The Economic Metaphor

 

Ouch!

 

 

USA = Kids

Europe & Japan = Needy friends

China & Arabs = Parents

Rest of the World = Our roommates

Let me oversimplify this economic disaster for a little second.  I wrote a long discourse on this mess a few months ago, but now that more light has shed on the liquidity issues it is a little more clear as to what the true problems are.  

Let’s reflect:  

1.  Housing market tanked and sub-prime loans began to cause a massive number of foreclosures.  

2.  Unemployment grew, gas prices rose, and fears of the worst possible economic conditions loomed.  This was reflected in inflation due to high energy costs and a contracting economy due to the housing bubble bursting.

3.  Lehman Brothers, AIG, and several large banks and other financial institutions began to fail, but thankfully as the markets dive so do gas prices.  

4.  Second version of 700 Billion Dollar bailout package passes both Houses of Congress as Henry Paulson declares he will not stay on after this administration leaves office to oversee his own creation.

5.  Banks across the world begin to look shaky and fail/get bailed out by their governments (ironically months ago, the same countries predicted the problem would not cross the ocean). 

6.  Stocks fall for six straight days (dropping below 10,000 on the Dow), but look hopeful for a small increase today.

So, the world looks dire and in some ways it is not so pretty.  The problem is that the U.S. and other “service” countries have been living off of nothing.  Let me explain.  The United States used to be the great creator of goods.  We made things and brought them to market.  Sometime in the last three decades as we began to lean heavily towards globalization (and thus worldwide specialization), we quit being a predominantly industrial/manufacturing nation and transformed into a service nation.  

Every economist and his mama will tell you that this is a good thing.  Let China, Mexico, and Brazil get there hands dirty and we’ll sit in our plush corporate offices and manage from afar.  There is a basic failure to understand the inherent dangers of such large scale shifts from real products to created services.  Not only is the shift new, different and untamed, but it is fragile.  We were experience a great economic revolution no smaller than the Industrial Revolution, with plants shutting down and outsourcing becoming a common word in our lexicon.  We could call this the Service Revolution.  I know this is getting a little complicated, but let me try and simplify it is a much as possible:  Our economy can be broken down like this - managerial and professional (35.5%), technical, sales and administrative support (24.8%), services (16.5%).  That’s nearly 75% of our economy dedicated to making money out of products created primarily abroad.  

Here is a crude example.  Cars are created for GM in say Mexico.  Here in the U.S. GM employs designers to design the cars, engineers to engineer the car, but then we have a whole shit list of people doing as much as possible to make a buck off that car.  Managers of the designers and engineers.  Corporate representatives of GM’s marketing division, dealerships with their car salesmen, loan officers to get you in a car before you can afford it, insurance companies to take your hard earned cash (and make a profit on it) in case you get in an accident, and don’t forget the janitor to clean up all those “hard” workers’ shit at the end of the day.  

I’m not arguing that we should all put on coveralls and get back into the factories and die of cancer from some toxin in the production cycle, but I am saying that our economy bloated itself on non-existent money.  At the beginning of this article I gave some metaphors.  Let’s look at those again.  

Pretend the America is a kid who just got to college.  He is learning the ropes and taking money from his parents (China and the Arabs), getting credit cards, student loans, and definitely not making enough money working for Pizza Hut to cover his costs.  He keeps doing this because he’s having fun, not really learning as much as he should and not really caring about the consequences.  One day he realizes his credit cards don’t work anymore because he has overdrafted and now owes more than the available credit.  Oh well.  Then later when he can’t afford to pay his rent he calls mom and dad and they send him a check, but they warn, “son we don’t have anymore to give you, we’re struggling to pay the bills as it is.”  He thinks little of it and keeps living the high life.  His friends (Europe and Japan) are all doing the same thing and sometimes they even ask America for money.  America willingly gives, because he doesn’t want to lose his pals.  America was studying economics and yet not making it to all his classes.  Even though he has all the potential in th world, he was too busy partying to worry about the future.  He can’t pays his bills again and calls his parents who say, “We’d like to help son, but we’re broke, we can’t keep footing your bill.  You’re on your own for now.”  

America fails his classes and gets kicked out of college (failures of globalization) and can’t afford his rent (bubble bursts).  America has to move home, leaving his roommates (rest of the world) to try and cover the rent.  He gets a job in a local factory and works hard to pay his debts and hopefully one day get back to college so that he can get a better job.  

Although this isn’t a perfect example, in many ways it works.  We have lived off of borrowed money for so long that it finally has begun collapsing on itself.  Banks are so scared they are unwilling to loan to each other.  We can cover the cost artificially with our government cash, but our national debt is 10 trillion and rising.  You can sandbag a levee and hold back the water for a while, but in the long term, a new stronger levee has to be built.  The piper has come to collect.

Here’s the scary part.  Like all pendulums that swing one way to the other, if you don’t like it on the right, you are probably not going to like it on the left either.  When things go this awry it will take a long time to fix and could mean a great deal of socialization.  Not looking forward to the long road back to when the pendulum was near the middle (when was that by the way???).