Is it time for an American recession?

I’m a big believer in free trade and the self-organization of products based on supply and demand. One of my favorite stories from the cold war era was a famous visit of the Soviet economic minister to London in the late 1980s. Keeping the country supplied with enough food was one of the many problems the Soviets were hoping to find fresh solutions for. Since bread shortages were typical, the communist bureaucrat responsible for ensuring Moscow was well supplied joined the minister’s entourage – hoping he would be able to meet his peer during the meetings in London. Not surprising to someone in the western world, there is no “minister of bread” in London – and apparently the Soviets left suspicious that this “state secret” was too sensitive to be shared with outsiders.

I claim that this system of supply & demand has generated more wealth and improved the living condition of billions of people worldwide. Furthermore, I believe its the correct way of “organizing” a world economy and every major country worldwide is on the bus. Its clear that in 2007, America is still driving the bus – primarily because the American dollar is the current de facto currency of choice – the “gold” of its time. (This has greatly benefited America as the world’s ONLY gold mine sits only a five minute walk from the White House – the US Department of Treasury.)

However, one major problem plagues America’s leadership of the world’s economy – the American government and American people form a debtor nation. After decades of being the bank to the world, the past 20 years has transformed America to be the largest borrower. The national debt is HUGE and the annual budget deficit is so large that even Alan Greenspan is disappointed to be a Republican. Worse, the latest data shows the current account deficit is at 6% of GDP! While countries around the world (including lots of countries “unfriendly” to Western interests – Russia, China, Venezuela, etc.) are hoarding dollars to shore up their currencies, America and Americans have no savings! We borrow from these “unfriendly” places to maintain our consumer oriented lifestyle. (Just follow how the American subprime mortgage mess. First, look at how casually money is being loaned to Americans. Secondly, isn’t it a surprise that the first bank to fail over the mess is probably Britain’s Northern Rock? – and not a bank in the United States. Weird, huh?)

Therefore, I believe there are two things that Americans must do to get the country’s books in order:

  1. Save more money.
  2. Reduce the government’s deficit (and eventually debt) by either cutting spending or raising taxes.

Like the Moscow bread situation of the 80s, I don’t believe this is going to happen in a top down way. Its not a coincidence that after three decades of only minor recessions, Americans don’t know the pain of not saving money. I believe that a two or three quarter recession will remind the American people how to save and why it is necessary. It will reduce consumerism and hence reduce the trade deficit. The dollar will strengthen – which benefits everyone (especially the author!) Most importantly, the world economy will reorganize around something other than western consumerism.

No pain, no gain…

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