Sunday, January 24, 2010

Unreal Economics

Unreal Economics

At one extreme of unreal economics we have the vision of politicians and economists. Current levels of productivity are established. Workers "earn" their income and there is no reason to expect their labour to be worth less in future. On the contrary we expect economic growth and per capita growth.

At the other extreme we see the doomers looking at all the debt in society, and other economic problems, and foresee the collapse of America.

What is real is this. America has lots of fertile soil and rain. It has huge stores of fossil fuels, including enough oil to cover high value requirements if things ever came to a big crunch. They have Nuclear power, with fuel and expertise. They have a powerful military which they use to protect their economic interests. 

They owe the world a lot of money, but guess what: it is all denominated in US dollars. They are currently printing money to cover their national debts, and they are willing to move private debt into public debt then pay it with printed money. The fact that some Americans owe money to other Americans doesn't negatively affect the country as a whole.

So America will remain strong, though not the US dollar. American assets are overvalued at the moment (compared to commodities), because there will be a long period of economic weakness. Also American assets that depend on oil, like housing in the suburbs, are going to lose a lot of value. Changing infrastructure destroys the value of infrastructure and expertise. Everyone has to accept being poorer. The advantage America has is a flexible labour market with workers accepting wage reductions when necessary.

India and China can return to a more frugal lifestyle more easily than the West. Even so there seems potential for both of them and all other third world countries without natural resources to have catastrophic social problems.

Europe seems the most likely to be forced to accept a large drop in living standards, and to struggle to feed themselves with more expensive oil.