An honest politician would tell the country the truth. The era of cheap oil, easy credit and spending more than you earn is over. America cannot exist with 70% of its economy based on consumers spending at the mall. We will actually have to rebuild our manufacturing base and that means we will have to rebuild our infrastructure. We can no longer be 16th in the world in Broadband Diffusion, 26th in the world in 12th grade science scores and pay our teachers like they were flipping hamburgers. This transition is going to be painful as people pay off their credit cards, reduce their silly spending for things they don't need and become more resistant to the 5000 commercial messages a day they are bombarded with. I am reminded of John Kenneth Galbraith's book, The Affluent Society. Galbraith's assertion that the perfection of modern advertising in creating desire for products we didn't know we needed puts the modern American member of the middle class in the position of the gerbil on the tread wheel: running faster and faster, but making no progress in relation to his neighbors.
Be sure to click through for the charts and graphs with all the data on which his conclusions are based.
It may not yet be obvious to most Americans, but beginning way back in the 1980s we began a long, slow, transition from economic powerhouse to debtor nation. Take it away, Mr. Krugman:
Mexico. Brazil. Argentina. Mexico, again. Thailand. Indonesia. Argentina, again.
The story has played itself out time and time again over the past 30 years. Global investors, disappointed with the returns they're getting, search for alternatives. They think they've found what they're looking for in some country or other, and money rushes in.But eventually it becomes clear that the investment opportunity wasn't all it seemed to be, and the money rushes out again, with nasty consequences for the former financial favorite. That's the story of multiple financial crises in Latin America and Asia. And it's also the story of the U.S. combined housing and credit bubble. These days, we're playing the role usually assigned to third-world economies.
For reasons I'll explain later, it's unlikely that America will experience a recession as severe as that in, say, Argentina. But the origins of our problem are pretty much the same. And understanding those origins also helps us understand where U.S. economic policy went wrong.
The global origins of our current mess were actually laid out by none other than Ben Bernanke, in an influential speech he gave early in 2005, before he was named chairman of the Federal Reserve. Mr. Bernanke asked a good question: "Why is the United States, with the world's largest economy, borrowing heavily on international capital markets -- rather than lending, as would seem more natural?"
His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.
The result, said Mr. Bernanke, was a "global saving glut": lots of money, all dressed up with nowhere to go.
In the end, most of that money went to the United States. Why? Because, said Mr. Bernanke, of the "depth and sophistication of the country's financial markets."
All of this was right, except for one thing: U.S. financial markets, it turns out, were characterized less by sophistication than by sophistry, which my dictionary defines as "a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone." E.g., "Repackaging dubious loans into collateralized debt obligations creates a lot of perfectly safe, AAA assets that will never go bad."
In other words, the United States was not, in fact, uniquely well-suited to make use of the world's surplus funds. It was, instead, a place where large sums could be and were invested very badly. Directly or indirectly, capital flowing into America from global investors ended up financing a housing-and-credit bubble that has now burst, with painful consequences.
As I said, these consequences probably won't be as bad as the devastating recessions that racked third-world victims of the same syndrome. The saving grace of America's situation is that our foreign debts are in our own currency. This means that we won't have the kind of financial death spiral Argentina experienced, in which a falling peso caused the country's debts, which were in dollars, to balloon in value relative to domestic assets.
But even without those currency effects, the next year or two could be quite unpleasant.
Most American's assume that because we are the biggest we must be the best. Not so. Rome, the Mongols, and the British all once ruled most of the known world. Today? Not so much.
Nothing is guaranteed to us. Nothing.
Here are a small sampling of today's economic news...
One:
Jan. 18 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the two biggest bond insurers, have a more than 70 percent chance of going bankrupt, credit-default swaps show.
Prices for contracts that pay investors if Armonk, New York- based MBIA can't meet its debt obligations imply a 71 percent chance the company will default in the next five years, according to a JPMorgan Chase & Co. valuation model. Contracts on New York- based Ambac imply 72 percent odds.Ambac shares plunged 52 percent yesterday before rebounding 8.5 percent today to $6.77 on news the company scrapped plans to raise equity. MBIA dropped 31 percent yesterday and fell 19 percent today to $7.48. Credit-default swaps on the companies, which rise as confidence erodes, are trading at record highs.
``In this market, a downgrade could mean the beginning of that company's eventual collapse,'' said Matt Fabian, an analyst with Municipal Market Advisors in Westport, Connecticut. While Fabian said he still expects the companies to keep their rankings, he said he has grown ``much more anxious.''
The bond insurers place their AAA stamp on $2.4 trillion of debt sold by thousands of municipalities across the country, as well as on subprime-mortgage securities. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg.
Two:
Jan. 18 (Bloomberg) -- Ambac Financial Group Inc. scrapped a plan to raise equity capital after the bond insurer's shares plunged 70 percent in the past two days, putting its AAA credit rating in jeopardy.
Without new money, New York-based Ambac risks losing the top ranking it depends on to sell bond insurance. Ambac, the second- largest financial guarantor, may have to stop writing insurance or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York.``This is a stunning development,'' Haines said. Ambac will probably be downgraded by Moody's Investors Service and Fitch Ratings, Haines said.
Ambac blamed ``market conditions'' and scrutiny by ratings companies for its decision. The company said two days ago it would sell $1 billion of shares or convertible notes, a plan that provoked a boardroom dispute and led to the departure of Chief Executive Officer Robert Genader. A downgrade of Ambac would throw doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by the company.
The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg.
Jan. 18 (Bloomberg) -- Sprint Nextel Corp., the third- biggest wireless carrier in the U.S., fell the most in more than 25 years in New York trading after losing more subscribers than analysts estimated and announcing plans to fire 4,000 workers.
Sprint fell as much as 30 percent, the most since at least July 1980. The company said today that about 683,000 contract customers left last quarter, more than the 350,000 estimate of Stanford Group Co.'s Michael Nelson.The subscriber slump brings defections to 1.2 million in 2007, forcing Chief Executive Officer Daniel Hesse to get rid of about one-fifth of Sprint's retail locations. Hesse replaced Gary Forsee in December, taking charge of a company that has struggled to absorb the $36 billion purchase of Nextel in 2005 and offer phones to compete with Apple Inc.'s iPhone, sold by AT&T Inc.
Four:
Jan. 18 (Bloomberg) -- U.K. retail sales unexpectedly dropped by the most in 11 months in December as higher borrowing costs and falling house prices curbed consumer spending.Sales declined 0.4 percent from November, when they rose by the same amount, the Office for National Statistics said today in London. Economists forecast a 0.2 percent increase, the median of 31 estimates in a Bloomberg News survey showed. On the year, sales climbed 2.7 percent, the least since September 2006.
The pound dropped as the report triggered speculation of further Bank of England interest-rate cuts after one in December failed to encourage Christmas spending. Retailers Tesco Plc and Marks & Spencer Plc this month called for more reductions in the benchmark to help consumers, who have a record 1.4 trillion pounds ($2.8 trillion) of debt.
``The consumer is feeling the headwinds from the financial and housing sectors,'' Richard McGuire, an economist at Royal Bank of Canada in London, said in a Bloomberg Television interview. ``This will provide added support in favor of a widely expected rate cut in February.''
Sales at non-specialized stores, the category which includes department stores, fell 4.3 percent on the month, the biggest drop since January 2007, the statistics office said. Overall non-food sales dropped 0.9 percent, outweighing a 0.1 percent increase for food retailers.
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