Is it Really that Surprising?

So, every morning at work, my coworker turns on some public radio station or another and listens to a program called "On Point." On this program, they discuss various things which don't really have any pattern at all. A couple days ago they spent an hour talking about bananas. Today, they spent some time talking about the recent investment in U.S. banks by foreign countries.

If you are equipped with two functional ears, you probably know that the U.S. is supposed to be headed for a recession caused by rampant loan defaults. Banks and financial institutions have been hit pretty hard, posting some pretty big losses in recent months. If you happen to pay any attention to financial news, you also know that some of these companies have received very large amounts of cash from places you might not have expected - the Middle East and (although I never saw this news story, they say it's true on public radio) China.

I just find it pretty funny that people are surprised by this. As far as I can see, this is an inevitable result of trends dating back to the end of the Great Depression. I'm no economist, to be sure, but this seems pretty obvious to me. Correct me if I'm wrong:

Since the Depression, the U.S. economy has been fueled by debt. Massive government spending was credited with getting us out of the Depression, both by war spending and (often pointless) civil infrastructure projects. This puts our government deeply in debt, debt from which we have not recovered from, and certainly don't seem close to recovering from. Government spending has continued and even accelerated, miring the government further and further in debt.

The economic theory that we currently use (at least as I was taught in high school - and I see no reason to doubt this as of now) is also based on debt. Low savings and high spending leads to higher GDP. Borrowing is one way of increasing spending; this is why when the Federal Reserve cuts interest rates, it's considered an economic stimulus - when rates are low, people borrow more money, and then they spend more money.

The average American also lives a life of debt. Home loans, credit cards, and student loans are something practically everyone in this country lives with. Our entire society is based upon this culture of debt.

Now I can't argue that this is all bad. Certainly it's done wonders for our economy - we're the largest economy in the world, yet we produce practically nothing. We do nothing for the world besides consume and invest. But all of this, our whole system, our whole way of life, is based on debt. There is nothing substantial to any of it. The fact of it is, if you owe more money than you have, you're essentially living a lie, spending what isn't yours. Most of us are like this: living on borrowed money, spending money we don't really have. Our entire system is based on nothing more substantial than a promise - a promise to pay money which, in all likelihood, doesn't exist, but is backed only by another promise, which is backed by another, and so on.

I admit that this is pretty awesome. We've basically built this whole system on nothing at all, and we're feeding all of our 300 million people by it. But it's pretty obvious that it's a house of cards. It may be the biggest and most powerful house of cards in the world, but it's still fragile.

Places like the Middle East and China, on the other hand, while they aren't as powerful as us, are built not on promises, but on real goods and real profits. Where we spend and consume, they save and produce. Saudi Arabia is rich off of exporting oil; China is rich off of exporting labor. They become wealthy by extracting real money from the fake systems of the U.S. It's genius in a whole other form, really. The ultimate result seems inevitable - eventually, the producers of the world will surpass the consumers. Then, when the consumers begin to falter, as is happening now in the US, the producers can infuse the consumers with a small amount of cash - a small amount which may keep the economy limping along for some time, all the while buying more from the producers, who continue to rake in massive profits. It's quite genius. With minimal investment they maintain a status quo which is making them very rich. Not being an economist, I can't say that this is what will actually happen...but I think it seems likely.

Even without formal economic training, however, I think I can tell that the culture of debt has a timer attached to it. It can't be possible to maintain an economy the size of ours purely on debt for too long. Now would be an appropriate time to champion drilling in ANWR, I think...



Oh, and what's really funny is that people are looking to the Fed to fix things by lowering interest rates. Because the best way to get out of a credit crisis is - you guessed it - borrow more money!