Where is the US economy headed?

I have often used deflation on my tyres when driving in soft desert sands or near the ocean beach. i find it increases traction.

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Let me hope
The next war--- will reshape or rejuvenate the economy of USA.
that is my hope.
Some of the articles in various news papers which I read today about US economy spreads various arguments .
But most of the news are very cautious about the future of the global economy.
War will come.

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Cycloptichorn wrote:

Is inflation honestly an unstoppable force? I don't really understand why.

Inflation is not an unstoppable force. The Fed could push it down to zero if it wanted to.

But stopping it completely arguably causes more trouble than it's worth. For one thing, the only way to purge inflation from the economy is to cause unemployment for a while. Since current rates of inflation cause very little damage, it isn't clear that this price in (temporary) unemployment is worth paying. Second, sometimes the market for loans needs a negative real interest rate to clear. But the nominal interest rate cannot fall below zero. Without inflation, then, the economy is at risk of falling into a so-called liquidity trap, where savings sit under people's mattresses un-invested, factories stay idle, workers can't find employment etc.

Problems like these are the reason why the Fed tries to keep inflation low and predictable, but positive -- ideally somewhere between two and three percent.

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Thomas wrote:

Cycloptichorn wrote:
Is inflation honestly an unstoppable force? I don't really understand why.

Inflation is not an unstoppable force. The Fed could push it down to zero if it wanted to.

But stopping it completely arguably causes more trouble than it's worth. For one thing, the only way to purge inflation from the economy is to cause unemployment for a while. Since current rates of inflation cause very little damage, it isn't clear that this price in (temporary) unemployment is worth paying. Second, sometimes the market for loans needs a negative real interest rate to clear. But the nominal interest rate cannot fall below zero. Without inflation, then, the economy is at risk of falling into a so-called liquidity trap, where savings sit under people's mattresses un-invested, factories stay idle, workers can't find employment etc.

Problems like these are the reason why the Fed tries to keep inflation low and predictable, but positive -- ideally somewhere between two and three percent.

I understand that 2-3% inflation is considered to be a 'manageable problem.' But, the long term effects add up. Do we enjoy enough economic growth in order to give increases in salaries to compensate for this? I seem to recall reading that wages haven't really increased much in the last 5-7 years; if that's true, then people's buying power has decreased by 10-15%...

Cycloptichorn

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Cycloptichorn wrote:

I understand that 2-3% inflation is considered to be a 'manageable problem.' But, the long term effects add up. Do we enjoy enough economic growth in order to give increases in salaries to compensate for this?

You don't need economic growth to compensate for this. Because every purchase is also a sale, every expense is also an income. Thus, whenever inflation raises the price of something by a certain percentage, it automatically raises the income of the one who sells it too, and by the same percentage.

Cycloptichorn wrote:

I seem to recall reading that wages haven't really increased much in the last 5-7 years; if that's true, then people's buying power has decreased by 10-15%...

No, it's not quite true. What you probably heard is that real wages haven't increased much in the last 5-7 years. While this is true, real wages are called "real" because they're already corrected for inflation. Your calculation above implicitly subtracts those 10-15% twice.

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Thomas wrote:

Cycloptichorn wrote:
I understand that 2-3% inflation is considered to be a 'manageable problem.' But, the long term effects add up. Do we enjoy enough economic growth in order to give increases in salaries to compensate for this?

You don't need economic growth to compensate for this. Because every purchase is also a sale, every expense is also an income. Thus, when inflation raises prices, it automatically raises wages too, by the same amount.

Cycloptichorn wrote:
I seem to recall reading that wages haven't really increased much in the last 5-7 years; if that's true, then people's buying power has decreased by 10-15%...

No, it's not quite true. What you probably heard is that real wages haven't increased much in the last 5-7 years. While this is true, real wages are called "real" because they're already corrected for inflation. Your calculation above implicitly subtracts those 10-15% twice.

Hmm, I see. I suppose that there's an argument that could be made, that while inflation affects everyone relatively equally across the board, higher prices for products are not necessarily leading to equality in wage increases for workers.

Cycloptichorn

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Not really applicable to the discussion, but....

http://articles.moneycentral.msn.com/Investing/CompanyFocus/WarMeansAWindfallForCEOs.aspx

Quote:

"CEOs at top defense contractors have reaped annual pay gains of 200% to 688% in the years since the Sept. 11, 2001, terror attacks." Additionally, "The CEOs made an average of $12.4 million a year, easily more than the average corporate chief. Since the start of the war, CEOs at defense contractors such General Dynamics, Halliburton and Oshkosh Truck have made, on average, more in four days than what a top general makes in a whole year, or $187,390."

War is good for certain, very well connected people in our society. Ah, the Iron Triangle - alive and well!

