jpinMilwaukee wrote:Do you think this trend has reversed recently or will in the near future?
That would depend on what one means by "near future." I don't say that to avoid answering your question, though. So, as tedious as it may be, i'm going to delve into history again.
Before the 15th century, the Dutch were rather poor, but they worked hard, and they took risks others did not take--specifically, wrestling land from the North Sea to feed themselves, and going into the North Sea to fish. Fishing may not seem like big money, but it was. The Dutch braved the roughest seas in which anyone then sailed to bring in the fish which all Europe ate in the springtime. In September, Europeans traditionally slaughtered all the livestock which they were not going to keep for breeding, reducing the amount of fodder they needed to feed their livestock over winter. They salted meat and made sausages (after horrendous, gluttonous feasts, such as Oktoberfest), and lived on that meat until late winter. By then, the meat was gone, and Lent began. The idea of eating no meat in late winter in spring (a provision of the liturgical season of Lent) was a no brainer--there was little to no meat left. Therefore, Europe ate fish. The Dutch sold it to them, and gradually made themselves rich.
At that time, the only great trading coster in Europe was the Hanseatic League, a loose confederation of mercantile cities in northern Germany, trading in the Baltic. Those people traded with other cities in the league, and cities which would buy their goods. The Dutch, as they became wealthy, and expert in deep sea sailing, began to compete with them for the carrying trade. The carrying trade means that you don't transport your own goods for sale, you transport someone elses. The Dutch decided that they would not pay a premium to Hansa for the Russian grain and wood and canvas they needed, but go get it themselves. They then realized they could make good money transporting goods which others produced, to sell to yet others who wanted them. The Dutch quickly outstripped the Hanseatic League, because Hansa weren't "blue water sailors," but the Dutch were. They could carry goods to any part of Europe quickly and cheaply, and profit on the margin for goods they had not themselves produced.
This they did by inventing credit instruments, and joint-stock companies. Lombard bankers and the Fuggers of Germany had long used letters of credit to extend their banking interests, but the Dutch now used it to finance ship-building (and they built the best ships) and to provide the capital to buy goods sold in one place, which could be sold at a handsome profit to someone else. They quickly outstripped all the competition, and they continued to expand, financing the expansion with credit instruments and joint-stock companies. The stock exchange at Amsterdam became the world economic powerhouse in the 17th century. Even though they fought an 84-year-long war of independence from Spain (i won't go into why Spain once "owned" Holland), they still managed to make good money and pay all of their own expenses. Eventually they fought for their very survival against the French for more than a century. It had the effect of squandering all of their surplus, but they were still wealthy and prosperous when the armies of the French Revolution finally overran them late in the 18th century. Their credit still remained extremely good until that time, because their expertise at sea assured that Dutch banks and Dutch investors would always be able to pay their debts. The credit structure of Holland created the prosperity there needed to support the system.
Long before the French revolutionaries overran them, though, the English had taken over the carrying trade, and made themselves the master of the world's oceans. In England, all merchants in "the City" (that part of London which was anciently within the city walls and which to this day is the heart of English finance) paid "ship money," a volutary tax which supported the Royal Navy, which protected their commerce. Not only did the merchants of the City follow the Dutch practice of using credit instruments to finance business, they invented the modern insurance industry to indemnify overseas shipping. When Vasco Da Gama sailed from Portugal to India in the 16th century, he lost three of his four ships. The one small ship which did make it back to Portugal, though, not only brought back enough valuable silk, gem stones and spices to pay for the expedition--it returned the original investment at 30 to 1. Lessons such as that were not lost on the Dutch and the English, and insurance companies allowed someone to get his money back if a ship failed to return. If a ship did return, he would be fabulously rich, literally overnight. (And hence, the origin of the wistful expression "when my ship comes in.")
