Monday 6 October 2003

Pic of the day: In fantasy games, fighting evil can be quite profitable. In the real world, it tends to be rather expensive. And it's the real world I want to write about today.

Economy, stupid, again

News are, employment is picking up a bit in the USA. Certainly this must be the upswing that all have waited for? Certainly the bad times are over now, unless terrorists strike again, and we can go back to the way things were?

And pigs may fly. Look, friends, the crash in the stock market began months before the whole sorry planes+buildings thing. And why did the crash begin? Because people finally realized that some shares were overpriced. That you could not continue to sell for more than you bought for, with no regards to whether the company made money or not. When you think about it, it was pretty dumb, don't you think? Buying and selling shares in companies that never made money, and that did things that none of the buyers or sellers understood anyway. But that's people to you. They drink & drive, they fornicate in the presence of deadly virus, and you'd expect them to be cautious around a minor thing such as money?

Having learned about as much as you can expect from the stock market bubble, people rushed to save what money they had left and put it into the growing property bubble instead, pushing home and office prices through the roof. Where they still remain; so when the tide recedes, people will be in debt over their roof as well. And even if nothing else changes, the loans will start to weigh heavily on common home- owners as soon as interest rates rise again. Even during a mild economic upturn, interest rates will normally be twice as high as today. Can you pay twice as much as you do today? Can you do that and still keep up the spending that feeds the economic recovery? I thought not. America is in a debt trap: If things get better, they will automatically get worse as a result.

I predicted last fall that the upturn would not be part of a "double dip" formation, but simply a small blip on the slide down. I was wrong. This is known to happen, although less often than I should wish in matters of economy. I had seriously underestimated the Bush administration's resolve to sink the country into bottomless debt in order to finance short-term goals. Giant tax breaks and a gargantuan military expansion don't just happen, you know. There is money poured into these things, and money has to come from somewhere. Now the whole Federation is sinking into debt, where most of its citizens were already. Woohoo! Let the good times roll!

I'm sorry, but I don't think this is a "sustainable development" as we like to say over here. I'm not saying tax breaks and toppling far-away dictators are bad things. I am saying the USA cannot afford them, and sooner or later the world will become wary of lending more money to it ...much the same as happened in Argentina. Perhaps you should find your favorite Internet search engine and search for "Argentina + economy" and ponder whether you want to be where they are now.

Of course, the Federal Reserve can just print more money. In fact, I think they should have done so already. This would not just reduce the need to borrow from abroad; it would also erase the risk of deflation. By definition, increased money supply works toward inflation. Of course, inflation would have some unfortunate side effects too. One of them being that all things become more expensive; but you could counter that by increasing wages and salaries, thus fueling even more inflation. But you could not stop the dollar from sliding compared to other currencies, and this would further raise prices on all imported goods. There is no way to compensate for this, and it means people would see their purchasing power slide. Not a good way to get the economy off the ground.

So, I was wrong. It will be a double dip after all. Unless some miraculous invention makes America much more productive; and it doesn't have long time to do so.