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October 22, 2008
What Will Be The Future Economy

by jony_b_cool
lifted from a comment

The issue that I still have not seen anyone address is — what will or should be the key features of the USA’s economy in 5 or 10 years?

It is an important issue because the failure to address this issue responsibly 10 years ago is the reason we are where we are today. The USA has increasingly re-aligned into a service economy to a large part in response to China’s growing export power & further assisted it by exporting much of its own manufacturing base to China. Essential regulations were tossed & interest rates lowered to fuel financial services & mortgages. Wage-stagnation followed, likewise massive debt across the board as the financial sector boomed & leveraged. Obviously a poor plan that was not sustainable.

We are now seeing a reversal of roles in the levels of scrutiny of G7 vs. non-G7 and this issue is probably getting far more attention outside the G7 countries than at at home. Like politicians everywhere, the G7 focus will be on stabilizing the debt situation & bringing back a sense of normalcy. If that is all that is done in the next few years, its going to be inadequate. There has to a re-alignment of the USA’s economy into a sustainable mode that is consistent with its economic & trade ties with the rest of the world.

One key marker the rest of the world is going to be watching is the USA’s military budget. If its not trimmed substantially in order to ease the debt crisis, the rest of the world is going to throw up its arms in frustration.

Posted by b on October 22, 2008 at 14:21 UTC | Permalink
Comments

Have any of you heard of or read James “Jim” Howard Kunstler ??
He has been warning us of these kind of problems and the way the economy is going to crater for quite some time now.
of course, all the kewl kids and the hipsters and the ones in the know were poo-poohing him and his warnings.
OOPS !!!
He posts a weekly essay at his blog here:
Clusterfuck Nation Chronicles
Here’s his home page and a couple of his books:
Have You Read ‘World Made By Hand’ or ‘The Long Emergency’ ??

Posted by: ClusterPhuck Nation | Oct 22 2008 14:59 utc | 1

Kunstler is a Monday morning “must read”. As with this site, his commentators have included some very interesting links for further reading.
Buzz Meeks

Posted by: Buzz Meeks | Oct 22 2008 15:20 utc | 2

Much of the US’ international financial problem is the result of the strong dollar policy. A strong dollar supports US imperial ambitions and allows US consumers to go on shopping binges. It was great as long as it lasted. Unfortunately, there was ultimately a price to pay.
By definition a strong dollar puts all American products and services traded internationally at a disadvantage. Republicans have responded by trying to do away with all other government policies that increase cost of doing business–regulations, taxes, etc. But none of it compensated for the inherent disadvantage of the strong dollar.
The next adiministration faces a real dilemma, similar in severity to weaning the political elites off the prerogatives of superpower status. The first problem is convincing Washington to abandon the strong dollar, force consumers to pay more for imports, and open key industries to foreign ownership. The second problem is convincing the rest of the world–China, Japan, etc.–to agree to having one of their major markets contract substantially.

Posted by: JohnH | Oct 22 2008 15:45 utc | 3

I usually read JHK on Monday, and his analysis is usually pretty mordant, but it helps if you ignore his propensity to make short-term predictions. That being said, I admire him above all as a critic of suburbia; his 1993 book Geography of Nowhere is an outstanding analysis of the history and sociology of the suburban landscape. In addition to his blog, his Eyesore of the month is likewise not to be missed.

Posted by: Colin | Oct 22 2008 16:14 utc | 4

@JohnH – If there ever was a strong dollar policy, as you seem to imply, why did the dollar continuously drop since Bretton Woods II? (In 1984/85 the US$ index was at 140. It is now at 102. It did rise during the dot-com times but is now back at its 1995 level.)
@Jony b cool – what will or should be the key features of the USA’s economy in 5 or 10 years?
In terms of industry I believe energy is the field where the U.S., with its very substantial research base, can do the most.
With the world population growing exponentially, energy will be a market of the future.
This in all subfields – energy generation (Thorium reactors?, a direct sun to hydrogen process?, artificial bio-engineered photosynthesis?) – energy storages (new batteries or other means) – efficient energy use.
If the U.S. really wants to regain some industry those will have to be new ones, not old ones. A Manhattan project for new energy could achieve a lot.
The financial sector should go down to its normal share of 5% of GDP or so. Service sector may go down too.
In the social field nationalization of health insurance AND health provision. The U.S. pays a lot more per capita than other nations with worse results. A lot of big manufacturers get eaten up by health insurance in the current system. There is the political power that will be needed for a change.
There will be a lot of political power applied against any defense reduction as those manufacturers are sitting in every state and pay relatively well. It is unlikely that they will be allowed to close. But they can probably be converted to energy specialist.
The above are the biggest changes I see. An alternative to reindustrialize is another world war.

