Mike Mandel commenting in Business Week on the global economic meltdown (It’s Not a Crisis of Confidence) blames the problem on three flows: technology and industrial know-how to emerging economies; goods from those nations back to the developed world (read: “US”); and, flow of capital back to the emerging nations to pay for those products.
This tri-flow 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.
And something did give. The house of cards collapsed — or as I have called it, the juggling act (the carry-trade and other arbitrage mechanisms that are now falling apart) on top of a house of cards (the slicing and dicing of risk that simply hid it, rather than reduce it) build on a foundation of quicksand (the teaser/liar subprime mortgage mess).
So, what should we do? According to Mandel:
Policymakers should stop talking about investor confidence as if it exists in a vacuum. Instead, they should focus on the real goal of stimulating the creation of innovative new goods and services that the U.S. can produce and sell on global markets. That would reduce the amount of borrowing the country has to do, and help create a sustainable global economy.
In other words, attack our underlying international competitiveness problem that got us into the financial quagmire.
I agree – to a point. I think the financial collapse came before the effects of the competitiveness/trade deficit problem could be felt. Everyone assumed the economic crisis would start with a drastic drop in the value of the dollar – as other nations stop lending us funds. But in the current situation, the opposite has occurred. The flight to safety has meant a flight to US Treasuries.
So the world has not yet given up on lending to the US. But, at some point, it will. To prevent that next catastrophe from happening we need to follow Mandel’s advice and use this opportunity to rebuild our economic competitiveness. Or the next time will even worse.