Monday, December 08, 2008

Has the US Become a 'Failed State' ?

Is the US a 'failed state'? The CIA monitors the 'current account balance' of the world's nations. The 'current account' measures the value of US imports vis a vis its exports. The ratio often reflects the financial health of a nation, in this case, the US. According to the CIA, the US 'current account balance puts the US at the very bottom of a list of nations with a NEGATIVE balance of $-731,200,000,000. That's NEGATIVE 731 BILLION dollars. China tops the list in the black with $ 372 billion. The US position mirrors that of China but more so! [See: Rank Order - Current Account Balance.]

This is not the first time the US has turned up at the bottom of the CIAs list of 'net debtor nations'. It is hard to remember a time when the US did not pull up the rear. The difference now is the exponential rate at which the national debt is increasing. Has the US crossed the event horizon into an economic black hole from which there is now no pulling back? It is now, perhaps, beyond the ability of the Heritage Foundation to put a smiley face on it as it did predictably in the 1980s during the Reagan administration.
Yet this "indebtedness" actually results from a massive vote of confidence in the American economy by foreign investors. Strangely, when a business is actively pursued by willingly investors, it is taken as a sign of strength. When foreigners put their money in American industry, however, there is concern that the U.S. has become a "debtor nation."

--Heritage Foundation
It was the Heritage Foundation that took issue with my article exposing the fact that 'terrorism' is consistently worse under GOP regimes. [See: Terrorism is Worse Under GOP Regimes ] Heritage, I think, has often confused 'analysis' with 'PR'.

Since Heritage issued its predictable apologia on behalf of Ronald Reagan, the nation has enjoyed but one fiscally responsible administration sandwiched between two incompetent Bushes. Things have changed precipitously.
If the U.S. net investment position continues to turn more negative, prospects increase that the positive U.S. net income receipts will turn negative as U.S. income payments overwhelm U.S. income receipts. In such a case, the U.S. economy will experience a net economic drain as income that could be used to finance new U.S. businesses and investments will be sent abroad to satisfy foreign creditors. Such a drain likely will be small at first relative to the overall size of the CRS-14 10 Weisman, Steven R., A Fear of Foreign Investments. The New York Times, August 21, 2007. economy, but it could grow rapidly if the economy continues to import large amounts
of foreign capital.

--CRS Report for Congress, The United States as a Net Debtor Nation: Overview of the International Investment Position [PDF]
Though China's position seems secure, the US could drag China past the event horizon, into the economic black hole! China's position is largely the result of its having dumped it's national product primarily in the US market via Wal-Mart.

China is motivated to keep US bucks afloat. A worthless dollar means that China may be slugging it out with the US for dead last when US consumers can no longer afford to buy Chinese crap at Wal-Mart.

Of 188 nations on the CIA list, only 67 are in the black. It must be pointed out that China willingly entered into its dysfunctional relationship with the US. The rough outlines of this Faustian bargain are most certainly traceable to the Senior Bush trip to China, laying the ground work for the famous and operatic Nixon visit to the Forbidden City in 1972. Without the US consumer, China may become just another sinking ship --a Titanic!

The possibility that the only factor keeping the US off the 'failed nation' list is the fact that a Titanic America will swamp and sink every other ship in its wake is sobering and frightful.
5. Uneven economic development along group lines: determined by group-based inequality, or perceived inequality, in education, jobs, and economic status. Also measured by group-based poverty levels, infant mortality rates, education levels.[9]

6. Sharp and/or severe economic decline: measured by a progressive economic decline of the society as a whole (using: per capita income, GNP, debt, child mortality rates, poverty levels, business failures.) A sudden drop in commodity prices, trade revenue, foreign investment or debt payments. Collapse or devaluation of the national currency and a growth of hidden economies, including the drug trade, smuggling, and capital flight. Failure of the state to pay salaries of government employees and armed forces or to meet other financial obligations to its citizens, such as pension payments.[10]

--Failed state
There may be some confusion about the CIA numbers. What the CIA calls the 'current balance' is commonly called the 'balance of trade deficit' or, simply, the 'trade deficit'. The 'deficit' indicates that the US is importing much more than it sells abroad. Deficits are always expressed as negative numbers.

