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The Trade Balance and the Limits of the Paulson Rescue Plan

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Dan Lieberman
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Federal government deficits, which have become unwieldy, financed a part of U.S. growth. Credit did the rest; fueling the seemingly perpetual motion economy of   continuous growth. Theory predicted, as for all perpetual motion machines, it would soon grind to a halt. Adhering to the principle that "a rolling loan gathers no loss," and utilizing artificially maintained low interest rates, creative financing, credit card expansion and finally sub-prime mortgages for the last batch of available spenders, system financiers increased the money supply and enabled purchasing power, especially for the home construction industry. Free money, rather than free enterprise, more accurately characterized the U.S. economic system, which has been hit by a four times whammy: (1) Credit markets have reached their limit, (2) foreign investment can no longer finance the trade deficit, (3) the federal debt seems too high to support adequate fiscal stimulus plans, and (4) a sizeable number of debtors cannot repay loans.

The U.S. advanced a global economic system that has created difficulties for itself, and been more beneficial to emerging nations. In the faster growing nations of China, India and Russia, mixed economies have advantages that are not easily overcome. By control of currency exchange rates, wages, prices, production facilities, health care expenditures and pension plans, the authoritarian statist nations respond more quickly to challenges and gain a competitive edge in the global economy. The United States has no choice but to become more social and align government and industry in common goals that will correct the dangerous trends. A pull-back in economic progress cannot be subdued, but a total disaster can be prevented. Although isolated recommendations are difficult because of the interdependence of factors that govern an economy, here are starters for thought:

Lower the trade deficit by limiting consumption of superfluous imported goods, diminishing energy needs, withdrawing from foreign adventures and decreasing foreign assistance.

Cut the budget for defense spending, earmarks, pork barrel, and non-expedient services, which will lower the deficit, strengthen the dollar and provide funds that more directly attack the financial problems.

Direct tax policies so those with definite needs will receive government benefits and those who have only superfluous needs will supply the funds, Redistribute wealth and soften the calamity on the lower and middle classes.

Plug tax loopholes that will also lower the national deficit and gain resulting benefits.

Revive domestic manufacture of essential industries – steel, metal products, commodities, and autos – which will increase payrolls and make the domestic economy less dependent on credit.

 

The United States has superior technology, highly productive agriculture, abundant natural resources, escalated productivity, developed transportation, efficient distribution, massive infrastructure, educated population and a blessed variable climate; reasons to be optimistic that an economic powerhouse can find an acceptable solution to a major economic crisis. One reason to be pessimistic is due to the free market purists and flag waving "patriots" who will fight the distressing situation with slogans and empty words. Their deceptive concepts might prevail to the ultimate bust.  

 

Another impediment to solution is the mindset of the American people. The U.S. consumer has become like The Great Gatsby believing in "the green light, the orgiastic future that year by year recedes before us."  The Paulson plan, although an important stop gap, is only a "boat against the current, borne back ceaselessly into the past." Negative trade balance leading to using credit to finance domestic production is the major problem. Is it difficult to convince a mindset to place the reverence of survival before the desire for imported IPods?

Dan Lieberman is the editor of Alternative Insight, a monthly web based newsletter. Dan has written many articles on national issues, which have circulated on websites and media throughout the world. He can be reached at alternativeinsight@earthlink.net                               

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Dan Lieberman is the editor of Alternative Insight, a monthly web based newsletter. His website articles have been read in more than 150 nations, while articles written for other websites have appeared in online journals throughout the world(B 92, (more...)
 
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