- 1/6/2010
I. Developed world balance sheets
As growth rates slow in developed economies and demographics change, it becomes more difficult to maintain a strong balance sheet.
US Government
- US State and municipal governments have budget issues due to promising/providing more services than they can afford, especially in those dealing with slowing population growth rates where problems echo national issues
- US National government has similar issues in promising/providing more services than they can afford, in addition to unfunded liabilities in S.S. and Medicaid, a large deficit, and eventual difficulty finding treasury buyers at low interest rates.
- Government spending to grow the economy has the consequences of inefficient allocations of money to pork projects, corporate subsidies, ineffective or nonproductive stimulus projects, defense spending, bailouts of bad companies and bad risk takers.
- Balance sheets are still weak, even without unfunded liabilities, but government continues to spend to try to stimulate and preserve the strength of the economy, funding this spending through treasury issuance.
- After the crisis, bailouts and quantitative easing allowed financial institutions and large corporations to strengthen their balance sheets rather than go bankrupt, but banks are not lending or spending the money they received.
US consumers
- US consumers are poorer due to low savings rates during the boom years and credit card/zero money down type mentalities.
- Their high spending rates were based on feelings of security, macroeconomic and personal financial stability, as well as perceived wealth in house and savings, a high proportion of which was money held in common/S&P 500 type stocks.
- Today there is less household wealth because of poor investments in housing and stock market bubbles, as well as a struggling job market. Households today are financially less well off, but the savings rate is higher at 4.6%
Banks
- Banks and other assorted institutions had bad balance sheets due to excessive leveraging, risk-taking, and Mortgage backed securities.
- This resulted in bailouts and the fed's MBS purchase program. The same people are basically still in charge, and the bad assets have been bought up by the fed.
III. The United States position within the Global ecology/ecosystem/economy
In the long term, economies develop and growth rates slow. Technologies and strategies can be copied and performances regress to the mean. Key natural resources such as oil, natural gas, industrial metals, timber, fresh water, farm land are limited. In any system there are always key constraints and limits.
In a stable, slow growth environment, multinationals are able to use their size and other advantages to be the best (high margins, cash rich) competitors. Advantages of being big include:
- patent portfolios, copyrights, licensing, R&D, technical expertise, proprietary knowledge
- brand strength, marketing science and ability to manipulate psychology/habits, consumer loyalty
- growth of competitive edges through acquisitions
- effect of size: legal, lobbying, political power
- effect of size: economies of scale, more opportunities to creatively use capital
- Unrealistic expectations about growth rates and myths about American exceptionalism contributed to attempts to stimulate as economic expansion rate slowed, getting the US into more unproductive debt
- The sense that Americans can have a high standard of living regardless of what they do, that they can spend without consequence, and that the US economy is the best by default are clearly misplaced. Myths of "american exceptionalism" should not guide policy.
- Rising interest expense, rising mortgage expense, rising materials expense
- Emerging economies have the most room to grow into.
V. US Strengths and weaknesses
Ecological limits to resources, space and population, limits to fossil fuels, industrial metals, timber, productive farmland, and fresh water are one drag on the growth of the economy. Accumulation of pollution, trash, and waste is another. A third is increased competition between factions within the global economy, as opposed to expansion against outside frontiers, as the global economy grows there are simply less frontiers to go around. These are all ecological limits.
GMO's Ben Inker writes that “The productive capacity of the economy comes from the skills and size of the workforce and the country’s accumulated intellectual and physical capital.” While there are ecological limits, the importance of these factors to the size of the economy means that even in an economy with a population growth rate of zero, complexity can grow, technology can grow, real wealth and the economy can grow.
The US strengths are in its great blue chip multi-national companies, the US military, its expertise in technology, its strong workforce and educational hubs of science and entrepreneurship, the dollar, the great plains basin and its geography, and its mostly friendly neighbors.
Its weaknesses are in government and consumer balance sheets, a growing wealth gap, the inability to grow the real economy with quantitative easing and poorly designed stimulus programs, and in rising costs and prices.
V. Federal reserve, QE, debt reflex
In response to a slowing growth rate in the US, the Fed buys government bonds, and government spending is implemented through the corporation-lobbyist-government complex. The parts of the economy tied to the this complex improve. Meanwhile, inflation of the monetary supply taxes savings, and incentivizes the purchase of something other than dollars. As opposed to be loaned out, large amounts of liquidity that the fed provided go into the stock markets, which rise across the board from influx of money. Consumers and businesses do not take risks or spend more than necessary, because from their perspective, the real economy is poor and uncertain, even if equities and other assets are rising. The effect is of deflation in goods, but inflation in domestic, international, emerging equity, and commodity markets.
