Noland's key paragraphs,
"This returns us to the critical issue of the “Quality of Output.” And it is similar to how companies can inflate earnings (“quality of earnings”) for quite some time seemingly without consequences, until the inevitable day arrives when it is discovered that assets have been overvalued. If assets are worth less than liabilities, crisis is then unavoidable. I have argued that a service sector economy is in reality a monetary economy. And, yes, as long as money and Credit are fabricated in great abundance, we do command the wherewithal to provide “services” to one another, seemingly without a hitch. We can treat each other to massage, consulting and legal services, brokerage inflating home and security transactions, and prepare each other’s meals. There is also nothing stopping us from gleefully boasting of our “economic output” and miraculous "productivity." But, at the end of the day, there’s a balance sheet problem: there’s no getting around the reality that we are creating (inflating) financial claims with little true economic value supporting the market value of this debt. We are simply playing an illusion with imputed market values detached from true wealth creation.
Mr. Greenspan is dead wrong on this most important issue. It matters tremendously that our economy continues to lose its capacity to create sufficient manufactured goods. First, we are no longer self-sufficient, and are vulnerable to price inflation and availability issues for energy and an increasing array of products. Second, we have lost the capability for mutually beneficial trade and balanced global growth – sustainable trade of goods for goods. Instead, we trade new financial claims for goods, building up a mountain of foreign liabilities, while fearing the day our creditors question the financial integrity of their holdings." |
