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May 23, 2009

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Rick Ballard

"We have an economy that has been based on consumption and spending."

Pofarmer,

I'm not sure what else an economy would be based upon. I'm not sure that your conception of consumption fits the BEA model from which those consumption percentages are derived.

RichatUF

Pofarmer, can I disagree in part and agree in part?

Don't know if I want to stay up until one writing a response though, but my attitude has improved since yesterday, so I'm going to give it a shot.

RichatUF

Part 1

**We have an economy that has been based on consumption and spending. Manufacturing now makes up around 30% of our economy, and those numbers, in absolute terms, look like they are about to drop. Services make up the remainder. Never in history has there been an economy that has survived with over 50% services, the U.S. is the first to try it.**


The classification is primary-agriculture, mining, fishing; secondary-manufacturing activities; tertiary-services. Services make up over 70% of the US economy, like they make up the vast majority of the economy all OECD countries. A company like GE or Boeing are both a manufacturing concern because of the products they build, but also service companies, because of the engineering testing on the products they make and the service contracts on the products they sell.

**Our balance of trade is routinely and horribly negative. The main bright spot in our export picture is agriculture, which makes up about 1.2% of our economy today.**

The US is the world’s largest importer and exporter. Everything from oil to gold to aircraft parts and machinery to military weaponry are priced in US dollars. The US runs a trade deficit annually because so much of the world’s trade is dollarized and some 70 countries worldwide have either a hard or soft peg to the US dollar. This could change; however, the idea of SPR’s from the IMF would just add another layer of corruption and confusion in global trade. Also, if it were to change, the country it changes to would have to become the importer of last resort and have capital markets deep enough to re-cycle the currency without major distortions in exchange rates, without fueling significant asset inflation (see the last few bubbles in our own economy as examples), and able to absorb the sorts of structural industrial dislocations and collapsing investment bubbles that the US has suffered for the last 30 years.

RichatUF

Part 2

**The boom of the 1990's and early 2000's was mainly fueled by easy credit and credit cards. Credit cards were still pretty new in the late 80's. I didn't get one until sometime around 1990. The use of credit cards allowed the easy use of debt, which increased the velocity of the money supply, but didn't build any wealth, because an awful lot of it was offset directly by debt.**


The availability of easy credit was fueled by securitization (the ABS market Rick referred to earlier) and there are 2 easy to identify subsidies for this: in real estate Fannie and Freddie provided a ready market for real estate securitization and what I mentioned above capital from abroad looking for safe but high returns from trade surpluses either through extraction (Saudi Arabia) or re-export manufacturing (China).

Credit cards might have helped spur consumerism, but it was real estate and the purchase of automobiles which were the main drives of the credit boom-and-bust. Technology also played a role. Computers and mathematicians could find data in a day that would have taken weeks to find and compile a decade ago and the data would not have existed 3 decades ago. They could also quickly find new consumers to sell a product too. They could build complex models, test assumptions, and could enter and exit the market extraordinarily fast. This technological advance failed spectacularly in some cases, but there were people on the opposite side of the real estate trade from 03-08 who took advantage of the capital and technology at their disposal and made out very well.

We also made it through the even more extraordinary Florida property bubble from 1920-1926 fueled by air conditioning, the just finished rail lines, and booming capital markets themselves fueled by the telegraph and electricity and it only stopped here when misfortune struck (a major ship wreck clogged the Port of Miami and then the 26 Great Miami Hurricane) and cooler heads took charge.

Pofarmer

I'm not sure what else an economy would be based upon.

Something has to provide the income for the production. What is the productive element that provides a foundation?

Rick Ballard

"What is the productive element that provides a foundation?"

If I were forced to choose one thing it would be design and implementation of information gathering systems and fast analysis of the information gathered (I know that's more than one but I cheated. Sue me.)

