Mostly rational politics, with occasional rants about how a few crazy Republicans are ruining the country.
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Thursday, March 17, 2005
Our economy is not sustainable
I'm not an inherently pessimistic person, so I hate to hit a continuously pessimistic note, but I worry fairly regularly that the U.S. economy is headed for a correction or crash in the short to medium term. I continue to fight my personal feeling - including leaving more money in the market right now than I think I should - but everything I read continues to fuel my pessimism.
First, there's the oil situation. Demand is increasing rapidly. Places like India and China are currently at the bend in the hockey stick - over the next few to 10 years their demand will spike. And global supply, as in the amount of oil in the world that we know how to access, is basically at full capacity, as in we can't have any more until we find it in new places and figure out how to process it in less than 10 years. There's a movement called Peak Oil that i DO NOT at all subscribe to (among other things, I believe that society if faced with a supply crisis will adapt to quickly ramp-up conservation and renewable sources), but that at least demonstrates the extreme version of the supply/demand imbalance view.
Second, there's the current account deficit situation, as described extremely well in this NYTimes Magazine article by a Harvard professor (thanks to Jess C. for sending to me). I've discussed it before - the basic summary is that because we buy so much more abroad than foreigners buy here, we require huge investments from Asian investors to make sure the flow of money isn't entirely in one direction - out of the U.S. But Asian banks possibly can't continue to be so entirely exposed to the U.S. economy (especially when the Euro has succeeded in its strategy as establishing itself as an alternative world currency), so there's plenty of reason to think they'll stop fully financing our trade deficit. The dollar would fall off the table, interest rates would jump, and the stock market could lose 20-30%. Thankfully the author seems to conclude that the U.S. situation is unique and unlikely to see any of these doomsday predictions. Despite my concern, I believe it's most likely that he is right and we escape this mess. If so, let's be careful not to go here again - meaning no tax cuts during the next war.