Monday, January 21, 2008

Economic Fear And Loathing

There’s been a great deal of economic angst in the Asian markets today, which leads many investors to face tomorrow’s open of the market with fear and loathing. But rather than rail against what may happen, it would behoove us to consider WHY this has happened.

First, like it or not, the United States is largely the world’s greatest consumer. We have the extra cash lying around to purchase a multitude of products that used to be made domestically, but are now made much more cheaply overseas. This is problematic because while our desire for luxury items appears insatiable, there is a limit to all good things. Many corporations deliberately chose to move off-shore to take advantage of cheap labor. Levi’s clothing is just one example; there are more. Other nations actively seek via embargo, trade agreements and treaties to limit imports from the United States. The U.S. in turn does very little to limit the inflow of cheap merchandise. Manufacturers who are greedy or lackadaisical can and have ended up importing shoddy and even dangerous product to the American marketplace. There are those who say the implementation of embargoes would further isolate and limit the American economy. On the other hand, such measures would discourage off-shoring of manufacturing, keeping those jobs here and while growth would occur more slowly, it would become more stable.

Secondly, with the dollar being cheap, there are many many investors from Asia and Europe who have taken on the economic risk of buying American companies. I know this for a fact because I know someone in my family works for one of these companies. The parent corporation is in the U.K. And because the dollar is so cheap, they have also bought many of the competing companies in this same industry. If the domestic economy slows down, those loans to purchase these companies will come due in overseas banks causing a ripple effect to the recession. On a global scale, it is exactly what happened with sub-prime lending. You have borrowers who aren’t quite up to snuff in credit, so the lending institutions or banks charge a premium interest, but defer that for five to seven years based on the assumption or blind hope that the economy will boom and the borrower will make enough money to cover the interest and principle from profit. When the economy slows down, these borrowers are forced to either consolidate companies, take assets and sell them while shutting companies or borrow more money at higher interest,further limiting their capital to grow the company.

Finally, if you look back at the first examples, remember how many times the United Nations would slap the U.S. with one hand but hold out the other for payment of the majority of programs. How many times has the U.S. offered aid for hurricanes, tsunamis, earthquakes, famines and such without any sort of expectation of repayment? Think how some of those nations misused donated goods by filtering them through the black markets. Or note how others asked that our military personnel enter to deliver aid under the cover of darkness so that nobody would know the source of needed assistance. Our money is so welcome, so long as we don't show our faces.

We in the United States are being blamed for a failing global economy, while the rest of the world stands around wringing their hands waiting for someone to do something.They continuously raise prices on goods that are imported to us, restrict exports from us then worry that maybe we won't buy another flat screen TV for junior. They hold this odd expectation that even under the burden of too much regulation and what amounts to a plundering of our assets as an economic anchor, that we can simply pick up the pace and keep going. Everything has a limit. And an economy can only run hot so long before correction must occur. In addition, an economy is not a thing of concrete, it is fluid and runs on money as well as emotions. The stampede to recession has been orchestrated by the media just as it has been feared by overseas investors.

The entire scene can be explained by the story of the goose who laid the golden egg. The short version is that there was a farmer who had a goose who once a day laid a perfect golden egg. The farmer used the eggs to barter for things to improve his life. But that wasn’t enough. So he demanded that the goose lay more eggs. The goose tried to comply, laying as many golden eggs as it could. But even those numbers didn’t satisfy the greedy farmer. The farmer in fact believed the goose was holding out. So the farmer killed the goose, hoping to find golden eggs inside, but all he had left was a dead goose, end of story.

The U.S. is the goose. We have produced in spite of artificial limitations placed upon us by well-meaning but misguided ideologues who would rather see this nation fall into ruin than admit that we could use our own resources rather than extending our wealth to nations that otherwise would destroy us. But when the goose is no more, what happens? Where will those tribal chieftains sell their oil if the United States simply stops buying? Who will buy those expensive electronics from Asia, if nobody can afford the power to run them? Who will buy the glitzy sports shoes, the pricey toys, the bells, buzzers and gizmos, if America’s economy crumbles? We are constantly told how we are in a “global economy” yet when we go to such silly summits as the one held for eco-celebrities in the such South Pacific, it isn’t the other nations that must limit growth, but the United States. It isn’t the other citizens of the world who have to pay the freight, it’s Americans. And let me remind you, that for all the griping about American workers, we are still the most productive in the world-bar none. So when I hear that investors around the world are concerned about our economy, I rejoice, because maybe, just maybe they will get a clue that by cutting us off, they are slitting their own throats.

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