Tuesday, October 28, 2008

Charge now and pay (much) later

if ever. Business Week has opinion on the financial crisis which, like R. Taggart Murphy below, suggests the past (?) idea of the US being able to drive the world economy by borrowing money from other countries to purchase those countries' goods and services may be gone for good:

...there's good reason to believe that the current crisis reflects a growing realization: Long accepted patterns of cross-border technological transfer, foreign trade, and global finance are simply not sustainable...

...This [system] worked as long as everyone believed that American consumers could finance their debt. But here's the problem: At the same time Americans were borrowing, their real wages were falling—and not just for the least educated. By BusinessWeek's calculations, real weekly earnings for college grads without an advanced degree have dropped every year since 2002.

You can't pay back rising debt with falling wages; something had to give....the entire global edifice was built on an impossibility. Full article here.

The house of cards has fallen and people are starting to take notice. What will Japan do if it cannot base its economy on exports to the US (or manufacturing goods exports to China so that they may export to the US) to the same degree that it has been doing for decades? And what will the US do if we have to stop relying on borrowing and have to raise taxes or cut spending (and rely less on individual credit as an income supplement/substitute) to make up some of the difference.

I am not holding my breath waiting for Aso, Obama, or maybe McCain to explain exactly how they plan to deal with this new reality.

No comments:

Post a Comment