Posted by: b | Oct 22 2008 16:39 utc | 5

Agreed with the role alternative energy could play in re-industrialization, but see this post by John Taplin:

I don’t mean to be a broken record on this, but if the U.S. doesn’t follow Tom Friedman’s advice and install a serious energy tax on oil, the alternative energy business is going to collapse and we will be even more in the clutches of the Petrogarchs.
Advocates are concerned that if the prices for oil and gas keep falling, the incentive for utilities and consumers to buy expensive renewable energy will shrink. That is what happened in the 1980s when a decade of advances for alternative energy collapsed amid falling prices for conventional fuels.
In order for investment to flow into the Alt. Energy business there needs to be a floor under the price of oil. The Europeans and Asians already have accomplished this, but the dreams of a new American economy based around ET (energy technology) will only be realized if domestic producers of solar, wind and geothermal can compete in the near term as well as the long term. I’m aware that this is a tough sell politically, but it is worth the next President spending political capital to make it happen.

And as one commenter noted, the oil companies are well aware of this pattern.

Posted by: EGrise | Oct 22 2008 16:58 utc | 6

Barbara Ehrenriech spills the beans: Read it all

Surely you have heard by now of the imminent socialist takeover of America, and if you find the prospect unlikely, ask yourself: How many socialists do you know who lost millions in the recent stock market crashes? Just as I thought—none—and that’s not only because you don’t know any socialists. The truth is that we, the Socialist International Conspiracy, not only saw this coming, we are the ones who made it happen.
The plan took shape during a particularly intense criticism/self-criticism session at our 2000 annual convention in a booth at an Akron IHOP. We realized that we’d been recruiting no more new members per year than the Green Bay Packers and that, despite all our efforts, more Americans have been taken aboard UFO’s than have embraced the historic promise of socialism. So we decided to suspend our usual work of standing on street corners and hissing, “Hey, how’d you like to live in a workers’ paradise?” Instead of building socialism, one worker at a time, we would focus on destroying capitalism, hedge fund by hedge fund.
First, we selected a cadre of crusty punks from the streets of Seattle, stripped off their Che t-shirts, suited them up in Armani’s and wingtips, and introduced them to the concepts of derivatives and dental floss. Then we shipped them to Wall Street with firm instructions: Make as much money as you can, as fast as you can, and as soon as the money starts rolling in, send it out to make more money by whatever dodgy means you can find – subprime loans, credit default swaps, pyramid schemes – anything goes. And oh yes: Spend your own earnings in the most flamboyantly gross ways you can think of — $10,000 martinis, fountains of champagne – so as to fan the flames of class resentment….

Posted by: biklett | Oct 22 2008 17:22 utc | 7

Great blog biklett #7, a funny Marxist no less. She makes a good point in THIS entry on why the “immiseration” of the people has not led to an open revolt in capitalist America, but has instead led to extreme destabilization instead.

