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Alias (5735)

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Tuesday February 26, 2008
09:45 PM

Goodbye USA

[ #35776 ]

Most of the business and economics people I respect have been saying for a couple of years now that the US economy is "cactus". The first people to put their balls on the line were saying this in 2004, anticipating the like effects of the massive stimulation caused by the interest rate falls of the time.

Through 2005 and 2006, opinion start to line up behind the the position that the scenario was becoming inevitable, with no escape options left.

The housing bubble collapse, and resulting world credit squeeze, was merely the trigger.

The underlying cause of the whole situation is a problem called a "triple deficit".

The idea of the triple deficit is that the health of a country's economic, and the risk of various policy actions, can be determined by examining 3 main cash flow indicators in a combined fashion.

1. Public Accounts (Government Surplus/Deficit)

2. Private Accounts (Citizen and Corporate Surplus/Deficit)

3. Trade Accounts (Trade Surplus/Deficit)

While deficits are generally seen as "bad", the triple deficit concept suggests that deficits in individual elements can be benign if they are balanced by the other elements.

Under these rules, a high-exporting country like Germany or China can make a decision to spend big and run up big government debts if it needs to, because it is healthy in overall terms.

The dangerous scenario from which negative consequences seem to always result is the situation in which you simultaneously have public debt, private debt, AND trade debt. The longer it lasts, and the higher the debt levels (in relative terms of course) the worst the final outcome.

For more background, there is a very interesting recent paper produced by the Budapest College of Management, looking at the state of Hungary's current triple-deficit as well. (PDF file)

Ever since the dot-com crash the US has been running with a high government deficit (now close to but not quite record levels in GDP terms), a high private deficit (made worse by the low interest rates and resulting credit and housing glut) and a high trade deficit (thanks to China and Walmart-and-friends).

The initial inevitable consequences of this are in full swing now. The large fall in the US dollar is by now obvious to all and sundry.

Warren Buffet made a major bet on this move a while back, moving a vast sum of money into the Brazillian currency. (a strong growing energy-independant democracy with high resources)

Buffet is particular interesting to watch because the cash pile he is sitting on is so large that he is unable to invest in short term events without his moves affecting those markets. As economic entities get larger, their performance inevitably approaches the performance of the economy as a whole.

So he is limited to betting mainly on country-scale and long term trends.

The current fall helps address the manufactured goods component of the trade deficit in particular, because it effectively imposes a trade tariff, making local manufacturing more competitive against foreign manufacturing.

Buffet recently bought a giant US generalized manufacturing conglomerate, effectively betting on US manufacturing as a whole.

Unfortunately, here is where things get ugly.

Although the currency fall helps manufacturing, there's lag involved, particularly in areas where manufacturing has largely died domestically. Thing textiles, toys and light bulbs. Industries you can't just bootstrap overnight.

Worse, the US also has a huge energy deficit, which can't be as easily correct by a drop in the US dollar. In fact, since energy prices controlled by supply/demand at a global level, the fall in the US dollar results in a very significant price spike in the cost of energy, above and beyond the underlying increases in energy prices.

The combination of rising import prices on household expenses and rising energy prices together creates a major risk of one of the most dangerous economic beats, "stagflation".

Stagflation is so dangerous because there's very little you can do about it. The Reserve Banks, whose normal job it is to control inflation, has one big weapon. Interest rates.

Under normal circumstances, with inflation driven by excessive economic activity, a rise in interest rates dampens this activity, and helps bring inflation undercontrol.

In stagflation, inflation is high DESPITE the economy being weak. Interest rate rises have less of an effect on stagflation and can easily be pushed too far (the effect of 15%+ home loan rates and the resulting recession from the 80s is burned into the Australian racial memory).

And with a triple-deficit in play, some of the other safety values are missing as well. Governments, already cash-strapped, can't simply spend big to help the country past the problem.

And thus, the three deficits, although resulting from separate causes, combine together in a devastating fashion. The Private Debt triggers the problem, the Trade Debt creates the stagflation, and the Public Debt prevents countermeasures.

As you can see at that first link, we now have the clearest evidence yet that the US economy is in bad enough shape to kick off stagflation, and that it's probably happening right now.

So it appears the US economy is indeed cactus.

You have my sincerest condolences, living under stagflation is not fun.

The Fine Print: The following comments are owned by whoever posted them. We are not responsible for them in any way.
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  • Current evidence suggests that we're dragging down the rest of the world with us. See for instance recent Economist articles on how countries that thought they were more insulated from the US economy than in the past are discovering that they are still highly exposed to the USA.

    We're just too big a part of the global economy for the global economy to ignore our implosion.
  • There's drag and then there's drag.

    We're in the middle of a short-term global credit shock, at the start of a medium-term energy and food shock, and we've still got unquantifiable environmental shocks ahead of us which will reflect at the very least in the insurance and reinsurance markets.

    With food prices for most stables linked to energy prices, the prospect of a simultaneous energy/food shock (two of the most fundamental products) means the entire world is moving in a recessionary direction anyways.

    The q
    • "But those US numbers suggest we're moving into a new more dramatic phase now, and it remains to be seen what impact that will have."

      That's the dangerous thing about numbers, once people believe them they start to become real. People are behind those numbers, and people always have an agenda or a bias, no matter how subtle.

      It is interesting to follow all of the economic speculation in the news. The one thing that seems to be missing from the equations though is that surprising adaptability that homo sap

  • Writing lots of paragraphs of less than or equal to two sentences makes it seem more analytical, doesn't it?

    • It certainly helps my frame my argument more cleanly...

      Also, it's probably a fallout from writing POD documentation.

  • I find the writings of By F. William Engdahl to be very informative. He has just published a new essay on the asset securitisation debacle [] in the USA. It contains a succinct passage that brings clarity to the issue I've not seen elsewhere:

    Lending banks no longer needed to carry a mortgage loan on its books for 20-30 years as was traditional. They sold it on at a discount and used the cash to turn the next round of credit issuing.

    That meant as well that the lending bank now no longer had to worry if the l

  • There are a lot of problems, but none of them are new, and we've gotten through just as bad. Yes, I am not worried.

    The fall of the U.S. dollar is not bad. It just is. I called that, hell, last decade maybe? And it's happened about when I thought it would.

    And we were actually running a government deficit before and during the dot-com years. The budget was very briefly in surplus during the best of those years, but our unfunded liabilities, especially medicare and social security and debt interest, conti