IrresponsibleUseOfFr's Journal: The Rough Road Ahead

I honestly believe that the American economy is in for some rough times. At the local level, I see a great squeezing of the middle class. We have moved away from a manufacturing economy to a service economy. The reason for this shift is to exploit cheaper labor and more lax environmental standards in developing countries. While this drives down costs for corporations, the cheaper production costs are seldom passed on to consumers.

The displaced manufacturing workers have to find a new job. Since manufacturing jobs are gone, the jobs left open to them are service jobs. These in general don't pay as well, nor do they produce anything that we can export to other countries. This results in massive trade defeceits. But this trend has been going on since the 80's. The question is: why have we been able to sustain this? One reason is that trade defeceit is exagerrated, we have American companies importing goods from their oversea factories. There is a steady outflow of cash to pay the workers. But, the major effect is the rich getting richer in America and the middle class becoming poor. But this doesn't totally explain the phenomenon either, since our oil imports are massive.

The best explaination is the dollar. Foreign countries buy our dollar. Since the dollar is cheap to produce, we are basically getting oil in exchange for paper. Here is another explaination. Although, I don't believe this to be the reason for the Iraq invasion.

So our dollar is inherently valuable, and it also means that we have huge foreign debts that may be cashed. This means, right now, the American economy is inflated by foreign investment. There are certain reasons why I believe this will change. The biggest one being the Euro. The US has alienated much of the world. I believe in retaliation, many contries are going to move their reserved funds to the Euro. This is going to be catastrophic to the US economy. Our dollar will rapidly lose value w.r.t. to other currencies and inflation will rise trying to balance our trade defeceit.

Balancing our trade defeceit is going to be hard because our local economy is now based on services, and secondly, that cheap labor that we were getting in other countries isn't going to be cheap in the face of a devalued dollar. This means a very painful transition.

What needs to happen: most importantly we need to ween ourselves off oil. But, ever since Carter said we had to do it in the 70's our leaders have done nothing to move us off oil. This is unlikely to change under the current political situation.

My best advice is to insulate yourself, I suggest investing outside the US. Invest in gold, Asian or European countries. All we need now is something to trigger this and I think the bubble will burst.