Thu Nov 24th, 2005 at 07:40:17 AM EST
(Back from the front-page by whataboutbob)
I caught a great article in the Dutch NRC Handelsblad this weekend about the housing bubble in the US, the growing trade imbalance, the downward spiral of US personal savings rates (to below 0), the likely results of this dangerous situation, and how these results will affect Europe and the rest of the world. It was paired up with a docu-drama on Dutch TV called "The day the dollar falls", featuring a collection of Dutch and American economists (guys like Stephan Roach), which sketched out a likely scenario, from morning trading in Asia to the end of the day in the US, of what a %20 or so drop in the value of the dollar vs. the euro would mean for the world. It wasn't a pretty sight.
I'll try to convey the broad picture of this below the fold, and I would welcome your thoughts and clarifications about some of the issues involved from a more learned economic perspective, as my primary interest in the value of the dollar over the last few years has been how far I can stretch my US savings to fund my rock star lifestyle in Holland, and not on what the ups and downs of the currency markets actually mean to the rest of the world.
The article had some accompanying graphs that gave a very clear picture of how skyrocketing debt among american citizens, financed by an arguably artificial spike in property values, has created a sort of parasitical system where Asian countries essentially dump money into the US so that americans can continue to buy Asian commodoties. Another graph showed the spike in money flowing into the US from the rest of the world--otherwise known as the trade imbalance--which has reached a mind blowing 3.5 billion dollars PER DAY. This money is coming primarily from Asian central banks.
One of the economists in the documentary characterized it roughly as follows:
There's seven people stranded on an island, six asians and one american. Each of them has a task. One of the asians goes out all day and fishes, one of them gathers cocunuts, one of them gets firewood, one of them gathers up leaves and sticks to build shelter. And the american sits around all day underneath the shelter, by the fire, eating the food they spend all day gathering. A modern economist might look at this situation and say, "Hey, that american is vital to this system: if he wasn't there to eat all the food these guys wouldn't have anything to do, they'd just be sitting around wondering what to do with themselves."
The obvious fallacy in that is that of course this american is a parasite--if he wasn't eating up all the food all the asians wouldn't have to work so hard and they could enjoy the fruits of their labor. But this scenario exactly describes what is currently happening in the world economy--the asian countries have spent the last several years dumping money into America to finance our spending sprees on consumer goods produced in Asia. One of these days they are going to stop, and when that happens you will see a large scale realignment in living standards in the world, where Asians are suddenly going to be able to afford a lot of nice things and Americans are suddenly going to have to rethink their spending habits.
So why isn't this happening today, already? And what's in store for europe, if this were to happen? Is this realignment something that would affect the entire west, or would the (comparatively) high rates of personal savings and level trade balances in most European countries spare us the worst effects?
There were a lot of other effects that were touched on, the most perplexing of which involved things like runs on banks and atms and general financial instability outside the US, as well as the predictable realignments of things like the currency pricing of oil and concerns about valuing of goods that have already been sold but not delivered, etc. All in all it was a very interesting, rather frightening story, and pushed me closer to the belief that our western way of life is pretty much sticks and glue, waiting for that one good shake to knock it all over, and we'll be left wondering how it existed as long as it did...
(thanks, my first diary here)