Posted by: anna missed | Oct 22 2008 18:31 utc | 8

In the past 15 years, or so, the economy has become the no. 1. topic of consideration of Gvmts., para-state organisms e.g. Central Banks, Energy Producers, dependent subsidiaries such as pension funds, etc. even mega businesses, last but not least, the public, short list of all.
Attention is uniquely focussed on exchanges of value, on the casino stock market, and on Ponzi schemes of one kind or another. As if virtual profit could be conjured up out of thin air, out of the stream, velocity, circuit of money -virtual exchanges at trillions of nubs figured by a very clumsy, inadequate, representation of real life events.
To the detriment of real-life production, events, control of these, and considerations about how to apportion stored value and how to redistribute. (Or for that matter, to forbid any long-term investment/exchange/gifs or dues, e.g. debt.)
Add in that root of the ‘profits’ of the past 20 or 50 years have rested on exploiting the environment, more sharply and efficiently than before, method which is now screaming with stress — peak oil, global warming, peak fish, scarce metals, soil erosion, deforestation, death of bees, male fertility on the wane, expiring polar bears, etc.
So the short answer is that the future US economy will be regulated by whatever new organizational, political scheme arises. The US is rich in land, can more or less support subsistence level for its population. The ‘economy’ will be subsumed to extra-economic considerations. As, in fact, it already is today. (Paulson bailout which makes no sense and negates previous principles.)

Posted by: Tangerine | Oct 22 2008 18:39 utc | 9

@b–strong dollar is official policy: http://www.usatoday.com/money/economy/2006-08-01-paulson-speech_x.htm
The $index is not a good measure of the strength of the dollar. The enormous current account deficit, funded to a great extent last year by central banks, is the true indicator. The current account deficit grew as the $index dropped, meaning only that the $index did not drop fast enough to keep the dollar from being overvalued.
Getting the price of the dollar right, along with all the pain that it entails, is key to solving the massive, global “structural imbalances’ and making the American economy sound again.

Posted by: JohnH | Oct 22 2008 20:43 utc | 10

JohnH@10
Lowering the dollar to an optimal value will be critical. The manufacturing base for exports has to ramp up accordingly. And its doable if the political will is there. But I’ve pondered if the now extensive outsource of the manufacturing base/jobs to China & overseas can be reversed, or at least stopped ?

Posted by: jony_b_cool | Oct 22 2008 21:13 utc | 11

Good topic. It reminds me of all the discussion in Silicon Valley about the need to re-direct defense industries to alternative energy back in the Carter years.
A lower US dollar is a disaster for all those countries that have been convinced they needed to hoard dollars against a currency run. China is putting 10% of its GDP into dollars every year. These countries must immediately co-ordinate an orderly sell-down of the USD, lest there is a run akin to the current one on banks and real-estate. Perhaps the IMF could buy them up in return for SDR’s based on a currency (or commodity) basket, and then sell them off gradually over the next 20 years or so.
When I look at the current US economy, it’s comparative advantage seems to have been consuming oil to produce weapons since pioneering this process in WWI. More than any other economy, illusions of growth and wealth suffered from poor accounting – valuing resources (esp. oil) at the cost of extraction rather than the cost of replacement. The daughters of a friend of mine used to have a roaring and profitable trade selling sodas on the beach until the supply in my friend’s fridge ran out. When the limits to resources inside the country were reached it had to expand the process around the world. Now that seems no longer profitable, even at only extraction + coercion cost.
Now the US must develop an economy based around producing something real in a sustainable manner. I don’t think it needs to be self-sufficient – you can trade music and software for rice or tennis shoes at some price. But I think the days when other countries can be forced to sell real goods – food, minerals, oil, tools – to the USA simply on credit are drawing to a close.

Posted by: PeeDee | Oct 22 2008 22:04 utc | 12

US economy is entering a two-year recession that will be longer and deeper than previously feared, said Nouriel Roubini, a well-known economist and professor at New York University.

Posted by: ClusterPhuck Nation | Oct 23 2008 1:00 utc | 13

Interesting discussion… long time lurker here, piping in for the first time.
My question: What do you mean by optimal value for the dollar? For whom is this value supposed to be optimized? What is optimal for multinational corporations is not optimal for citizens whose savings and purchasing power will be vaporized by a major devaluation.
If the dollar weren’t being propped up by its reserve currency status, its purchasing power might be 10¢ by some estimates. The US money supply has been doubled in the past four years, and the US economy has barely grown. Money has lost all relationship to productive economic value.
We’ve been gaming the dollar system for so long, using all of the power levers at our disposal: military, oil prices, covert drug money laundering, bubble after bubble. And now, we’re witnessing the limits of all of those methods. I’m not sure what policy could bring back US manufacturing, or what the implications are. The distortions have been building for years, hidden by papering over and financial alchemy, but the reckoning is here.
This economy has been built disproportionately around what had once been the inner Washington power structure — the Wall street financiers and their Military Industrial Complex. Now that the world no longer wants us to be the World Policeman and is likely to stop trusting us as their Banker, well, the balls are all up in the air.
Anyways, right now the world monetary regime is flying apart at the seams… The GBP had a 6¢ drop in one day. That’s crazy.

