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Posts Tagged ‘economic meltdown’

The credit crisis and recession of 2008 are symptomatic of the underlying problems of the American economy.  In my opinion, what has been going on is an overall decrease in Americans’ incomes.  This is due in large part to the loss of manufacturing jobs in the US.  These highly-paid jobs are replaced with either no jobs or poorly-paying jobs.  Despite their decreasing earning power, Americans continued to spend at record rates, financing their spending with credit.  This was evidenced by the housing bubble, where housing was generating record prices while Americans real earning power was falling.  People without jobs or verifiable income were being given loans with the expectation that this ponzi scheme would continue through additional home sales and rising home prices.  Of course this process eventually collapsed as the foreclosure rate began to rise.

However, don’t let the foreclosure crisis guile you into thinking that that is the underlying problem with the American economy.  It is not.  The real underlying problem is the fall in American income and wages.  The #1 cause of this is our trade deficit.  American retailers and outsourcing manufacturers have long falsely claimed that purchasing products made more cheaply in foreign countries is good for US consumers.  What this fails to explain is with what income will those consumers be buying those products?

Let’s simplify this idea with a very simple analogy.  Let’s say there are 2 farmers.  One farmer grows apples and grows 10 bushels of them.  Another farmer grows wheat and grows 10 bushels also.  To keep it simple, let’s say that all you need to survive are apples and wheat and that the only economy that exists is between the 2 farmers.  The apple farmer only needs 1 bushel of wheat to sustain himself and his family but the wheat farmer needs 2 bushels of apples.  So since the apple farmer has no use for the wheat farmer’s extra bushel of wheat, he is willing to <i>lend</i> the wheat farmer an extra bushel of his apples by pawning some of his farm equipment or by outright purchasing the wheat farmer’s land.  So with time, the wheat farmer either goes into debt to the apple farmer or loses his earning power in order to maintain the same level of spending on apples.   Eventually, he either starves or loses his farm if he maintains the same trade imbalance with his neighbor.

American consumers are in the same situation.  Rather than keeping our money at home, we’ve continued to spend at record rates on foreign products.  This money goes overseas and pays for the jobs of foreigners.  That money is not sent back here to buy American products.  Asian and European consumers are not so foolish as to buy as many imports as we do.   A much higher percentage of general merchandise sold in Europe and Asia is domestically produced.

So in my opinion, we now have a simple choice.
1) We spend less and become accustomed to a lower standard of living in accordance with our decreased manufacturing base, or
2) We change our buying habits and buy more American-made products and have a positive trade balance, or
3) We impoverish ourselves through indebtedness to the point of pauperism and slavery to foreign powers (no thanks!)

The choice is ours.

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