A good friend Thomas just posted his analysis of the financial situation, here, on his “View From The Bottom”. One of his gifts is explaining complicated stuff in plain english, so I took notice. I had some followup questions that turned into much more than a comment on his post. But Thomas (and David, and, and), I want to know what you think of this….
As a non-financial guy & someone not well-informed by US perspectives on this stuff…but as someone who spent so much of my university schooling in foreign unis looking at international economics…I am longterm extremely bearish on the US economy. In all my studies, seemingly every possible longterm economic health indicator made things look really bad for my country (balance of trade, rate of education, sustainable national competitive advantage, and most importantly, debt). Sure, we have greatest universities, plentiful natural resources, many of the world’s most sophisticated institutions, and are still the world’s largest economy…but everyone already knows this stuff…The stuff that we don’t think about as often…the comparative trends…don’t look good.
(source for trade deficit chart: NYTimes & Bureau of Economic Analysis).
Take for example, our (Im)Balance of trade, which has been going south for many decades. It is now massive (we are at -$500 Billion on a ‘good’ year). The way I understand this is…if this were a company, it would mean “Amount of $ Sales to other Companies” minus “Amount of $ Purchases from Other Companies”, divided by “How Big Domestic Economy Is”. So with a deficit around 5% of GDP, that’s like a company earning $95 but spending $100 to do it, while all the employees do a lot of trading goods and services among themselves. But overall, the company is losing $ every year, for many decades.
So…our country chronically buys more than it sells…we buy lots of goods (think oil and plastic toys) and we sell lots of services (think consulting firms), but we buy a lot more oil and hondas than we sell services and fords.
(Source for Balance of Trade Chart: US Census Bureau Dept of Trade Stats)
In a way, this extraordinary “imbalance of trade” since the 60s/70s has no choice but to directly result in mounting debt. Because our imports so vastly exceed our exports – where does that money come from? Well, the way I simplify things is that this is where debt comes from. If we receive WAY more stuff from other countries than we send to them, then someone is lending us that $ (think China & Saudi Arabia), and that means over time, our ability to repay them becomes riskier and riskier, and so our currency becomes less valuable. Thus, we have to spend more of our currency to buy more of the foreign goods we need, and the cycle reinforces itself.
The crazy thing is that this is commonly available knowledge. We all know we buy tons of oil and stuff from China. We all know we have a big national debt. But somehow, professors in our finest institutions still think that our government is absolutely “good for it”. Despite us losing $ every single year, our governments bonds are still called the “risk free rate.” How insane is that?
As an entrepreneur, I’m hard-coded to manically focus on increasing the # of things I can sell and limiting what I have to buy…but our country’s overall position is exactly the opposite.
Plus, maybe I’m old-school, but I’ve always been the type of person that was severely bothered by owing anything to anyone ($4 latte to mortgages)…and I generally consider debt to be a dangerous thing to play with, etc. So coming from that perspective the US debt situation seems all the more egregious (#s so big that when I look at them, they make me freak out and I don’t want to think about it anymore).
A couple of times in Finance class, I would ask the professor something like “why do we call this the risk-free rate – does that mean there is 0 chance that our country defaults on its debt?”. Everyone would look at me like I’m from Mars…but if my company had the debt, income, and competitive profile of the US economy, I would be absolutely mortified (like, in the full etymological meaning of the word). And if our country’s balance sheet was anonymized and we all analyzed it in b.school, we would all say “yeah, this company is totally SOL”.
Seriously, what would an honest rating agency rate our bonds at (if you took away a bunch of zeros and measured it against what we consider to be healthy financial organizations…)? Would our country receive the same type of ratings that Apple would get right now on its debt? Hah, no way! So I sort-of expect a long term, protracted, and painful downward trajectory for our economy. I don’t like to think like this, but I would have to deceive myself to look at these types of numbers and believe otherwise.
I’m jaded enough about the longterm outlook, that when stuff like the housing crisis and this pop up, I’m not like “OMG the sky is falling”, I’m more like “well yeah, okay so THIS is how this prolonged downward cycle is playing out right now…that all of these elephant hiccups are just a sign of an inevitable obvious X0 year decline.”
But then again, I’m not a finance expert, I don’t watch the news, and I’m not well-informed about what’s going on this week, or even this month. What I’m wondering is about the big picture, the three-decade picture, and it is twofold:
(1) when (ya know, I assume this is not an IF) the moment of reckoning comes, how bad of a situation are we in? Like Argentina 2001 where banks close, lower third falls into seriously awful shape, avg person’s savings catastrophically melted away…? I guess that maybe splits into two different answers? The upper quartile of the society will probably have their $ squirreled away in asian banks or whatever and be able to eat, enjoy, and have a safe life…? Meanwhile, the lower quartile will grow into the lower 3 quartiles and life will be miserable?
In other countries where the bottom falls out, the middle class disappears, things get less safe, people’s savings implode, and things get really really ugly (crime, shortages, etc). What if this happens to the biggest economy on the planet? I keep asking myself, are we caught up, freaking out about this particular short-term problem, when the bigger issue is the longterm situation which is much worse than we are all anticipating it will be? The US has been so wealthy (relatively) for so long that most Americans (including myself), can’t imagine what a really bad outcome looks like.
So does that play out where our insurance programs explode? A run on the banks? Or seniors have all of their pensions go poof? And then discretionary expenditures drop further, and then corps shrink, and investment dries up, and social services shrink, and on and on? Please tell me I’m not glass-half-emptying this to death? Is there a bright spot? Something I don’t understand that makes this all okay?
But really, if this wasn’t the largest economy of all time, the global icon of freedom and national wellbeing, and on and on, wouldn’t we just all say “yeah they’re on the brink of bankruptcy”? And if so, when a country does go completely bankrupt – this might not even be close to being the kind of relatively lovely place to live that it has been for a century, will it?
And (2) how soon is this happening? I have been looking at these events…the housing thing, this debt thing, other “woah, what happened??” moments…as “well, yeah, this is one of the kerfuffles that will eventually fit together with all the others over the next 10 years? 30 years? 50 years? that is one of those “well we should have known this would eventually happen”. One of the handfuls of steps in this inevitable march towards serious catastrophe (ie not a two-year blip, but a way-of-life altering mess).
So I’m curious if you, someone who is actually well informed about what’s going on, agrees with this overall picture?
And really, what I am curious to know more of what you think – how big of a mess do you think the US debt situation is, mid & longterm…Should I trade my $s for yen and move to Canada?
Finally, as all of this is obviously depressing – what would we have to accomplish to change our path? Do we have what it takes, as a society to course-correct? We gotta try…