Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Looming American Economic Disaster?

Written by johnleemk on 10:18:30 am Aug 16, 2007.
Categories: ,

One obsession a lot of people seem to have is with predicting the coming American economic collapse. To these people, it is a tenet of faith that the United States economy will collapse, and bring down everyone else with it if we are not prepared.

I have always taken such claims with a boulder of salt, even if I do not have the academic prowess to evaluate their veracity. The outlandish nature of these claims is not exactly compelling; extraordinary claims require extraordinary proof.

One such claim I remember looking at late last year alleged that the US economy would be wiped out within the week. Of course, the claim, as we all know, turned out to be completely false.

But what evidence was presented to corroborate this allegation? One line chart (which the author incorrectly referred to as a bar chart) which presented the proportion of US dollars held by developing and developed countries over time.

Of course, a lot of simple criticisms could be made of this — how do you define a developing and developed country? What is this supposed to imply?

The author suggested that this showed the sophisticated developed nations were divesting their US dollar holdings, while the developing world was being saddled with a soon-to-be worthless currency.

Really, you don't have to be a genius to see the hole in this logic. First of all, this assumes that the the developed nations have inside information that the developing countries don't, and that thus they will be 100% correct in whatever their analysis is.

The second and probably most faulty assumption is that the developed nations intentionally divested their dollar holdings. The chart did not show absolute values; it only indicated the relative proportions.

If there are more developing than developed countries (not an unreasonable assumption), then logically developing countries should have more of everything than developed countries — be it natural resources, toilet paper, or currency holdings. In short, what the chart told us was nothing of use.

Also, as any economist can tell you, when you trade with another country, you collect their currency — that the dollar holdings of the developing world have been increasing only indicates that they are trading more with the US, which is a good thing (at least until American consumption falls). Even so, provided that the US is not their only trading partner, there is no reason to anticipate impending doom if the American economy falters.

Of course, not all claims of economic doom centre around ridiculous paintings of fact like the one I just discussed, but they all centre around flimsy evidence, or at least evidence which is not extraordinary enough to prove an extraordinary claim.

Most of the time, what happens is that the same facts everyone is privy to are given a different interpretation — a common approach of conspiracy theorists. For instance, the conventional interpretation of the fact that there are clouds in the sky is that water vapour forms clouds. An unorthodox interpretation based on the same facts may allege that the clouds are extraterrestrial spaceships which only appear as clouds to our inferior technology.

One example I've seen is that of an American state government, which decided to pay off part of its debts early. The conventional interpretation would be that this is simply prudent fiscal policy — but the economic chicken little will proclaim it is proof that this state government knows the sky will be falling soon.

One thing I always wonder is what happens when, say, the American federal government decides it can afford an even larger budget deficit so it can spend more. Is this simply pork barrel politics, or is the government somehow confident that American economic prosperity will continue forever more? We all know the answer to this question, and yet we seem to reject the same logic we have applied here when it comes to the opposite circumstance of budget balancing or running a surplus.

There may be reason to believe that the American economy will collapse. (There's definitely good reason to anticipate a recession in the near to medium term, at any rate, considering the recent subprime loan scandals, which have been affecting global share markets.) But if there is such a reason to fear the worst, it has probably been lost in the clouds of rhetoric and illogical alarmism spread by the economic chicken littles of the world.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

Infernal Ramblings is run by John Lee. For more, see the About section. If you have any questions or comments, do drop him a line.

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