Another Recession
Thomas Dawson
author's web site
view author's other articles
Join this author's mailing list
Your Name:
E-mail Address:
By Thomas Dawson
July 11, 2005
Since the end of the Cold War, we have entered into a new phase of the market economy generally known as globalization. Diverse companies with international interests such as Wal-Mart and Exxon have expanded and acquired huge profits. The national economy is experiencing record GDP growth. The stock market is steady to strong and new housing is at an all-time high. This American economic powerhouse can run wars, cut taxes and create a growing economy, all at the same time. We are told that soon the middle class will participate in this great economic growth. That would be nice for a change.
The result of this activity is a National Debt that is now 2/3 of our Gross Domestic Product. But of course we don’t have to pay it. We can just make occasional payments on the interest, of the increasing debt. It’s kind of like one of those new mortgages where you only pay the interest for a few years, until the value of the property goes up and you get a raise. It is only then that you become responsible for paying down the principal. The beauty of this particular “creative debt” is that our generation will never live long enough to begin paying the principal.
What about that National Deficit? It grows somewhat proportionately to the profits made by our international companies on their imported products. As they produce less in this country, they send more of our dollars overseas to buy product and ship it back here. Our deficit is increased by an approximately equal amount. The deficit is reduced only when we sell something to a foreign country. We are no longer competitive in the world. With the exception of trade-protected properties and weaponry, we have little to sell these days. To get money back into our system, we sell notes against our National Debt to the creditor nations. When they buy our debt, they give us back the dollars. In the not too distant future, we may consider just giving the corporations their profits out of our treasury, if they will bring some business back home. At least the money would stay here, reducing the deficit, decelerate the rising National Debt, and as a bonus; keep in mind that when middle class people are working at a reasonable wage, they pay nearly all the taxes.
Nothing lasts forever. The housing boom currently driving the American economy will soon begin to fade. Greenspan’s inverted curve will only bend so far. Interest rates will begin to spread across the financial services industry. Loan rates, credit card rates and mortgage rates will begin to rise. Even with these low interest rates, demand is already slowing.
Personal debt in the US is very much like its national counterpart. Unsecured debt as well as secured is at an all time high. We are in a fragile and dangerous economic position. Enron was not the only company using ‘creative accounting’. Our financial institutions have found ways to allow everyone all the credit they desire, and have kept the economy going on credit.
The financial institutions think they are protected against bankruptcy because they had a clause inserted in the law requiring financial institutions to be repaid even after bankruptcy. Squeezing blood from stones will give them and our courts something to do in the upcoming recession.
Before this president leaves the White House, there will be a converging of domestic and foreign threats to our economy. If we can maintain some control, and keep the oil spigot open, we may be able to hold oil prices near their present levels. If not, the price of oil could hurt the world economy for some time to come. We will have our piece of the oil pie in any case, but the price will become painful. Inflation will rise along with the price of oil. The inverted credit curve will be straightened when interest rates begin to rise, inflation is recognized, and the economy slows. The housing boom will be in a slump and unemployment will be rising again. The middle class will feel poorer because they will indeed, be poorer as their buying power is again reduced. The equities market will suffer as profits are trimmed. Financial services will again be in trouble as new loans will be difficult to make and old loans begin to default.
The creditor countries, especially Japan and China will suffer with us as they hold the bulk of the American debt, and its value will fall with rises in the interest rates. Hopefully, they will throw good money after bad, and continue to buy our debt in an attempt to protect their previous investments. The American dollar is the currency of international trade and its devaluation could easily lead to a world depression.
The strength of our current economic underpinning resides mainly in the support areas, of government employment and spending, corporate subsidies, social programs, and military spending. The government can control or even expand these areas at will. This will create a greater strain on our treasury, but deficit spending is nothing new to us. Financial services may be at the mercy of the government’s willingness to bail them out again, if asset values fall too far. A decline in consumerism will cause the demise of many domestic retailers and even hurt the Asian exports. At this moment in time the last vestige of industrial enterprise in this country is looking overseas to find a new home with cheaper labor. At this same moment, the recession is right around the corner.
2006 and especially 2008 could be tough election years for the party in power. |
