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I’m becoming more and more convinced that the US economy is screwed. Just read an article by Joseph Stiglitz, a heavy hitting economist, (winner of the 2001 Nobel Prize in Economics and former world bank head), about what drove the economy in the 90’s. He concludes that it was mostly luck and the returns on wise spending in the past that fueled growth. He concludes that deregulations and forcing foreign countries to open their economies to investment did more harm than good (see Enron and WorldCom for deregulation gone bad and Asian financial crisis and Argentina for what happens when courtiers follow our advice). This is all pretty much old news though.
One thing interesting was his take on balancing the budget in the early 90’s. Normally in a recession you want to raise spending thereby increasing any deficits. However Stiglitz claims that this recession was driven by the saving and loan scandal and the reluctance of banks to make new loans. One of the reasons banks couldn’t make new loans was that they had to cover the risk that bond prices would go up in the future. But then the fed allowed the banks to ignore this risk, this move would have been bad if the interest rates had gone up, but by balancing the budget Clinton made sure that interest rates would stay low. I don’t think this is a problem now because rates are low and long-term bonds aren’t an attractive investment, but what if the budget deficit is increased due to a recession? The same problem could come back to haunt us.
the trade deficit is scarier. I’m reading more about it, though it’s mostly lefties or isolationists who right about it. Globalization people seem to ignore it… Well here’s an article I just found form the good ol’ boys at the Cato institute, I agree with most of there assessments actually. The protectionist argument against the trade deficit has to actually show that it causes a loss in jobs. The Cato article also doesn�t take into account the lowered wages caused by increased completion, but this might be offset by lower prices…
A trade deficit isn’t all-bad, but the thing I am most worried about is that it represents foreign debt. The Cato article presumes that we have a trade deficit because our economy is strong, if instead it is a Ponzi scheme, when the bubble bursts our foreign debt will only make matters worse as huge amounts of money leave the country. Here is a rather dated article that is the best economic analysis of the trade deficit I could find. Its conclusions might be a bit different if it were written after the bubble crash.
well that post was too long and probably filled with nonsense.
Please tell me where I am wrong.