Cycloptichorn

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Cycloptichorn wrote:

Hmm, I see. I suppose that there's an argument that could be made, that while inflation affects everyone relatively equally across the board, higher prices for products are not necessarily leading to equality in wage increases for workers.

Sure, but the same is true for lower prices or even decreasing inflation. For example, the deflation at the beginning of the Great Depression and the Volcker disinflation of 1979-82 were both much harder on poor people than on rich people.

In practice, inflation doesn't affect the income distribution much. Tax policies, labor market policies, trade unions, and the industrial structure of the economy are all much stronger influences.

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Europeans wary of US-style capitalism

When asked whether Europe's economy should be more like that of the US, the results were clear-cut. Those saying it should not, included 78 per cent of Germans, 73 per cent of the French, 58 per cent of the Spanish. In both Italy and the UK, 46 per cent opposed the US model.

Among those polled in the US, 30 per cent thought Europe should be more like the US.

http://www.ft.com/cms/s/0/22a93b12-69ea-11dc-a571-0000779fd2ac.html

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Rama, There is no way to equate the economies of Europe to the US. The US economy is "mature" and we use the US dollar as our currency that allows us to tweak inflation and interest rates (psychological). The countries under the Euro are a mix of economies with different inflation rates and economic development. There are benefits and disadvantages to belong to the Euro, and the strongest three countries that includes Germany, France and Italy can influence what happens to all. I'm not sure all the smaller economies in the Euro can compete on an equitable basis.

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C I
Like you I watch the current developments in the financial market.
But still I am of the opinion that USA's economy is not stable.
I am not sure whether you had perused the article..

"The Chinese government does not want free trade with dollars in its country. The dollars earned by Chinese exporters are exchanged against local money by the Chinese Central Bank. The Chinese Central Bank has an enormous stock of dollars. In March 2007 about 1,000 billion dollars. [28] In fact this constitutes a fairly effective weapon against eventual aggression from the US. When China wants, it can offer loads of dollars on the exchange markets and push the dollar rate down, or even make the dollar collapse at once."
http://www.courtfool.info/en_Secrets_of_Money_Interest_and_Inflation.htm

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Rama, That would be a stupid move by the Chinese; if they sell the US bonds on the open market, demand will drop, and their value will drop. It will end up hurting themselves more than it would the US. Our balance of trade will decrease by such a move, and our cheaper dollar in the world market will make our products and services more competitive. It'll be a win-win for us.

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C I
Perhaps you are correct.
But pressure to link the local currency is gaining ground.

China's yuan revaluation starts another stage of US dollar demise worldwide
http://english.pravda.ru/world/asia/23-07-2005/8621-yuan-0

The perennial decline of the dollar is effectively penalising UAE residents for the past fiscal profligacy of the US. There seems to be no respite in sight as the UAE Central Bank remains adamant on sticking to the dirham's peg to the dollar.

The dollar's fall from the grace hit a new milestone last week, with the euro rising above $1.41 for the first time. The immediate trigger for the dollar's recent sharp decline was a half per cent interest rate cut by the US Federal Reserve to prop up the domestic liquidity. The key underlying factor behind the rate cut, the weakness in US domestic growth, is here to stay for some time and further rate cuts by the Fed in the months ahead are a reality that currency markets are already anticipating.
The dirham has lost heavily in purchasing power. A weaker dollar is also causing a decline in the value of dollar denominated assets and investments, which underlines the urgent need for revaluation or even depegging. While the "live now, pay later" syndrome of US policy has undermined the global confidence in the dollar, it is unfair to penalise residents for someone else's financial indiscipline.
http://archive.gulfnews.com/opinion/editorial_opinion/business/10155667.html

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Rama, The US dollar is already losing ground against other currencies, and this will continue for the unforeseeable future because our economy will slow - as will the world economy. It'll be many years before this round of recession is overcome, because the sub-prime liquidity problem affects not only housing but consumer spending. The increase in the British pound and Euro is going to slow down tourism in their countries from the US.

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It is truly staggering that none of the "mainstream" political candidates from either party has attacked this subject on the campaign trail. All are heavily funded by the financier elite who will profit no matter how bad the U.S. economy suffers. Every candidate except Ron Paul and Dennis Kucinich treats the Federal Reserve like the fifth graven image on Mount Rushmore. And even the so-called progressives are silent. The weekend before the Perlstein/ Samuelson articles came out, there was a huge progressive conference in Washington, D.C., called "Taming the Corporate Giant." Not a single session was devoted to financial issues.

