Either start saving or start learning Chinese and Hindi
Americans, individuals and the government, aren’t saving and are in deep debt.
Our national savings rate went negative in 2005 for a while and hasn’t gone over 3% during this century.[1] This is not good as most economists estimate national inflation to be about 2-3% on average per year and savings are the source of economic growth.[2]
As to debt, according to a USA Today article I read, every US household, when you take the national debt, Social Security and Medicare programs, and total consumer debt (credit cards, mortgages, car loans, student loans etc) owes about $628,391.[3]
For the most part, our spendthrift ways are financed by the Chinese government. They buy our Treasury Bills with the dollars we’ve used to buy their cheap goods and supply us with “new” dollars we need to buy more cheap Chinese goods. We then buy those goods and hold more Treasury auctions.
We’re addicted to spending. They’re stuck on 2 fronts:
1) They’ve already got a lot of dollar assets so if they decided tomorrow to stop buying US Treasuries they could cause a panic and severely harm their own financial position.
2) They need to keep buying our money to maintain an artificially low exchange rate for their currency against the dollar so they can continue exporting cheap goods to America. This keeps Chinese workers so busy they have no time to contemplate how immense wealth disparities could possibly exist in the “People’s” Republic of China.
Go here for a great article in The Atlantic Monthly by James Fallows on this issue:
http://www.theatlantic.com/doc/200801/fallows-chinese-dollars
Regardless, America’s financial house seems to be a mess.
But does it really matter?
For example, if you go to the link below you will see that in 1990 our national debt was $3.2 trillion but took up 42% of GDP while in 2007 it was $9 trillion but only took up 36.8%:
http://en.wikipedia.org/wiki/United_States_public_debt
Our nation debt has gone up but our GDP has gone up more.
Our economy is bigger.
So even with all this debt and a huge trade deficit (about $725 billion in 2005), which means we are consuming more than we are producing, isn’t the United States’ economy such a power house that we’ll keeping inventing, growing, producing, and paying the bills for generations to come?[4]
Maybe.
But now would be a good time to remember the counsel of Professor Paul Kennedy who in 1987 wrote a book entitled The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000.[5]
Kennedy’s thesis is simple: in the long-run military power is mainly rooted in a nation’s economic well being and expansion.
When nations grow economically they eventually flex their military muscles on the world stage.
Just as invariably, when they reach a stage of great power relative to other nations, they tend to forget the economic roots of their military power, over-stretch their military assets, weaken their economic and technological power bases, and eventually fall from the top perch.
In the book (which I haven’t read in full) Kennedy provides a wealth of examples such as the rise and fall of the Ming dynasty and the Hapsburg Empire, 19th century Germany, Great Britain in the late 19th and early 20th century, and ends with an examination of the bi-polar world of the United States and the Soviet Union. .
He argues “the historical record suggests that there is a very clear connection in the long run between an individual Great Power’s economic rise and fall and its growth and decline as an important military power (or world empire).”
Why?
Because “economic resources are necessary to support a large-scale military establishment” and that “in so far as the international system is concerned, both wealth and power are always relative and should be seen as such.”[6]
On the back cover of the book is a quote I find ominous (remember this book was published in 1987) given what’s been going on since 2001.
It reads:
“Although the United States is at present still in a class of its own economically and perhaps even militarily, it cannot avoid confronting the two great tests which challenge the longevity of every major power that occupies the ‘number one’ position in world affairs: whether, in the military/strategic realm, it can preserve a reasonable balance between the nation’s perceived defense requirements and the means it possess to maintain those commitments; and whether, as an intimately related point, it can preserve the technological and economic bases of its power from the relative erosion in the face of the ever-shifting patterns of global production. The test of American abilities will be greater because it, like imperial Spain around 1600 or the British Empire around 1900, is the inheritor of a vast array of strategical commitments which had been made decades earlier, when the nation’s political, economic, and military capacity to influence world affairs seemed so much more assured. In consequence, the United States, now runs the risk, so familiar to historians of the rise and fall of previous Great Powers, of what might roughly be called ‘imperial overstretch’: that is to say, decision makers in Washington must face the awkward and enduring fact that the sum total of the United State’s global interests and obligations is nowadays far larger than the country’s power to defend them all simultaneously.”[7]
As a side, it is worth noting that part of Osama Bin Laden’s strategy to defeat America is to try and bankrupt us.[8]
America’s military commitments were large in 1987 and continue to be so (Afghanistan, Iraq, the global fight against Al-Qaeda, & Iran; not to mention troops still in Europe, Japan, and Korea).
While our economy remains strong and continues to grow, our financial position as a nation is headed in wrong direction.
What that means is that we are still producing lots of valuable goods and services but we are consuming them all and then borrowing to consume more.
Our equity position grows worse even though we are “making money” every year.
This trend, I would argue, threatens not only our economic well being but also our national security: if it keeps up we’ll eventually be bankrupt.
Now, there is no reason to panic: our political system, with all its faults, is still better than China and India’s. We also have earned significant advantages in military and scientific power. The Chinese and Indians won’t be invading anytime soon.
But Kennedy’s argument is that it is exactly at times like these, when power seems secure, that Great Powers of the past have gotten complacent, lost their financial way, and eventually lost their status as a Great Power.
If we wish to avoid this fate, I think we as a nation should pause to reflect on what made us a Great Power and if we’re doing the things required to maintain that status economically, militarily, scientifically, and technologically against the rising economic powers of China and India.
What can you do tomorrow to help?
In the long run, make sure you always spend less than you make no matter how little or much that is (if you make $3 billion a year and spend $5 billion you’re worse off than someone who makes $50,000 but only spends $20,000).
Save and invest the rest.
The future of the country, not just your credit score, depends on it.
[1] http://www.bea.gov/briefrm/saving.htm
[2] http://www.inflationdata.com/inflation/inflation_rate/CurrentInflation.asp
[3] http://www.usatoday.com/printedition/news/20070529/1a_lede29.art.htm
[4] Here’s an interesting article and website with a lot a graphs and stats. http://www.financialsense.com/editorials/hodges/2007/0315.html
[5] Paul Kennedy. The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000. (New York: Random House, 1987).
[6] Ibid, xxii
[7] Ibid, back cover.
[8] http://www.usatoday.com/news/world/2004-11-02-bin-laden-economy_x.htm
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Firstly, the exchange rate peg is more a problem for China, than India. Secondly, welath disparity in China is lower than in most countries (much lower than in the US). Thirdly, exchange rate pegs can and always are, eased over time. The Chinese have always maintained that they reserve the right to keep the peg as they feel best. They’re growing for growth right now, and the idea is to ease it slowly later.
Lastly, and most importantly, noone’s invading. These countries are far, far behind yours in terms of money. They always will be, since their populations are too large. You will always have a more comfortable life. What is happening is simply that the incredibly enormous differences that arose in this century between modern and pre-modern economies is evening out. At the end of it, all countries, including china and india, will be at least as productive per capita as Mexico (which is in the G8). The world will be a better place.