The Coming Crash

The US economy has been living beyond its means since the 1970's. After a period of infrastructure investment after World War II the growth of deficit spending and militarization resumed. A succession of wars and foreign adventures has artificially boosted the economy as borrowed money has been used to finance these activities. The purchasing of war material acts as a stimulus to certain manufacturing sectors which would be in decline otherwise. In addition, the absorption of young people into the military keeps unemployment down. For much of the period these activities were funded by internal borrowing, but in the past decade or so most of the money has come from external sources.

Three factors have coincided to bring matters to a perilous point:

Firstly, the military/police fraction of the economy has reach a point where basic social and infrastructure needs are being sacrificed to it.

Secondly, the militarization of society has reach a point where this sector is no longer an arm of government policy, but has become an independent power center with its own goals.

Thirdly, the US has lost its ability to control foreign affairs to its benefit. The other power centers in the world have now become strong enough to pursue their own interests. The principal ones being the European Union, China and the oil-producing states. As a consequence of these developments it is quite likely that the US will be forced into a period of economic contraction.

How this manifests itself is not totally predictable, but certain trends are already underway:

  1. Decline in the standard of living for the working class.
  2. Drop in the value of the dollar relative to trading partners.
  3. Rise in inflation.
  4. Drop in value of real estate.
  5. Loss of value in luxury items.
  6. Rise in poverty and unemployment.
  7. Increase in social unrest and loss of domestic civil liberties.

We now examine each of these in turn.

As the US loses it ability to force trading partners into unequal arrangements it is required to match their costs of doing business to retain business. This leads to a drop in real wages for those working sectors that are subject to foreign competition. We have already seen this in the manufacturing sector where jobs have been made mobile by the rise in efficiencies of shipping finished goods from abroad. The trend is starting to seep into remote service jobs. Those that are not subject to competition still retain most of their worth.

The US can no longer force trading partners to buy our products at unfavorable prices, there are alternative source of supply. The trading partners no longer have to invest their excess funds in the US, but can place their money elsewhere. As a result the dollar is becoming a less favorable currency and US Treasury bonds less desirable. Which leads to the next point.

As the dollar drops in value the cost of imports rises. Also the cost of borrowing money from abroad rises since the currency adjusted value is dropping. Both of these factors cause prices to rise. This is especially true now that the US makes a much smaller percentage of its own goods than in the past. Hence, the drop in currency can be expected to affect almost every sector of material goods.

As prices and interest rates rise the cost of financing real estate rises, this makes it a less affordable investment. In addition, the rise in inflation causes a drop in disposable income which causes a slow down in the economy. Therefore commercial property, like all capital investment, declines. The Japanese economy in the past twenty years provides a foreshadowing of what is to come.

The definition of wealth changes with the type of economic system. In agricultural societies it was tied to the value of the land which could produce income. In the industrial age it was most closely related to shares in publicly traded firms. When the allocation of wealth becomes seriously imbalanced the rich find it hard to use their wealth. This leads to the rise of luxury items as a means to absorb excess wealth. In the past this was usually restricted to royalty or the church. Thus, we had societies like Italy during the Renaissance, and France under the last several Louis. In these societies huge sums were expended on palaces, churches and their furnishing and entertainments. In our current economy we have somewhat the same effect, this time with MacMansions, yachts, paintings, jewelry, and million dollar birthday parties.

When the economy declines and the wealthy need to convert their luxuries to cash they find that there is no one able to afford them. They essentially become worthless. During the French Revolution luxury furnishings were chopped up and used for firewood. During the last stages of the runaway inflation in Germany in the 1930's almost the only thing that held its value was uncut diamonds that could be smuggled out of the country and exchanged for more stable currencies elsewhere.

