@Aedes,
Aedes;100234 wrote:
We may have a manufacturing and export deficit, but one thing we do not have is a deficit in innovation. China may be a powerhouse of an exporter, and it indeed has world class universities, but nothing anywhere in the world competes with the United States in the sheer mass of invention, whether in academia or in private industry. And you just never know what industry will come next. It doesn't need to be raw materials and it doesn't need to be cars.
In other words, I'm not giving up on our potential to recover -- as long as it's based on real things and not based on turning $1 into $2 by some investment instrument.
That's what they said about the dot com boom. They said there was a "New Economy" based upon information. But the sector that prospered most during the dot com boom - and also during the real estate boom - was the financial sector. The financial sector is currently the largest sector of the American economy. What America produces or until recently produced was highly technical, innovative financial instruments designed by mathematicians at M.I.T. The book to read is Kevin Phillips "Bad Money" where he chronicles the rise of the financial sector.
This is all will-o'-the wisp. The so called New Economy has been revealed as a fraud. In order to understand the nature of this ongoing fraud you need to look at two things:
1. Productivity of real, tangible goods.
2. And the level of consumption compared to that productivity.
The Chinese and the Japanese are savers by nature and they will always be thus. The Americans beginning in the late 1970's are consumers who save very little.
The Chinese and the Japanese produce a great deal more than they consume. The purchase by the Chinese and the Japanese of American debt (e.g. T bills) is the means by which they dump or subsidize their highly valued manufacturing sectors. So that free trade ideology by the Americans produces an ongoing contraction of American manufacturing.
Americans consume more than we produce which leaves us with a large amount of ever increasing debt. The problem is that we are dependent upon this debt; we can no longer live without the basic necessities of life which we import. So the debt is continuously rising ever higher.
We are at a point where we cannot function without the debt and yet we cannot conceivably continue to function with the ever increasing amounts of debt.
Aedes;100234 wrote:
The best explanation I've heard for this is on the utterly phenomenal Planet Money / This American Life collaboration, called "The Giant Pool of Money", which you can get for 99 cents on iTunes (it originally aired on NPR).
The subprime crisis would have never happened but for one critical phenomenon: the global treasury holdings (esp in China, India, etc) have literally doubled in value since 2000, to the tune of roughly $70 trillion. Treasurers everywhere have been looking for lucrative returns. And as is brilliantly explained in this show I reference, the return on securitized subprime mortgages was enormous -- particularly so because the interest rates were high and the penalties extremely high on these high risk mortgages. Brokers were motivated to sell to crappy buyers because they'd make a killing selling a group of mortgages to an investment bank, so they'd never have to live with the risk.
The low Fed interest rate had something to do with this mainly because the return on a treasury bond was so low that investors turned away from them.
I am not interested here in the workings or the circumstances which brought about the real estate/banking disaster. You misunderstand me or I haven't been clear.
What I am asking is why was there a need for the Americans to rely upon such bad practices in order to produce a satisfactory level of economic growth? In other words, there was a reason, a cause for the implementation of these bad practices IN PLACE of facing the truth, which is that they could no longer grow the economy in any other normal fashion.
In a sense, for me, the American dream ended once and for all when Alan Greenspan lowered interest rates to near zero producing inflation in the real estate market. This inflation in the real estate market was necessary because there existed no other means to grow the economy. There was no technological innovation, for example, to rescue the economy after that last recession. So they relied upon inflation in the real estate market as a substitute for having to recognize the true extent of the economy: that it was smoke and mirrors.
The only alternative they had to creating housing inflation was to put up with an extended recession cum economic malaise (which of course came eventually in any event). So the gargantuan financial sector sold overly sophisticated financial instruments. They exported debt, and they monetized it.
So I ask you Aedes, why wasn't their a great technological killer app at the time when it was most needed during the late 90's early 2000's recession?? The only killer app the Americans could come up with was these sophisticated financial products. That is what we have devolved into. And I would add that the gall of such immoral dealings on behalf of the Fed and the banks is not much discussed for obvious reasons.
Aedes;100234 wrote:
You may indeed be right, but you also may not. There are variables at work that are beyond the prediction of the smartest, most experienced people in the economic world. The academicians have had 70 years to understand what happened in 1929 and they're still fighting over that. What makes you think you understand what's happening right now so completely, so conclusively, that you can carve this prediction in stone?
Because the evidence is already extant. We can logically deduce the outcome given the current circumstances.
Aedes;100234 wrote:
Am I? I don't recall it being part of this conversation up until now.
I was merely attempting to be comprehensive.
Aedes;100234 wrote:
Not every practice of every bank was responsible for the problem. Plain old consumer banks were hit hard, but they weren't responsible for the crisis. Commodities trading wasn't the problem. Not even doomed industries (that still have bubbles) like credit cards and college loans were the problem. The problem came from investment banks, hedge funds, and a couple other players like Fannie/Freddy and AIG who were inseparably intertwined with one another and took extraordinary risks using a finite set of investment instruments and overleveraging.
In other words, the problem arose from a relatively small set of offenses -- the banking catastrophe was from the chain reaction that ensued once Lehman collapsed. Well, we're not out of the hole but we're not exactly worried about Bank of America collapsing anymore, and banks are starting to be profitable (somehow) again. They have a second life, and the way to prevent a relapse is for them to avoid pissing away $30 for every $1 in their pocket.
Your view seems very narrow to me. You think that we can innovate our way to prosperity. But as I have said the debt that the bankers sold
was the great Ameican innovation. It was the best innovation that America could come up with.
I have read papers from workers at the IMF. The consensus there is that there exists an oligarchy (their words) between high finance and the politicians at the federal level. But these 'too big to fail' institutions full of toxic assets are merely a symptom. The real problem is immorality, the outsourcing of jobs, the 'selling out' of America at every level.
It is a blindness when people come to believe that great financial events exist somehow seperate from the culture at large. They do not! There is a level of basic immorality afoot in America. The very fact that one would get one's country out of a recession by allowing the housing sector to expand is so ******* immoral its not funny.
I agree with you: there are basically two ways to expand an economy. One way is to increase or expand the productivity of real goods and the other way, as you say, is to increase or apply a new and higher level of technology and innovation. I keep coming back to the question: why didn't they use one of these two ways to get out of that prior recession? Why did they have to rely upon the pure nothing of these financial products? The answer should be obvious.
Aedes;100234 wrote:
We haven't exactly been experiencing anything resembling hyperinflation in the last year and that's despite the federal interest rate being near 0%.
It strikes me as odd that they are keeping interest rates this low. Isn't that how we got into this mess, with an easy money policy? The only reason the dollar hasn't completely collapsed is because it is the world's reserve currency. But that is a double edged sword because it allows us to go even deeper into debt than we would be able to otherwise.
Aedes;100234 wrote:
Probably not, but we're such large consumers that the entire world depends on our fiscal health -- which is why they'll always bail us out even before our own government does. If we didn't have an enormous trade deficit, then we wouldn't be able to live in deficit economies.
That's the heart of the problem. The Chinese and the Japanese are subsidizing their rightly treasured manufacturing industries by purchasing our debt. They are and have been 'bailing us out all along'. Without their support, without all of their money rolling in I don't believe the housing crisis would have been possible, and so without their wonderful support the banks the banks wouldn't have been able to fail on such a world-historical level.
