The Great Divergence

[kandrathe]

Yes someone has to spend, but if nearly everyone has been overspending (which I feel is the case) I think the question really is. Is it better for the government to pick up this slack and spend or should we suffer the consequences of previous overspending and let the economy reshape itself to the smaller level it should have been at?

Here are some economic / moral questions I ask myself?

Do you think it is morally correct that we consume as much as we do just because we can? Don't you feel that we American's are swimming in a sea of commercialism and conspicuous consumption? The US accounts for about 5% of the worlds population, and about 33% of the consumption. Consider that half that consumption is based on money borrowed from the future. What obligation do we have to conserve, and to attempt to leave some of the natural resources of this world to successive generations?

Our 2009 economy was estimated to be about $14.3 trillion (down from its boom). How much of that do we really need to spend? In spending, and buying this stuff, what are we accomplishing? Also, consider that the government spent $3.5 trillion and took in $2.1 trillion in revenue. At the end of the day, do we measure ourselves by how much we consumed and spent that day, or by how much we accomplished and how efficiently and cleverly we accomplish our goals?

Ok, so let's take the low hanging fruit. Two long and expensive wars in Iraq, (say $750 billion), and Afghanistan (say $339 billion). What did we tangibly get for this investment ($3,500 tax (plus interest) per each of 307M Americans). The CBO has estimated the long term cost by 2017 would be about $2.4 trillion, or or $6,300 per U.S. citizen. I don't really understand the logic of going to other countries and spending tremendous amounts of money to break things real bad, then spend a decade trying to put them back together again for people who don't want us there in the first place. Yes, there is the whole "Fear" factor of terrorism, the poor mans war. You stop it by refusing to be afraid. Ignore the flea bites, and do your best to rid your rug of fleas. We are the military 800lb gorilla, so the only way they can beat us is to drive us to be like them (fascist aholes).

I just see that every thing we do has positive and negative consequences, and I think we are being frivolous with our wealth. We don't put our ingenuity to good purpose, and we could be transforming the lives everyone on the planet. We can be a producing nation, and helping to lift everyone. Rather, I feel we are more the gluttonous tick, feasting on the world. And, against the moral principles we expound, we freely enter into unholy alliances with despot monarchs, dictators and employ dark forces to accomplish our goals. If we need to sink the the level of extraordinary rendition, employing 3rd party torture, placing bounties on peoples deaths, and sending secret hit squads into sovereign nations, what do we have left to defend?

So, yeah. Pretty harsh self criticism for an American libertarian, Friedman loving capitalist.

Kan pretty much believes we should suffer the pain that we have coming to us. Current policy in the government wants to limit that and shuffle it off to later. It is possible that shuffling it off makes it avoidable because of how other things can change, but personally I think we are going to have to suffer more than we have for the errors that have been made. My problem is that the suffering isn't always hitting the people that caused some of the problems or made the mistakes. I think Kan also feels that the borrow and spend model that government is following does shift more of the burden to people that aren't at fault.

Ok, the way I look at it... Think of the economy as a car, driving down the road at night without headlights. We start out on the road, and we're moving! Woohoo! People get excited and begin pushing the car along, faster, and faster. Faster, and faster, and suddenly there is a curve and we end up in the ditch, and everyone gets dejected. We begin the arduous process of motivating everyone to get the car out of the ditch and back on the road again. Once again, the car is in a position to accelerate again.

Greenspan did a pretty good job of keeping us on the road for awhile. There was the stock market bubble. Paulsen and Bernancke did a worse job. But, then again, they can only do so much steering. Eventually, the exuberance of the economy pushers create an unsustainable velocity in one place or another, and when it crashes (pops) it tends to put us in the ditch again. This is the Austrian business cycle.

The acceleration is real, only its in the growth in value in goods and services. How do we know that we're going to fast? The value of _____ grows, and valuations seem too good to be true! In 2000, I remember when I was pulling all my money out of the stock market that Google at $200/share is ludicrous. In 2005, when I was arguing with the local assessor, that there was no way the value of my home could have doubled in five years. Success leads to over investment, or over consumption, which leads to a fictitious price. Once people realize the price is bogus, they stop buying and the price plummets (further than it should due to oversupply in the production pipeline). Also, we hit peak oil production in 2007, and the doubling, or tripling of crude oil prices was not sustainable either. Also, we are in an economic war with China, and the US so far has not been very firm in dealing with China's abuses. All these things made us vulnerable.

In our situation now, its housing. Housing is not something you can move around, so it becomes complicated to absorb the glut in housing. On my short drive 5 mile from the freeway to my house today I counted 30 homes for sale (about 25%). I don't know how many are foreclosed, or how many are vacant. A house is also an anchor, when it comes to getting a job that's out of commuting distance. The bad housing market exacerbates the unemployment problem by anchoring people to homes they cannot sell.

Recessions are a self fulfilling prophecy. You get out of them by letting the pushers rest, and get ready for the next cycle. Government "can" make things better if they do the right things. They just seldom do the right things. For example, Jan 1st, the stimulus funding for 100,000 jobs disappears, and so we get another big spike in unemployment, or face borrowing more billions to keep on paying people for make work jobs and not be unemployed. Had the government not interfered with these people lives, giving them make work jobs, many of them might be employed in places where they won't suffer being fired on Jan 1st. It might have been tougher on them in the short term, but many would have become permanently employed by now.

So far, the biggest wind sucks our congress has tossed at us are; a) Increased health care costs and years of uncertainty for companies as new rules get written, b) pushed a pseudo stimulus filled with political boondoggles and temporary spending masking the technical corrections that need to occur, and c) passed financial regulations that strip profitability from the banking industry and add years of uncertainty during rule making. I just feel the Obama camp has doggedly adhered to their political agenda, without heed to the peoples short term, or long term needs, or to the short term or long term costs. The latest $30 billion small business bill they passed was the first infusion at anything approaching what I would call effective government stimulus.

From what I've read so far, we are in for 5 to 10 years of sluggish or stagnant growth due to our self inflicted wounds and shackles, while we watch China rise to become the bigger 800lb economic gorilla.