The rise in prices, drop in real estate value, loss of value of luxury items, and drop in the standard of living of the working class all lead to a drop in demand. This leads to unemployment and a rise in poverty. Already for the past twenty years the lowest sectors of the working class have seen their standard of living stagnate or decline. This trend has now moved up into the middle sectors. The rise in costs of essential services such as health care, education and retirement security has not been balanced by comparable increases in real wages. This problem has been papered over to a large extend by the increase in personal debt that people have taken on to maintain their lifestyle. As the economy contracts the costs of this debt rise and the ability to pay for it declines. This leads to foreclosures, bankruptcy and increased poverty. We have faced this situation several times in the past the most recently in the 1930's.

As large number of people are thrown into economic distress they become dissatisfied with their position in society and their government. In the most extreme cases this leads to revolution as in France in 1789 and Germany in the 1930's. In other cases the country adapts and survives as did the US after 1929, but at a high cost to an entire generation. Since one cannot know in advance if a declining economy will be resolved peacefully or not, it would be wise for the society to plan for a soft landing rather than take the risks the an unmanaged crash can cause.

So far, in this country, we have seen a fair amount of discussion about the defects caused by the excessive US expansionism of the past fifty years. Many books about “The End of Empire” have been written.

What has been missing so far is an acknowledgment from the dominant class that the society is at risk. Also lacking has been any long-range discussion of what needs to be done to avoid the worst aspects of a crash or to avoid it altogether. The greatest risk is that the dominant sectors of society seize control and control the entire society by intimidation and force. In this case there is almost a complete loss of civil liberties and the impoverishment of almost every one.

A good example is South Africa, where a small white minority lived moderately well at the expense of everyone else. In addition the poor social structure caused the entire economy to lag behind the rest of the world for over a generation. The collapse would have been quicker if the country had not been able to generate wealth from the export of gold and diamonds. In Zimbabwe minority rule has lead to poverty and famine for most of the population, since there are no artificial props for the economy. Many other cases can be produced all of which ultimately end badly for everyone concerned.

Since there are three principal factors driving the coming crash they must be the place where change is to come.

1. The US must find a way live in a more competitive world without resorting to military intervention or intimidation. Several of the former world powers have adapted when they lost power. The most recent being England, Germany, Spain, Holland, Portugal and Japan. In each case they had a global network of client states which were forced to operate at a disadvantage. In most case their domination did not end quietly, but was the result of losing a contest with some rival empire. However they lost their dominant position, they are all now moderate members of the world community, with fairly successful economies, and good levels of social services for the bulk of their population.

2. Militarism when left to its own devices becomes a cancer that eventually destroys the country from the inside. The classic example is Imperial Rome, but Germany from unification in the 19th century until its final defeat in 1945 is a more recent example. This is an extremely difficult dynamic to alter. Firstly, the military/police have the raw power to intimidate and control people. Usually only a small show of force is required to cower the majority of the disaffected. When this doesn't work the society is already in a state of disintegration. There have been a series of “peaceful” revolutions in the past few decades which give some hope that a militaristic society can be transformed reasonably smoothly. Several South American countries have achieved this, as have several East European ones. In most cases the economic situation had already deteriorated as well so that much of the military didn't see much reason to continue to support the failed regime.

3. The US must refocus its resources towards infrastructure and social support. An undereducated populace living with decaying cities, factories, and despoiled natural resources can not compete with a healthy, well fed, educated country where scientific research is encouraged and innovation is supported. The natural advantages that the US possessed in the 19th and 20th centuries, open space, a growing population and abundant raw materials, are no longer unique. Much of the innovation coming along now is more related to biology, information technology and other areas where these advantages are no longer important. If we keep skimming off the quick profits to be made from overusing our infrastructure and installed manufacturing capacity we will not be in a position to compete. Our relatively small population means that we can, at best, expect to become a modest player on the world stage, with a standard of living more towards the middle of the range than the top. The decline has already started. Politicians are unwilling to discuss it, but events are proceeding on their own. If we continue to pursue unrealistic goals we are only deluding ourselves.

We cannot wait for the big vested interests to take the required steps. It's our future, we must lead.

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Copyright © 2005 Robert D Feinman
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