Sunday, October 18, 2009
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THE PERSISTENT ECONOMIC CRISIS: FACTS AND SOLUTIONS
THE PERSISTENT ECONOMIC CRISIS: FACTS AND SOLUTIONS
As I estimated and was publicized in a newspaper in February, one year after the start of the mortgage market meltdown, we are approaching a lost of 6.9 Mill employments and an estimate of 8% decrease in the physical merchandise flows. This recession remind us that housing demand can increase only if additional salaries go up together with credit availability. This is a profound crisis, which comes out of significant changes of the structure of the economic network, and has been brewing during the last 15-20 years.
We have to look at the big picture in order to define and quantify the magnitude of the economic crisis and threatens we face.
Systems Approach.
To guarantee that nothing important is left without evaluation we must use a systems approach to the analysis of the status and trends of the economic system.
Only non free-market relationships can induce noise in our economic system. The negative impact in the economic system is created by the intervention of domestic or international governments or institutions that are not totally submitted to the economic laws, due to the absence of personal property exchange in the transactions. The effect of international transactions makes its way into the domestic market network through merchandise and money flows.
Property exchange with foreign countries
The money demand of the USA takes 78% of the international money trade (1). The money received implies that we give away property in exchange. The amount of money of our external debt in 2007 represents that foreign nationals could have property of 36% of all our private Assets (2). If the trend 2005-07 doesn’t change, then in less than 7 years we will put in peril more than 50% of our private property. The reduction of economic activity since 2008 have changed the trend of debt to a decreasing rate, but this is not a permanent fix to stop the trend.
In 2005 the investments of foreigners in the US exceeds almost 2 trillions dollars our investment in other countries (excluding financial derivatives).
The money deficit with China in 2005 represents 27% of the total foreign money received, and was growing up to 36% in 2007 (3).
Merchandise Markets.
As I estimated and was publicized in a newspaper in February, one year after the start of the mortgage market meltdown, we are approaching a lost of 6.9 Mill employments and an estimate of 8% decrease in the physical merchandise flows. This recession remind us that housing demand can increase only if additional salaries go up together with credit availability. This is a profound crisis, which comes out of significant changes of the structure of the economic network, and has been brewing during the last 15-20 years.
We have to look at the big picture in order to define and quantify the magnitude of the economic crisis and threatens we face.
Systems Approach.
To guarantee that nothing important is left without evaluation we must use a systems approach to the analysis of the status and trends of the economic system.
Only non free-market relationships can induce noise in our economic system. The negative impact in the economic system is created by the intervention of domestic or international governments or institutions that are not totally submitted to the economic laws, due to the absence of personal property exchange in the transactions. The effect of international transactions makes its way into the domestic market network through merchandise and money flows.
Property exchange with foreign countries
The money demand of the USA takes 78% of the international money trade (1). The money received implies that we give away property in exchange. The amount of money of our external debt in 2007 represents that foreign nationals could have property of 36% of all our private Assets (2). If the trend 2005-07 doesn’t change, then in less than 7 years we will put in peril more than 50% of our private property. The reduction of economic activity since 2008 have changed the trend of debt to a decreasing rate, but this is not a permanent fix to stop the trend.
In 2005 the investments of foreigners in the US exceeds almost 2 trillions dollars our investment in other countries (excluding financial derivatives).
The money deficit with China in 2005 represents 27% of the total foreign money received, and was growing up to 36% in 2007 (3).
Merchandise Markets.
If you think that imports from China are just clothing and toys, think again. Chinese imports also share an important part of the value of the total US merchandise available in 2007 (4) in the following items:
CLOCKS AND OTHER HOUSEHOLD EQUIP. 35%
VIDEO EQUIPMENT 26%
COMPUTERS 27%
China imports are second in importance after Canada and represent almost the same value amount than the annual oil imports in 2005 and 2007.
About the solution:
The exposed economic facts make the case for an urgent attention to the situation we face.
At the core of the crisis there are two main components: unfair business practices deeply rooted in some social patterns, and the limitation of the market freedom in our market connections in some countries.
