Thursday 1 May 2008

Silver Lining

Benefit from the financial crisis to the US political-economy

The present financial crisis, despite its portentous appearance, does have some hidden benefits to the US economy, or at least to the political managers of the US economy.

How is that?

Well, the two most important economic issues facing the US economy for the next generation or so are its enormous external debt, and its aging population.

The external debt of the US is estimated to be around $13 trillion, according to official statistics - http://www.ustreas.gov/tic/external-debt.shtml, and is growing at the rate of $665 billion annually.

And the first of the baby-boomers started retiring in 2008.

Now, although it is commonly understood these two factors will cause strain in the US economy, what usually does not figure high in public perception is the specific nature of the impact.


Take the aging population.

We know this will reduce the percentage of workers in the US. We can infer that this will increase the burden on the younger workers – because each of them will be supporting more people.

This means higher tax burden. This further means that workers will have to have a much higher productivity in order to pay the higher tax burden. However, there is a way to instantly raise productivity levels in the international market – devalue the currency.

The current crisis allows US to do just that.


Now, take the high external debt.

A higher inflation rate will reduce the claims on US property that these debts represent. In other words, a weaker currency reduces the amount of companies that say – the Chinese sovereign fund will be able to buy.


KEYNOTE SUMMARY:
A devalued dollar:
1. Increases the international competitiveness of the US industry – reducing the pressure on the pension system.
2. Reduces the claims of the debt the US owes to the rest of the world.

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