Scary Economic Times

Sure, our economy is bad right now, but so is everyone else's. Is there something that could really makes things bad? Yes. The Wall Street Journal is reporting that the price of US Treasury Bonds has started to fall.

What are the implications of this? Currently, United States citizens import about $800 billion worth of goods more than we export. In order to pay for this, countries around the world (especially China) buy IOU's from our Treasury Department: we get real money, they get a slip of paper that says "We owe you money and will pay you interest for it." This relationship works only if these foreign countries believe that the US dollar is, and will be, worth something in the future.

The failure of that relationship constitutes my greatest fear for true economic meltdown. Eventually, it seems as though the Chinese and other producing nations will grow tired of giving us money to buy their products. It only makes sense: As we live like kings, their proletariat continue to struggle to live decent lives.

There are two solutions (though I'm sure there are more, they are probably rooted in one of these simplified categories): 1) We start consuming less. If we consumed $800 billion less in foreign goods a year, then our trade deficit would be zero. This would make the United States and our currency look viable. 2) We start producing more. If we produced more goods and services--to the tune of $800 billionish annually--our trade deficit would balance out.

Of course, there are repercussions to either of these solutions which may have even greater detrimental and lasting effect. Keep your fingers crossed.

The Trade Deficit Bubble

Here is a well-written blog on a topic I have been mulling over for a couple years. The nickel version: First there was the dotcom bubble, then the housing bubble. What's next? How about the trade deficit bubble? The United States borrows billions of dollars every year to pay for things for which we don't have money. What happens when that bubble bursts and countries around the world no longer want to buy our currency? It's a big question with lots of scary answers. Click the link, it's worth a read.