It appears to me that your question is 'How does brawn earn its bread when there is little demand for brawn?'. I don't have an answer but the answer wasn't terribly apparent as agriculture mechanized the vast majority of farmhands out of a job either.

It appears that the purpose of the meeting of the Billionaire Boys Club was to address the problem of excess brawn by coming up with a rational plan for killing it off. I think I'll hold my applause for a bit.

Pofarmer

If I were forced to choose one thing it would be design and implementation of information gathering systems and fast analysis of the information gathered

I had been thinking a little more about that sort of thing. I think the problem is, that there are other countries working on the same systems, as well as most of the other white collar services that the U.S. has been providing. Increasing computer power, and the knowledge to use it are going to be a great evener. I certainly hope that you're right and I'm wrong. However, I'm not sure that sitting in a cubicle all day processing "information" is going to be any more fulfilling than working in a factory all day making widgets.

Rick Ballard

The WaPo continues to highlight the conflict within the Fed.

Take away quote: "I don't think we should have a huge amount of confidence about how all this is going to work," said William Poole, former head of the Federal Reserve Bank of St. Louis.

St. Louis joins Dallas in expressing reservations concerning wading into a quagmire with an unproven exit strategy.

I wonder if "Bernanke lied, the market died" will become a rallying cry?

Pofarmer

I don't have an answer but the answer wasn't terribly apparent as agriculture mechanized the vast majority of farmhands out of a job either.

Agriculture mechanized largely becuase it had to. A great many hands had been called off to fight in WWII. After WWII, there were plenty of manufacturing jobs in the cities, rebuilding all the stuff we had just got done bombing to dust, and we had lots of industrial capacity to produce all manner of farm implements. The early 50's through the early 90's were times of HUGE change in American Agriculture. How does that fit into the current crisis? I haven't a clue.

cathyf
Something has to provide the income for the production. What is the productive element that provides a foundation?
It seems to me that you are making a fundamental error: wealth is not a conserved quantity, like law of conservation of mass or energy in physics. The most basic law of economics is that whenever a free exchange takes place wealth is created. And as time goes by, we get more and more efficient at creating wealth. Categories like "services" vs "physical goods" are interesting in that you can show odd characteristics of each class, but the ad hominem of "service" meaning "without value" is simply another variation on the zero-sum-game fallacy.

As a general rule, as time passes, the cost of producing physical goods will fall more sharply than the cost of producing services. Because of the downward-sloping nature of demand curves, this means that, in general, more and more of consumers' incomes gets spent buying services and proportionally less gets spent buying goods. This is not some sign of the Impending Apocalypse -- it is merely a sign of people becoming wealthier over time.

The various and sundry left-wing redistributionist fantasies all rely on the same zero-sum fallacy: that wealth can neither be created nor destroyed, so moving wealth around through force will not destroy the wealth. In fact, as has been definitively proven over and over and over again, forced redistribution always destroys wealth, and alway must accelerate until all of the wealth gets destroyed.

Margaret Thatcher said that the problem with socialism is that eventually you run out of other people's money. The complementary truth, is that while wealth-destroying activities (spending other people's money) always end up in the wealth running out, the wealth-creating activities are fundamentally self-sustaining.

Pofarmer

O.K.

Let's say that I pay you to do my taxes, and you pay me for gardening advice.

Where was wealth created in those transactions?

cathyf

I have a more enjoyable garden than I would have had without the advice, and you get your taxes done with much less aggravation than if you had done them yourself.

Both of us richer than if I had gardened without the advice and you had done the taxes yourself. Otherwise I wouldn't have agreed to pay you for the advice and you wouldn't have agreed to pay me for the tax service. This wealth creation argument is nothing sophisticated -- it's pretty much a tautology.

sbw

Po, the wealth created is the opportunity to do something else wealth-creating with the time saved not doing what you are inefficient at doing.

Basic Adam Smith: 1) Division of Labor increases efficiency. 2) GDP is the some of what everyone in a country could do working at top efficiency.

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