American Economy Moving Towards Failure Mode

For awhile Americans thought that the saying "they sweat, we think" was cool. However, now thinking Americans are beginning to wonder if a service based economy will be able to compete in today's fast moving world. Nations that have concentrated on high tech manufacturing and that actually make things that people all over the world want are moving ahead economically while the US falls behind.

The US economy is failing by any objective measure, but just as long as the D or the R word is never mentioned, the powers that be in Washington, D.C. can deny, deny, deny and spin, spin, spin the obvious.

Idiotcracy is right around the corner. The US economy is employing people to sell things, to move people around, and to serve them fast food and alcoholic beverages. The items being sold may have an American brand name, but many of them are made off shore. Even services are being handled off shore, many in call centers located in India.

Over the last 30 years America's manufacturing base, the powerhouse economic driver that made America rich, has been hollowed out, to be partially replaced by service industries. For awhile Americans thought that the saying "they sweat, we think" was cool. However, now thinking Americans are beginning to wonder if a service based economy will be able to compete in today's fast moving world. Nations that have concentrated on high tech manufacturing and that actually make things that people all over the world want are moving ahead economically while the US falls behind.

Americans at times have looked to government to break up or regulate companies that appeared to be developing so much power that they could defy market forces. They have relied on government to address matters the private economy overlooks, from education to protecting the environment. Americans are comfortable with the extraordinary unity the country has demonstrated in the wake of the 9/11 attacks, but they also show considerable tolerance for dissenting views.

The public has little discomfort with the widespread expressions of patriotism and religious expression - just 8% say there has been too much showing of the flag, 10% believe there has been too much playing of patriotic songs, and 12% say the expressions of religious faith and prayer by politicians have been excessive. Americans have always believed that some services are better performed by public rather than private enterprise. For instance, in the United States, government is primarily responsible for the administration of justice, education (although there are many private schools and training centers), the road system, social statistical reporting, and national defense.

American consumers are heavily indebted. The growth of consumer debt is what has been fueling the economy. American median family incomes have experienced no real increase during the 21st century. Moreover, if the huge bonuses paid to CEOs for off shoring their corporation's production and to Wall Street for marketing subprime derivatives are removed from the income figures, Americans have experienced a decline in real income. America's economy is the world's largest (for now ) and is a key driver of the global economy, though its impact is often exaggerated . After a long expansion , America's economy looks weak (though unevenly so). In a sign that America has made some poor economic decisions in recent years China is expected to replace America as the world's largest economy within ten years.

In America private businesses make and sell most goods and services. The market works by bringing together buyers and sellers who establish market prices and output levels for thousands of different goods and services. Private nonfarm payrolls were little changed in January, and the unemployment rate moved up to 4.9 percent, on average, during December and January, after remaining around 4-1/2 percent from late 2006 through most of 2007. The NFP report released last Friday for May, 2008 was a real shocker with the unemployment rate moving up to 5.5%. The stock market fell almost 400 points, about 3%, on the NFP report and the spike in oil prices. More bad news on the employment and economic fronts is probably on its way.

Housing permits and sales are dropping, and inventories of unsold homes are at very high levels. Moreover, rising foreclosures will likely add to the supply of houses on the market. House prices are still falling at a 20 percent annual rate (over the last quarter). This means that the worst is yet to come, including another wave of mortgage defaults and write-downs.

The recent spike in crude oil prices to nearly $140 a barrel are now inflating transport and utility bills, while the sharp rise in agricultural commodities is working through the food-industry supply chain. Sadly, the tight balance between global supply and demand for oil shows little sign of easing this year.

Consumer purchases of housing and consumer durables such as autos and appliances are also affected by instability in energy markets. The economy would most likely perform better with stable or predictable energy prices, than when the price of energy fluctuates greatly. Consumers are pulling back as high energy and food prices leave them with less money to spend on other things. Falling home values are making many homeowners feel less wealthy and less inclined to spend.

On balance the economic outlook for the US economy over the next year or two, perhaps longer, looks grim. Unless better leadership at all levels of government and private industry is somehow provided Americans are going to have to adjust to a lower overall standard of living. Countries like China, India, and Brazil are on fast growth tracks are millions of their citizens are entering middle class status. Unfortunately in America families who have always thought of themselves as middle class are finding it more difficult to maintain a middle class lifestyle.

Leadership does make a difference in the affairs of a nation and the US has been poorly served by its leaders, especially over the past eight years. The typical hard working American should be angry about all of this but it appears that the government has been successful in selling the concept of American exceptionalism and that Americans do not realize how far they are falling behind in important areas like technology, manufacturing , affordable healthcare for the masses, and infrastructure.

In recent years the government has poured so much money into the military that the Pentagon is now one of the main driving forces in American manufacturing production. Unfortunately, while that activity certainly produces jobs overall high rates of production of military goods are a severe misallocation of resources and leads to more wars, not a better more prosperous society.

About the author: Gerald "Taipan" Greene is a retired forex trader and portfolio manager who worked in Asia for over 20 years. The nickname was acquired in Hong Kong and is now used for a number of financial, political, and Internet business related blogs. One of them is at News Analysis