars flowing out of the country, their value is dropping on the world market. (According to the Bank of Canada website, a Canadian dollar was worth about 63 cents American at the beginning of 2003. Now, it’s about 90 cents. Rates for savings appear to be significantly lower there. Coincidentally, Canada exports oil.) The only way to entice foreigners to keep buying a depreciating currency is to raise interest rates to compensate for the depreciation. Raising interest rates kills the folks with ARMs, increases our national debt payments, and hurts the business climate. (It also pretty much wipes out the ‘refi’ market, which has been a major economic engine for the last few years.)
Although productivity has been going up, real wages haven’t. I know it’s gauche to talk about income distribution, but there’s no other way to explain how those can both be true at the same time. Corporate profits are going gangbusters, with an astonishing amount of the profits being spent on taking ‘public’ companies ‘private’ (that is, buying up their own stock). As opposed to, say, investing in productive capacity, or paying workers some small fraction of their increased productivity.
So my question to my economics-literate readers: how are we _not_ screwed? (That’s the technical term.) If China lets the yuan float, we get inflation. If the Euro starts to displace the dollar as the denomination for international trade, demand for dollars drops and we get higher interest rates, eventually tipping us into a nasty recession. (If we’re really lucky, we get a burst of 70’s vintage stagflation: inflation and unemployment at the same time. Oh, goody.) If oil stays high or goes higher and we don’t get really serious really quickly about alternative energy, we continue to bleed money. If somebody manages to blow up a key pipeline or refinery, the sky’s the limit.
I’m instinctively inclined to doubt doomsayers, so I’m thinking I must be missing something really basic and wonderful that will reduce these concerns to nothing more than blips on the screen. I don’t foresee a complete collapse, like a Weimar or Depression scenario, but something as icky as the 70’s is starting to look awfully likely.
Please tell me why I’m wrong. I’ll sleep much better if I can dismiss this as the ravings of someone who just needs a vacation.