Are you concerned about the Global Economy?

[nicolade1976]

I have actually been writing “Consequential Economics” for most of my life. Growing up in the United States, most of us were taught that the United States was the most powerful country in the world. However, even then I could tell something was going very wrong. I noticed at an early age that most of the products that I loved so dearly were not manufactured in my beloved country. At the same time, during the 1980s a symbol of pride for the United States; that being domestic automotive ownership was being replaced with disdain towards American makes of Autos. As I got a bit older my fears were confirmed as picking up any Almanac at the time would see an alarming trend of ever increasing trade deficits for the United States. At the time pundits were blaming American Citizens for not being competitive enough with their Japanese counterparts. Many said that it was just a temporary trend and that the growing fears of America’s fading industrial power should be put to rest.

As I got older, I lived through the dot com boom that took place in the nineties. For many of us that had lived through the decline of the United States in both Automotive and Electronics this was signaled as the great new hope that would breath new life into the American Economy. For a time, the robust economy made even me a believer that maybe the pundits had been right as Japan’s surge had stabilized and the United States seemed to be at the forefront of the new dot com boom. Eventually even this boom was replaced by a massive bust and many people’s retirement accounts were decimated followed by crushing layoffs. At the time, we were told that this was just a matter of people getting ahead of their skis and that recessions were normal and people shouldn’t be too alarmed.

What followed was another period economic growth and prosperity in the United States. The problem was our politicians had managed to slip another bomb under the radar during the last economic boom. Seeing that Japan’s economy had begun to equate to the relative level of the United States, to keep the false growth economy going in the United States, a new trading partner needed to be exploited. Since the relationship with Japan had worked out so well as a relatively impoverished nation after WWII, what if we began to trade with an even poorer nation with an almost limitless population? The obvious choice was China. It did not matter that China had been a major adversary only decades before or that the government still continued to govern their people with an iron fist. China represented the ultimate source of cheap labor to source almost limitless mountains of consumables. Pundits didn’t even try to hide the intentions this time as China rose in power by saying such immaterial arguments as China was making better quality than the United States. Most people even admitted that most of the product coming out of China was disposable junk that was inferior to any product coming from anywhere else. All that didn’t matter. As the landfills rose and average relative wages for similar work in the United States fell, pundits expressed joy over the latest buying frenzy in the United States. The fall in wages was for jobs that “no really wanted anymore”. All this should of been enough to make average American (as well as citizens in other industrial countries) rise up in protest, but it wasn’t.

Meanwhile a new recession was developing on the horizon. Financial wizards needed a new way to get the population who were no longer seeing any real rise in living standard greater levels of credit. Decades before, the principle that Henry Ford introduced that a workforce could better afford your products if they were paid better was replaced. To take its place it was discovered that a workforce with greater levels of credit at lower interest rates could better afford your products at a lower cost to business. These financial wizards came up with a new vehicle to extend credit for even the greatest credit risks. Bad loans were bundled with loans with much lower risk and then passed on as having the same risk level as the low risk loans. In the end the bad loans failed at a much higher level than anyone ever expected and the Great Recession was the result. The United States government was forced to act right then and there as credit markets seized up and many feared that a complete collapse of the United States economy was imminent. Some have estimated the final cost of the Great Recession to be in the neighborhood of six to fourteen trillion dollars. Instead of learning from this latest failing of the Global Economic system pundits wrote this cost off as being caused by greed and a lack of regulation.

It is true that greed and deregulation did lead up to the Great Recession but it really was only half the story. In order to understand why new sources of credit must always be introduced and rules on big business must continually be loosened in the United States we need to go back to the beginning. Trade deficits represent the transfer of wealth from one nation to another. As much as pundits wish to deny this fact it is the reality and we can see it represented by the relative wealth increase of the surplus nation followed by the increase in the debt held by both the citizens and government of the country holding the deficit. Some economists have even shown a direct correlation between the national debt and the trade deficit even though one is primarily the result of public spending verses private spending. This relationship can be better understood because as money leaves an economy, it must be replaced in the form of government aid such as unemployment, education expenses or assistance with medical bills that individuals can no longer afford. Beyond this idea, in the book “Consequential Economics” I introduce the concept of “Relative Economics”. Relative Economics is the idea that when most of the consumables that are brought into an economy are produced using relatively cheap labor, the cost of goods or services made in an economy with higher wages will become relatively more expensive. To compound the problem since most of these more expensive goods and services are vital for survival such as housing, medical care or education people living in the more expensive wage market get priced out of the most necessary items. At this point you ask how the United States got here in the first place with over 22 trillion in debt while foreign nations continue to extend the US credit both publicly and privately. The answer lies in the all mighty dollar.

Ever since Nixon removed the dollar from the requirement of gold redemption in 1971, the US dollar has largely been a currency whose value is set by demand. Surprisingly, even as the United States has racked tremendous levels of debt both privately and publicly, the world has continued to hold it. This gives the the US dollar its strength and allows holders of the US dollar to buy more foreign made product with it. While many have argued that we need to return to the Gold standard, I would not argue that this is required. The problem with removing the dollar from the Gold standard is that such a removal also removes the natural mechanism which prevented countries from racking up unreasonable levels of debt. As a country started to buy more foreign made product, they would plunder their gold reserves (as currency was just a vehicle to simplify transactions of valuations of gold). At some point a nation would either have to stop importing product or start selling its own product to other nations to restore their gold reserves. Under the free floating dollar valuation system, this mechanism was removed and all that mattered was a currency’s “value”. When Nixon removed the US dollar from being redeemable for gold this should of been a new lease on life for the US economy, but instead the government and regulators lost any sense of discipline. The general perception was that the racking up of new debt can go on indefinitely but we should have learned from the Great Recession that at some point the credit risk becomes too great and the whole system can collapse. In my writing of the book “Consequential Economics”, my hope is that even people who are not particularly interested in Economics or Politics can understand more about this very alarming form of economics and exercise their rights to implement change before it is too late.

Ironically many socialists have identified that something is wrong in the economy which unfairly empowering multi-nations while destroying the environment. The problem is, that the argument is very contextual. This shift is not necessarily being caused by Capitalism but rather by the destabilizing forces of Globalization. Globalization pits governments against each other who have no choice but to compete the tempting jobs waved over their heads, even at the expense to all governments of additional revenues. Meanwhile, environmental treaties which exclude developing countries only accelerate the world's environmental decline.

We still have time to fix this system. The first step is to acquire the knowledge to take action and get the officials in charge to start to unravel this powder keg. I ask you to participate in the discussion. I will try to provide my feedback to anyone who requests it.

Sincerely,

Nicola DellaCioppa
Author of 'Consequential Economics'