In 1660, there were about 4000 merchant ships in the world, and more than half were Dutch. If you look just at oceanic shipping, the Dutch owned 80% of the merchant fleet--most other European shippping was coastal. By 1760, the English alone had more than 4000 oceanic merchant ships at sea. In England, the government stepped in to help finance the prosperity. They bought foreign bonds (such as the Dutch offered) and they issued bonds of their own. The "Consols," the consolidated bonds which the English government sold, gave a guaranteed return (usually 3% or 4%) which was not large, but was sure. If you had 10,000 pounds and a drunkard for a son, you could buy consols and settle the interest on him. He'd never be rich, but he'd reliably get the money he needed to live on. By 1760, an estate of 10,000 pounds from a merchant family could be considered modest--prospective brides were not considered a really good match unless the dowery were an estate of 50,000 pounds or more. In 1760, a working class family in London of a man and a wife with four children and a live-in serving girl could live on less than 100 pounds per annum--someone whose income was 1500 pounds per annum from the consols could live very well indeed.
Once again, the credit structure was based in England, and depended upon the strength of English commerce. The government never had to pay off the bonds, they simply had to pay the financing to the bond holders, those who invested in the "consols." That money then circulated within the economy. The economy continued to expand, and the credit structure remained sound. With the rise of Napoleon, and his implementation of the "continental system," the growth of the English economy stalled. Although they could no longer trade (except by smuggling) with the continent, the French invasion of Spain destroyed the overseas Spanish empire, and the English were able to make up some of the loss in trade by trading with Central and South America. Still, their economic growth stagnated, and the national debt grew. After the fall of Napoleon, though, European nations came to the City to find investment capital, and the English were able to "globalize" their credit system, with much of the return circulating in their own economy.
America's story was much the same. Although the English and French were the premier manufacturing nations, they also invested in the United States, and the American economy was a powerhouse which relied upon agricultural export, vast amounts of cheap or even free land, and a vigorous oceanic trade. American ships appeared in all the world's seas, and competed effectively with the English and the French. Eventually, of course, we began to compete industrially. One of the representatives of the English at the Paris Peace Conference in 1919 was John Maynard Keynes, and he pouted a good deal because he was not treated as well as he thought he should be. He denounced the Conference and its decisions, and as a brilliant mathematician, he made allegations about the economic consequences of the settlement. He became the world's first internationally famous economist, and his fiscal interventionist policies became the popular economic theories of the 20th century. Based (rather loosely) on Keynesian economic theory, the concept of deficit spending became popular as a solution to depressions and recessions. The first application was in the brief recession in England in the 1920s. Americans were sufficiently impressed that Franklin Roosevelt adopted the policy to get the United States out of the Great Depression.
The effort only partial succeeded. Americans were able to go back to work, and a modest consumer economy was born. But the economy continued to stagnate, because the law of diminishing returns kicked in with a vengeance. Government deficit spending stimulated economic growth, but the revenues from it did not repay the expenditures, and the national debt grew. The Second World War, however, provided the necessary stimulus for a fantastic growth in manufacturing and employment. A shattered world economy after the war gave the United States the opportunity to become the industrial giant we like to think ourselves to be, and no one noticed that Keynesian "macroeconomic theory" had actually been proven less than a spectacular solution on a large scale. In recent decades, people have come to realize that massive deficit spending can actually depress an economy because it reduces the capital available for domestic investment. Simply (and simplistically) put, when banks are lending money to the government (buying treasury notes), they have less capital available for venture capitalism. The only plausible cure is to reduce government spending while maintaining or increasing taxation. Eventually, the government has to manage its indebtedness just as individuals need to do.
Both the policies of Reagan and Bush fly in the face of this sort of fiscal responsibility. Both administrations have cut taxes and increased spending. There is a short-term drug-like effect which stimulates investment, but the export of jobs and industries since the Reagan era means that the money is not necessarily circulating within our economy again. As i mentioned in the other thread, new capital just as likely leads capitalists to build a new plant in Indonesia, and to open a call center in Bombay. The current administration has played a dangerous game. Rather than borrowing through treasury note issues and practicing deficit spending (although both are still done on a large scale), they have borrowed from China. China has no vested interest in our economy beyond selling cheap goods here, and they can actually sell more as Americans become less affluent. We have an astronomical national debt, and much of it is now owed to China.
So, if "near future" means the next few decades, no, i don't think we'll suffer for it in the near future. If "near future" means the next century or so, then things are a lot more dicey. Without doing something both to reduce government endebtedness, and to staunch the bleeding of jobs and capital in this nation, things might no look so good for your children or grandchildren. I'm not trying to be predictive here, but i am striking a cautionary note.