Even if we could start another technological revolution we have to find a cure to fix our international trade to really break the vicious circle of the crisis. Actually, that is the only permanent way out. We have to prohibit our citizens to engage in unfair business practices also in our international trade markets. All connections to our national network of markets must have safeguards for protection against unfair competition.
We have to stay out of protectionism to avoid creation of unfair competition with other countries. This is the most important difference between protectionism and free market safeguards against unfair competetition.
We have to escalate a process in connection with international markets for the elimination of anti-competitive practices, dumping and government subsidies (except those justified for our national security). Some of he most important anti-competitive barriers are in the work force immobility and the monopolistic practices in the oil markets.
The dollar value is created by the economic activity of almost 140 million participants in our economic system. It is unfair that some minority group compromise the whole system diminishing that value with their activity.
Only products that cannot find a competing domestic counterpart (e.g. raw materials unavailable in US) are out of anti-competitive practice due to workforce immobility.
The danger posed by the significant inertial energies of some incoming merchandise flows from one foreign country: it could be manipulated from outside our country. Oil market is an oligopolistic market controlled by cartels. This is the best example of this kind of market, where offer and demand cannot fully organize the trade.
The lower environmental risk is in the desert fields. However, we cannot trade freedom for that risk reduction. The only solution is the reduction of the hot spots for risk and the increase of electrical transmission of energy.
Possible Market Solutions
1. Reconnection to free international money markets
a. Payments of US citizens to a country without free currency exchange must connect to a sales point (imports bank) where they buy the money for each payment. That bank must buy its money in the international market, and may charge a fee.
b. More than one bank should ensure competence, and each import shipment must be paid and have insurance against default.
c. The implementation of such money market in connection with China markets could have change the money flows of the US market network of 2005 in the following proportions (5):
· 44% reduction of imports from China.
· 2.1% of increase of average domestic prices.
· Increase of 7% of employment and 4.4% in personal income.
· Increase 36.8% in import prices and 3% in export price
· 2.9% increase in currency prices.
· 35% reduction in the annual amount of money borrowed from foreign countries.
· Reduction of 9.7% in tax rates.
The expansion of our export markets could help, but that alone cannot stop the other trends of the economy.
The Government must monitor the changes in the money supply and take into consideration that most part of the Chinese imports reduction corresponds to consumer spending. The available tax reduction could compensate the expected increase of prices in these goods. In the course of 2-3 years the proposed changes could make a significant reduction of our imports.
2- Increase of freedom in domestic markets
Changes in market flows must unfold gradually, and at the same time, in order to create room for a national manufacturing revival:
a) Soft money lending in the housing market must stop.
b) If necessary, government credit must back up the additional money demand.
c) Government revenue and expenditure reduction.
DATA SOURCES:
(1)Calculated with data of the Organization for Economic Co-Operation and Development (http://stats.oecd.org/Index.aspx?DatasetCode=HS1988#)
(2) US Department of the Treasury (Debt) (HTTP://WWW.USTREAS.GOV/TIC/EXTERNAL-DEBT.SHTML). U.S. Bureau of Economic Analysis (Assets) http://www.bea.gov/bea/dn/FA2004/SelectTable.asp#S3
(3) Trade Stats Express (China): http://tse.export.gov/MapFrameset.aspx?MapPage=NTDMapDisplay.aspx&UniqueURL=snxacc450texi0fmxhgawz45-2009-9-4-23-56-19 US Balance of Payment: http://stats.oecd.org/Index.aspx?DatasetCode=HS1988#
(4) Imports: US Census Bureau (http://www.census.gov/foreign-trade/statistics/product/enduse/imports/c5700.html Manufacturing: http://factfinder.census.gov/servlet/IBQTable?_bm=y&-filter=&-sortkey2=&-sortkey1=&-defOrder=Y&-ds_name=AM0531VS101&-sortkey0=PSCODE&-ib_type=MFG&-_skip=6700&-dataitem=GEO_ID$PSCODEPSCODE$YEARPRODVALPRODVAL_S&-_lang=en
(5) Calculated by the Author (see Table in http://virtualeconosystem.blogspot.com/)
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