What is likely to happen? I'd suggest four possible scenarios:

Acceptance by the U.S. population of diminished prosperity and a declining role in the world. Grin and bear it. Live with your parents into your 40s instead of your 30s. Work two or three part-time jobs on the side, if you can find them. Die young if you lose your health care. Declare bankruptcy if you can, or just walk away from your debts until they bring back debtor's prison like they've done in Dubai. Meanwhile, China buys more and more U.S. properties, homes, and businesses, as economists close to the Federal Reserve have suggested. If you're an enterprising illegal immigrant, have fun continuing to jack up the underground economy, avoid business licenses and taxes, and rent out group houses to your friends.
Times of economic crisis produce international tension and politicians tend to go to war rather than face the economic music. The classic example is the worldwide depression of the 1930s leading to World War II. Conditions in the coming years could be as bad as they were then. We could have a really big war if the U.S. decides once and for all to haul off and let China, or whomever, have it in the chops. If they don't want our dollars or our debt any more, how about a few nukes?
Maybe we'll finally have a revolution either from the right or the center involving martial law, suspension of the Bill of Rights, etc., combined with some kind of military or forced-labor dictatorship. We're halfway there anyway. Forget about a revolution from the left. They wouldn't want to make anyone mad at them for being too radical.
Could there ever be a real try at reform, maybe even an attempt just to get back to the New Deal? Since the causes of the crisis are monetary, so would be the solutions. The first step would be for the Federal Reserve System to be abolished as a bank of issue and a transformation of the nation's credit system into a genuine public utility by the federal government. This way we could rebuild our manufacturing and public infrastructure and develop an income assurance policy that would benefit everyone.
The latter is the only sensible solution. There are monetary reformers who know how to do it if anyone gave them half a chance.

Richard C. Cook is the author of "Challenger Revealed: An Insider's Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age." A retired federal analyst, his career included work with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. He is now a Washington, D.C.-based writer and consultant. His book "We Hold These Truths: The Hope of Monetary Reform," will be published later this year. His website is at www.richardccook.com

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c.i. wrote-

Quote:

our cheaper dollar in the world market will make our products and services more competitive. It'll be a win-win for us.

That will depend on how far down the dollar goes. For those who work with their sweat it will be a disaster. To keep up they will have to work harder. They might end up on a bowl of rice a day. I presume you don't sweat c.i.

Quote:

The increase in the British pound and Euro is going to slow down tourism in their countries from the US.

Bring it on.

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Greenspan was being interviewed on tv yesterday, and he was saying that "all" the presidents he served under had a good grasp of the economy.

We are doomed.

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"The dysfunctional state of American politics does not give me great confidence in the short run.''

Alan Greenspan, Fed Chairman (1987-2006)

The mismanagement of money and credit has led to financial explosions over the centuries. The causes, cures and consequences of such financial catastrophes are most often repetitive. Indeed, such financial collapses are usually the result of the unbridled greed and cupidity of financial operators and of the lack of necessary supervision by public institutions designed to protect the public and the common good.

http://www.globalresearch.ca/index.php?context=va&aid=6832

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spendius wrote:

c.i. wrote-

Quote:
our cheaper dollar in the world market will make our products and services more competitive. It'll be a win-win for us.

That will depend on how far down the dollar goes. For those who work with their sweat it will be a disaster. To keep up they will have to work harder. They might end up on a bowl of rice a day. I presume you don't sweat c.i.

Quote:
The increase in the British pound and Euro is going to slow down tourism in their countries from the US.

Bring it on.

It will go as low as the market will let it; most economies base their currency on the US dollar.

FYI, many people already work two or three jobs, and US productivity is the highest in the world. The wealthy will be protected no matter what happens to the US dollar, because our currency will not disappear as a currency in the world marketplace. There are more billionaires and multi-millionaires in the US than anywhere else.

It's not a matter of "bring it on." People will stop buying when the price ratio becomes unreasonable.
I refuse to pay $10 for a cup of coffee and donuts in London for which I pay less than $2 at home. I will stay away from London until I get a better exchange for my money. I'm sure many Americans will stay away too!

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Forget about the super rich guys.
C I

"There are so many flaws in the system that it's time for real change.

As I have been pointing out in articles over the last several months, the key to a rational solution would be immediate monetary reform leading to a fundamental shift in how the world conducts its financial business. It would mean taking control of the world's economy out of the hands of the private bankers and giving it back to democratically elected governments.

I spent twenty-one years working for the U.S. Treasury Department and studying U.S. monetary history. For much of our history we were a laboratory for diverse monetary systems.

During and after the Civil War (1861-5) we had five different sources of money that fueled our economy. One was the Greenbacks, an extremely successful currency which the government spent directly into circulation. Contrary to financiers' propaganda, the Greenbacks were not inflationary.

Fundamental monetary reform implemented to restore economic democracy is what America's real task should be for the twenty-first century. One thing is for certain. The out-of-control financial system that has wrecked the U.S. and world economies over the last generation cannot be allowed to continue.

How the outcome will play out may well depend on whether there is a Jefferson, Lincoln, or Roosevelt waiting in the wings. The success of each of these great leaders was due to one critical factor: their ability to implement monetary reform at a time of national emergency.

http://www.globalresearch.ca/index.php?context=va&aid=6239

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Where is the US economy headed?

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