Posted by: Dan | Oct 23 2008 1:25 utc | 14

GRRRRRRRRRRRR…..

Posted by: Uncle $cam | Oct 23 2008 1:30 utc | 15

it is & will be worse than even mr roubini imagines
it is clear they are overwhelmed by the machinations they are very far from controlling because even if it is designed in part as a concentrating of wealth it risks for the 21 st century to be an era of insurrectionary politics – out of necessity

Posted by: remembereringgiap | Oct 23 2008 1:53 utc | 16

Was listening to a recorded banker’s convention speech by Wells Fargo’s Kovacevitch describing how deregulation made banking “incredibly profitable once the state usury laws were overcome”, and how back office staff that once made up 75% of bank personnel “were completely replaced by modern computers”. Then as banks expanded their services into brokerage after Dot.con and Phil Gramm, how “truly creative people” came up with the innovative (SIVs, CDOs and CDSs) financial instruments that (plague the) globe today, althought Kovacevitch quite naturally chose to skip gaily over the consequences portion of his history lesson, to end on our future.
“In the future, more of the same, faster!” [oh bloody good!] “You will receive a national CredNet ID card which contains all your biometric and medical data, and with this auto-deposit and debit card you will be able to take care of all your financial transactions.” [chip, chip, cheerio!] For the bank-brokerage industry? “There will be further consolidation, as 8,000 small banks today are encouraged (sic) to seek the protection (sic) of larger, better capitalized holding banks.”
So from a “boring business of fixed rate banking” in the 1970’s, banks were able to slough off 75% of their workers through automation, pump up their profitability to “incredible” levels through the application of unrestrained usury, start the Second Depression, and in our future, bring on red pill blue pill biometric barcoding, and a fully-automated artificially-intelligent computer-controlled CredNet Machine.
He was proud of that accomplishment! He was looking forward to his future!
And he closed his talk by saying that, “the most important thing in your people.”
Your people! Your people! That’s Pharoah-slave talk! That’s right out of Deuteronomy!
Now why couldn’t Congress have created the US Trust Bank, and fractional-reserved our SSTF payments, then loaned out 9x from that to commercial businesses, so that when we retired, our SS Trust had grown as rich as the holding banks have become?
Why?
Because Congress stole our deposits, and left an IOU in the bank vault that we’ll have to repay ourselves, with interest paid to our Chinese and Saudi overlords.
Think about that. We could have been Pharoahs if Congress had made SSTF a bank!
Now we’ll be lucky to get a greeter job wearing a blue WalMart vest.
Red pill, or blue pill?

Posted by: Red Blue | Oct 23 2008 3:33 utc | 17

There has to a re-alignment of the USA’s economy into a sustainable mode that is consistent with its economic & trade ties with the rest of the world.
(…)
In terms of industry I believe energy is the field where the U.S., with its very substantial research base, can do the most.

On MSNBC this evening Joe Klein said, in an interview w/Obama to be on TIME this weekend, Obama stated forcefully (Klein’s words) that his #1 economic focus would be development of green energy. FWIW, that fits w/what I’ve read on Obama’s advisors.
This could turn into a very good thing, depending on breadth of that focus IMO.

Posted by: jdmckay | Oct 23 2008 4:41 utc | 18

Red Blue @17.
Brush up your resume – going to be a lot of applicants for the Wal-Mart vest.

Posted by: Allen/Vancouver | Oct 23 2008 4:49 utc | 19

Why are Docs From the Bailout Being Redacted?

