A New Economic Paradigm

Since the 1980s, a culture of debt has arisen in the United States. That change was the consequence of a misguided trade policy that gave rise to a current account deficit of unprecedented size. Between 1982 and 2008, the United States imported $7.4 trillion more than it exported. It financed the shortfall on credit. That credit transformed the structure of the US economy.

Every country?s balance of payments must balance. Thus, between 1982 and 2008, $7.4 trillion in foreign capital entered the United States to finance that deficit. That amount was considerably more than the entire amount of US government debt held by the public at the end of 2008, $5.8 trillion. As the money flowed in, it created a credit-fueled economic bubble?just as foreign capital inflows blew Latin America into an economic bubble in the 1970s and the Asian crisis countries into economic bubbles in the 1990s.

In the process, the structure of the US economy changed. The manufacturing sector was decimated when exposed to ultra-low-wage foreign competition, while the service sector came to dominate the economy and employment as credit-driven asset price inflation created the wealth that made many of those services profitable.

Consequently, over less than three decades, as the US trade deficit grew to previously unimaginable levels, the country?s economic growth model became one of credit-financed consumption that depended on ever-increasing amounts of credit each year to sustain it. In 2008, when the private sector could no longer bear the burden of so much debt, that economic paradigm collapsed.

That paradigm of debt-fueled consumption can never be resuscitated. The US economy is now on government-funded life support that cannot be paid for over the long run. The limited nature of government resources makes it inevitable that a new economic paradigm will emerge over the next five to ten years. The future of the United States?and the rest of the world?will be determined by the form that new paradigm takes.

Regards,

Richard Duncan

for The Daily Reckoning

P.S. For additional details, please see The Corruption of Capitalism, Chapter 10: ?America Doesn?t Work.?

A New Economic Paradigm originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

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