May 30, 2024

Credit Crash Coming?

At the Washington Post, Kevin Phillps compares financial and business trends in the U.S. to those of other, failed global empires and finds our situation unenviable:

The U.S. economy faces unprecedented debt levels, soaring commodity prices and sliding home prices, to say nothing of a weak dollar. Despite the recent stabilization of the economy, some economists fear that the world will soon face the greatest financial crisis since the 1930s.

Phillips, author of "Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism", says that the U.S. seems to be following in the footsteps of Spain, Holland, and Great Britain by allowing its economic focus to shift from creating wealth to managing it, something that’s insufficient to sustain growth in an economy.

The most chilling parallel with the failures of the old powers is the United States’ unhealthy reliance on the financial sector as the engine of its growth. In the 18th century, the Dutch thought they could replace their declining industry and physical commerce with grand money-lending schemes to foreign nations and princes. But a series of crashes and bankruptcies in the 1760s and 1770s crippled Holland’s economy. In the early 1900s, one apprehensive minister argued that Britain could not thrive as a "hoarder of invested securities" because "banking is not the creator of our prosperity but the creation of it." By the late 1940s, the debt loads of two world wars proved the point, and British global economic leadership became history.

Intuitively this makes sense.  Banking and investing are essentially non-productive intellectual exercises, exactly the sort of activity for which lower-cost alternatives can be substituted.  Consider wealthy Saudis, as one example.  What is their incentive to bank with U.S. firms vs. those from other nations?  What is stopping them from withdrawing from U.S. investment companies entirely?

Phillips wonders, "who seriously expects the next great economic power — China, India, Brazil — to have a GDP dominated by finance?"

Economic strength comes from the production of goods and services that are desired by others.  Financial services are important and can, in the short run, provide a lucrative source of income to our nation.  However, a significant portion of this income is derived, in the final analysis, from the productivity of other countries.  While these countries may be unable to perform top-notch financial services for themselves today, that is a situation that cannot last.

For America to be truly prosperous, in sustainable fashion, we must re-dedicate ourselves to incubating the work ethic and inventiveness that made American industry the strongest economic force in the world.  There is absolutely no substitute for the ability to create a useful product from raw natural resources. 

Currently the obvious examples of this phenomenon are oil-producing nations.  Although it’s tempting to call their success happenstance, an accident of geology, there really is nothing unique about their success.  These countries have a product for which demand is high, for which no substitute exists presently, and they produce it at lower cost than consuming nations can.  That’s a recipe for success in any business. 

What sectors of the American economy are bright spots in which we dominate the rest of the world?  How have we achieved success in these areas?  And how can they be leveraged into the next great step forward?  Answering these questions may mean the difference between a resurgent American economy and a demise like that of past global powers.


Marc is a software developer, writer, and part-time political know-it-all who currently resides in Texas in the good ol' U.S.A.

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