The Decline and Fall of the American Economy

Offshoring Our Security

The United States has three large economic problems.  The overarching one is that the U.S. dollar’s role as world reserve currency is wearing out from continuous and large trade deficits and from government budget deficits that have to be financed by foreigners because the U.S. savings rate is approximately zero.  Judging by the dollar’s loss of value in relation to gold and to currencies such as the euro, Swiss franc, and Japanese yen, the U.S. dollar is losing its attractiveness as a currency in which to hold assets.

A second problem is the solvency of our financial institutions because of the crisis of subprime-mortgage derivatives and other ill-conceived leveraged derivatives.  The extent of this crisis is not known.  Financial-industry balance sheets and capital structures are impaired.  If the troubled derivatives are in trillions of dollars, as news reports claim, the Federal Reserve bailout of one investment bank, Bear Sterns, is unlikely to have stopped the bleeding.

A third is that the U.S. economy has entered into recession.  Normally, the Federal Reserve responds to recession by expanding credit through the banking system, relying on the growing supply of money to fuel consumer and investment demand.  However, with the banking system impaired and with American consumers overloaded with credit-card and mortgage debt, that course of action alone might not be effective. ...

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