The current account balance is one of two ways that a nation's foreign trade is assessed. The other is the 'net capital outflow', which is fairly self-descriptive. The 'current account' is one of two components of the 'balance of payments'. The other is the 'capital account', the sum of the balance of trade, in other words, the value of all exports MINUS imports of goods and services abroad, interest and dividends, and net transfer payments like foreign aid. A current account surplus is the opposite of a negative current account balance or negative trade deficit. A current account surplus may result from an increase in a nation's net foreign assets; a current account deficit is the reverse, a 'decrease'.

The cure for a negative trade deficit is to manufacture and sell more goods abroad. With the rise of Ronald Reagan and the GOP, however, the US --to its chagrin and shame --began to think differently about 'exports', 'productivity' and 'the current account'. I've already written reams about the fraud called 'supply side economics'. There are yet other trends begun under Reagan that must not be ignored.

It was a combination of factors --primarily 'monetary tightness' and a strong dollar --in the early 1980s that resulted in a big decline in net exports. China is in 'positive' territory now because it sells to us. What will China do when we can no longer afford to buy? China will go broke just as the US has done. Following is an example of the kind of flawed thinking that has helped put the US on its knees.
Under Reagan, business and investor optimism increased because it was expected that the tax cut would stimulate economic growth, which indeed turned out to happen.

Under Clinton, business and investor optimism increased after 1994, when the Republicans gained control of Congress, because of expectations that the reductions in government spending would stimulate economic growth, which was also the case. Note that the dollar declined during the first two years of the Clinton Administration, as the initial tax increases did not boost confidence.

--The Mundell-Fleming Model
In fact, Reagan's 'tax cut' did not stimulate economic growth. It was, in fact, followed by a depression of some two years --the longest and deepest since Hoover's 'Great Depression' of the 30s. Secondly, I am amazed that 'businessmen' --expected to be somewhat knowledgeable about economics --would fall for the mythology that GOP tax cuts stimulate growth. [See: The GOP --a Parasite That Murdered Its Host]

The gurus of 'tax cut' are Herrs Reagan, Bush and Bush and when all the stats have been tabulated for Junior, all three will be shown to have presided over the very worst economies in US history.
That was the platform that brought Ronald Reagan and the market-based conservative strategy to power in 1981. They vowed to reinvigorate the American economy and restore profitability for corporations by promoting markets and reducing government. Taxes were cut and business regulations reduced. Anti-union regulations were promoted at the same time that the social safety net was cut. Professor Rosenberg argues that this agenda did not promote growth, but let the stagflation continue as the budget and trade deficits grew.

The movement toward greater equality that had faltered in the 1970s was reversed as inequality in income and opportunities grew and unions became even weaker under Reagan and George H. W. Bush -- the "guardian" of the Reagan legacy. Unions were forced to engage in "concession" bargaining rather than bargaining to improve the welfare of union members. Professor Rosenberg concludes that this decade from 1981 through 1991 was one of "growing inequality and, at best, stagnating living standards for many. This legacy, along with the recession that followed under the Bush administration, made many Americans angry. They would want a relief from the Republican-led, business-dominated restructuring of the economy." (p. 278)

--American Economic Development Since 1945: Growth, Decline and Rejuvenation
This book was published in 2004 when '...no one could have foreseen' the fact there will be no rejuvenation. If one subscribes to the theory that the prosperity that followed FDR was due solely to World War II, and, prior to 1900 the development of the 'American Frontier', then the conclusion is inevitable: the US must be listed among the 'failed nations' of the world.

