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| quote: | | Unemployment is still far lower than levels in Germany, France, and much of Europe, and inflation is low. So how exactly is the US economy a paper tiger? Because if it is I'd hate to see what you call the other world economies. |
Appearances are deceptive.
The reasons why america is a declining power are numerous but I will try to keep complex economic issues short.
During most of the Cold war america was the worlds largest creditor nation. America was the worlds largest investor and had the worlds strongest economy. It could afford to wage long wars. In those days there was a relatively closed capital market, a relatively closed currency market and trade was far more regulated and controlled than it is today.
Now it cant. Not forever anyway. America has very very serious structural problems with its economy (which isnt to say that other countries dont but we are talking about america here)
1) It runs very large trade deficits, which will only get larger
2) it runs increasing federal government debt to pay for an ever increasing military budget having soldiers in more and more countries. This debt will only get larger.
3) ever increasing state government debt. As the federal government diverts fund to pay for defence and tax cuts to the rich it reduces the amount it pays to the states. Many states in the 90's lowered their own state taxes. Which now means many states cannot make ends meet. They obviously either have to go into greater debt or cut essential services.
4) an ever increase divide between the rich and the poor. This issue is important because you need increasing wealth across the board both to support the trade debt and the budget debt. Yes america is getting wealthier but not where it really counts amongst people who pay taxes. The rich and the major corporations dont pay taxes and there is only so many plasma tv's or BMWs that a rich person can buy.
But you say, most americas are still able to make ends meet, productivity still keeps going up. Sure, but this is illusory. Real wages amongst the lower to middle classes havent gone up for twenty years but they can maintain there living standards because of low interest rates. This has lead to very large levels of household debt.
So this means you have a) a government that lives beyond its means, b) an economy that spends more than it earns c) individuals who borrow to make ends meet.
Using the unemployment rate to compare living standards the US and Europe is misleading. America uses the prison system to get unemployed people off the streets. If you add the 2 million people in the corrections system you would see the unemployment rates would be comparable.
4) an overvalued currency.
5) an overvalued equity market
So what does all of the above mean. America is dependant on the rest of the world to buy its debt. And what happens when foreigners decide that america isnt credit safe . Because america does not have restrictions on the movement of capital there will be Capital flight. People will pull their money out of america in droves just like what happened to all those third world countries in the nineties.
America uses us to pay for its defence program and when we decide that federal bonds arent an attractive asset to hold compared to what I get elsewhere, america will have to take drastic steps to reduce its debt. America does not have the capacity to wage large wars because its financial situation. This is not something I make up Greenspan even hinted at the risk of capital flight in one of his speeches.
There is a complex relationship between debt, interest rates and currency valuations which I wont go into here but I stand exactly behind what I said. America is a paper tiger that can afford to fight weak countries like Afghanistan or Iraq who cant really fight back on any really effective level and thats it.
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