By: Ned S

Ned S — Wed, 01 Apr 2009 10:26:25 +0000

John - A somewhat longer and more considered reply: I think one has to put a bit of perspective on the concept of America being broke. America seems to be just one of many deficit nations in the world (lots of which are highly developed) and leaving any media driven hysteria aside, I have a strong suspicion that America's deficit as a percentage of GDP won't be that extraordinarily high even after the costs of recent bailouts and stimulus packages are added in - Comparatively anyway - About 100% maybe? Although that certainly does seem to be higher than what either the US or it's creditors would like it to be. The USD's status as the world's reserve currency presumably does put America's debt as a percentage of GDP under the world's microscope in a way that most other country's normally wouldn't be. As does the fact that the US is the world's largest single nation economy. And the fact that satisfying US consumer requirements has played a significant role in world growth for some years now. That said, I certainly must admit I have no specific figures to back up my general take on it - I could make that my weekend's "homework" perhaps? But either way, I do not believe America is the USSR. My that is that is that the USSR was basically never anything much more than a developing nation, that given Mother Russia's very long term and historically understandable national paranoia about being invaded, insisted on supporting a truly first world nation's military, albeit on a truly second world nation's income. While also providing free health and education to its broader population. As well as heavily subsidised housing. (Not that the housing was especially high quality - But hey, what can one expect on the cheap, especially when everyone is getting it.) Plus the USSR also decreed that everyone would get paid pretty much the same irrespective of how much or how little their individual efforts actually added to the overall economy. Which all made for a very good recipe for ultimately going broke apparently. And that seems to be what happened. While one could make out a few vague similarities there to America's situation if they desperately wanted to (some poor people who can't afford them should get cheapy housing loans perhaps???), the fundamental situation in America is still truly very different to the old USSR I'd say. Taking it to an even further extreme, I actually get frustrated seeing the US compared to Zimbabwe - To sell some sort of hyper-inflation boogeyman perhaps? As opposed to the more garden variety but admitedly very uncomfortably high inflation of maybe 20% pa (???) that just could happen. But if America is not the USSR, then America is most definitely not Zimbabwe. My understanding of the Zimbabwe situation is very limited. But I suspect that I know the one really key bit of info required to understand why Zimbabwe "went broke" - They got a government that decided to rather actively encourage anyone who had a politically undesirable skin colour to depart. And the unfortunate part of that scenario for Zimbabwe, was that those same undesirables the country happily waved goodbye to, just happened to have been the custodians of a very large proportion of the nation's genuine and entrenched entrepenurial skills. (The problems were also compounded by some other government policies that made the resulting slack especially difficult to compensate for - Like breaking up previously large and productive farms I gather?) Mr Mugabe would probably have a rather different take on it of course; Tied to punitive international anti Zimbabwe sanctions perhaps? But either way, again, that definitely isn't America. Could America become the USSR? Or Zimbabwe? Well, just about anything is possible as they say. But the first bet would be long shot at best in my opinion - The fundamentals simply aren't in place. (Although one could quite reasonably expect American's general standard of living to go down rather than up for quite a few years perhaps? And anyone sitting on savings that weren't inflation protected could get hurt badly.) As to the second bet on America becoming Zimbabwe - Well that is really SO unlikely as to almost defy imagination - In my opinion. Heck, America isn't even close to being Weimar Germany financially broken by having lost one of the two most destructive wars in history and further crippling by extreme and ongoing war reparation payments - Let alone Zimbabwe! Of course if someone was to say that the USD might devalue by 50% over a few years (against the Euro for example?), or even a few months(!), or even increase in value by 50% over a similar time period, then I'd happily listen to their arguments. Plus any related ones about gold prices going up or down by a similar and even higher percentages in USD terms over a similar time period. (Or gold prices even not really moving at all.) I suspect that one lesson that could be learned from both the USSR and Zimbabwe experiences is that a country should try to encourage its entrepenurial types (within reason), rather than create a system that does not encourage them in any way or even goes to the extreme of actively tossing them out. Plus try and keep its politicians from ripping too much out of the system for themselves - But that's more just a secondary moral issue for any country that does have a few economic basics going for it and has encouraged its entrepeneurs because countries like that should actually have some spare slops for the politicians to wallow in anyway. But your point about America being broke is a good one, if it is actually true. I'll certainly try to look into it a bit more. But I'll be basing my assessment on how America sits relative to other countries. And bearing in mind that countries (unlike individuals) can typically pass debt onto future generations. And that America (unlike a lot of other countries) has pretty healthy population growth - Namely lots of future individuals to pass the debt onto. And also bearing in mind that America's debt to GDP during WWII was over 100% and the country seemed to manage to work and/or inflate its way out of that pretty happily over a few years. Not that America in 2009 is necessarily all that similar to America in the 1940's either, but it does at least give a historical precedent to compare against. I'm not saying the US economy is in good shape. It obviously isn't. But my gut feel is that it is in WAY better shape than the USSR's when the USSR collapsed financially - For lots of very fundamental reasons. And I'm not even especially panicked about the US's future unfunded health and pension liabilties. At worst some ill Americans will not get medical treatment and many older Americans will have to cope with retirements that are at a significantly lower standard than they'd hoped for. But if anyone suggests America is at all likely to become Zimbabwe or even Weimar Germany anytime soon, I say to myself "Why is this person telling me this?" What is their angle? Because they surely must have one to be trying to tell me something that is just so far from what a more sensible and unpanicked look at the big picture would seem to indicate. Either that or the whole world is truly stuffed and in that case America probably still will come out on the top of the heap because it's economic fundamentals aren't too bad comparatively speaking and it has the only remaining really big functional guns and in a real pinch would certainly find the money to use them. I specifically don't want to be alarmist, but if I had to take a bet on whether it was more likely that America would become the USSR or start rattling its sabre, my money would be on the sabre rattling. And as for Zimbabwe - No way. But Yes, some current hard data on whether America is "broke" or not would be handy.

By: Ned S

Ned S — Wed, 01 Apr 2009 05:07:25 +0000

John - I suspect Germany wasn't real flash for cash in 1939 either? But it was highly motivated and presumably believed it could win. So a shortage of cash just could be argued to be a motivation for war rather than a disincentive. Especially if unlike the USSR when it fell over, there is no one else around with any really big guns pointed at you.

By: Richo

Richo — Wed, 01 Apr 2009 00:02:15 +0000

The US military is a huge liability to them in a recession/depression.

By: John

John — Tue, 31 Mar 2009 18:52:52 +0000

Ned, America doesn't have "more money", it's actually broke. The whole "bigger armies, bigger cannon" doesn't work too well when you have no money, look what happened to the Soviet Union.

By: Ned S

Ned S — Tue, 31 Mar 2009 12:23:47 +0000

So based on that analysis, are you implying that the fact that America has "more money, bigger armies and bigger cannon" than the rest this time around it counts for squat? Grow up - Stop Wishing. Stop believing in Karma. Stop believing that "Justice will be done."
It's horse manure - The big guy wins and the big guy is America.

By: mark carpinelli

mark carpinelli — Tue, 31 Mar 2009 10:01:22 +0000

given the threat of higher inflation (eventually) i have read the forecast for higher commodities, precious metals etc, what will this environment mean for other asset classes, in particular real estate as i presume high levels of inflation will attract higher real interest rates

Comments on: The Dollar’s Last Days

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