Addendum and update from jurassicpork at Welcome Back to Pottersville:
Even a complete tool like Bush knows that Wall Street is prone to wild swings every time Warren Buffet or Donald Trump fart in public. The wild, drunken losses and gains of the Dow Jones Industrial and Mercantile Averages in the latter half of this year are proof of that.

But Gerald Ford, in the opening remarks of his first State of the Union Address in 1975, wasn't very concerned about Wall Street's volatility when he said,
I must say to you that the state of the Union is not good: Millions of Americans are out of work. Recession and inflation are eroding the money of millions more. Prices are too high, and sales are too slow. This year's Federal deficit will be about $30 billion; next year's probably $45 billion. The national debt will rise to over $500 billion. Our plant capacity and productivity are not increasing fast enough. We depend on others for essential energy. Some people question their Government's ability to make hard decisions and stick with them; they expect Washington politics as usual.

Ford's Address before a joint assembly of Congress on January 15th 1975 goes back to nearly 34 years but the numbers President Ford mentioned, the ruinous legacy left to him by Richard Nixon, look absurdly small by conspicuous relief. A national deficit of $30-45 billion? A national debt of half a trillion? Oh, if only we got off that easy under Bush!

The only number referenced by Mr. Ford that appears larger than today's 6.7% unemployment rate is the 8.1% civilian unemployment rate in January 1975. But consider that the population of the United States back in 1975 was just under 216,000,000. An 8.1% unemployment rate with a civilian work force of 93,775,000 would've translated to 7,929,000 out of work.

The population of the United States is now at more or less 300,000,000. The supposedly lower 6.7 unemployment rate announced just today is another way of saying that 10,300,000 people who've lost their jobs (well over half a million last month alone). That's almost 2,500,000 more jobless people than we had back in 1975, which is generally acknowledged as the worst jobless rate in recent history until the end of the Bush administration. It only stands to reason that the bigger a population gets, even a modest ratio of unemployment will result in greater numbers of jobless. But never in this generation has America ever seen 533,000 jobs evaporate in the blink of an eye.

The difference is that even under the darkest, meanest days of the Nixon administration, outsourcing of American jobs to India and China, for decades the two most populous nations on earth, wasn't an issue. NAFTA wasn't even a gleam in Bill Clinton's eye and we didn't have a trade imbalance with China or any other country that even approaches the cartoonish one that we see with China nowadays. The government also didn't balloon in size under Nixon or Ford as under Bush (17,000 government jobs were created and filled in May 2008 alone.).

The scary thing to remember is that the unemployment rate up until Nixon's resignation in early August of 1974 held at a steady 5.1-5.5%, well under the dreaded 6% mark. By January of 1975, when his successor addressed Congress and the American people, it was up to 8.1 (peaking to 9.0) and wouldn't go back down to normal numbers until a year and a half into Jimmy Carter's administration.

To his credit, Ford did take steps to cut inflation (although his misguided mantra for more tax cuts and the rationale behind it is identical to ones we've been hearing these last eight years) but Ford was handed a huge mess at a time when Richard Nixon had poisoned the well for the Republican Party for two decades.

I fear this is what's awaiting President-Elect Obama. As Louis the XIV once famously said, "Apres moi, le deluge." After me, the deluge. Who would ever think that things would actually get worse after Nixon left office? Who would ever think that things could actually go from bad to worse to worst after Bush leaves office?

Bush's cruelly-belated acknowledgment of the recession may be a political ploy to poison the well. With Obama entering the White House in January, his name will be synonymous with economic ruin, trillions in bailouts, a failing housing and auto market and an elevated debt ceiling now about to break $12 trillion.

So if and when things get worse in the first year or two of Obama's administration, let's cut the guy a break and remember how this started, on whose watch and why before we go to the polls on Super Tuesday 2012. The Titanic also didn't finish turning before it struck the iceberg.

--Welcome Back to Pottersvile
The following blog is valuable resouce: Greg's Mankiw's Blog. Greg is an Harvard economics prof and writes about economics as well as: How to Write Well. Greg is also the author of two economics textbooks.

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