The U.S. Treasury Department has decided against publicly releasing key details of the contract it awarded Bank of New York Mellon to keep the books for the government’s purchase of toxic securities. “It looks like a reflexive, ‘we don’t want to tell you,'” said Steven Aftergood, director of the Project on Government Secrecy

hahaha…

Posted by: Uncle $cam | Oct 23 2008 7:19 utc | 20

@17
Now why couldn’t Congress have created the US Trust Bank, and fractional-reserved our SSTF payments, then loaned out 9x from that to commercial businesses, so that when we retired, our SS Trust had grown as rich as the holding banks have become?
Why?
more thinking is needed along these lines. The banking sector that supports the critical “internal economy” — (business credit, low-mid income wage-earner deposits, single-home owner mortgages, SSTF, …) could be broken off into a separate category & immunized completely from “banksta” activity.

Posted by: jony_b_cool | Oct 23 2008 10:17 utc | 21

The banking sector that supports the critical “internal economy” — (business credit, low-mid income wage-earner deposits, single-home owner mortgages, SSTF, …) could be broken off into a separate category & immunized completely from “banksta” activity.
That is what Glass-Steagal was thought for – until Congress and Clinton put it away in 1999.

Posted by: b | Oct 23 2008 10:55 utc | 22

Thanks b@22.
we need it back. NOW !!!

Posted by: jony_b_cool | Oct 23 2008 12:23 utc | 23

Thanks b@22.
we need it back. NOW !!!

Posted by: jony_b_cool | Oct 23 2008 12:24 utc | 24

how grotesque it is of greenspan to describe what is happening as if it is a natural disaster. he is not the only one of their number to try to couch the crisis in those terms. they are scandalous
it has always been so with the right, they refuse to accept responsibility for any of their actions & the consequences of those actions. & it has been true for centuries. the only time imperialism ‘accepts’ what is happenning is when they are capitulating
& that is what we are witnessing today – capitulation. a beast running through the square of its own catastrophe using all means foul & fair to get a handle on ‘things’
& it would seem, to no avail
what pitiable creatures
greenspan himself looks like a ghoul from a bad hammer film in his congressional discourse
mr greenspan – the soviet economist kondriatev would have told you some simple physics – what goes up must come down

Posted by: remembereringgiap | Oct 23 2008 16:44 utc | 25

a comment from the south african communist party

Posted by: remembereringgiap | Oct 23 2008 16:51 utc | 26

Thanks b@22 & we need it back. NOW !!!

Posted by: jony_b_cool | Oct 23 2008 18:34 utc | 27

Digby adds to post #7&8 on the morality of capitalism, and how the system is not. See “Wealthy Parasites”.

Posted by: anna missed | Oct 23 2008 18:52 utc | 28

Look at it this way: with leveraging, hedge funds are out there 30:1
and with fractional reserves, banks are out there 6:1 in fluffed $’s.
The top 5% own 55% of the wealth I think was the last figure, then
1/30th of 55% is about 2% in real deposits. Of the remainder 45%,
then 1/6th of 45% is about 8% in real deposits. Total about 10%.
So when this all blows up like they’re saying it’s going to, even if
the deposits was distributed absolutely equally to everyone, there
would only be that proverbial “10¢ on the $1” left of our assets.
Net wealth in the U.S. – the total value of all assets, including
stocks, bonds, bank accounts, houses and retirement funds,
after subtracting debt – is approximately $54 trillion.
10c on $1 real value on $54T of fluffed assets is $5.4T.
So $5.4T asset recovery divided by 45% divided by 95% of
345,000,000 in US is $7,415 per person. That’s it.
The other folks, the Elitkenazim?
So $5.4T asset recovery divided by 55% divided by 5% of
345,000,000 in US is $172,175 per Elite. That’s all!
The Elites are gonna be pissed! That’s why they’re looting Treasury.
They’re dragging up and heading for the Mediterranean with their $’s.
That means there’s less than $740 left for each non-Elite American.
$740, that’s about two year’s wages (in 1870)!
NO SOUP FOR YOU!!!!!!!!!!!!

Posted by: Mizan Ekhsa | Oct 24 2008 3:58 utc | 29

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