The reasons for the current crisis

Because of changes to money markets and agreements of tariffs and trade the world is no longer divided into different markets in the same way as it was. China, India and the US are basically on the same markets for very many products. Nothing prevents the labor in China and India from in the long run getting an education as good as that of the US workers. This means the prices of labor will be the same. If the wages are the same China and India will each have an economy about 5 times as big as the US economy. The US will lose it’s current position as the worlds dominating economy.

What we see now is that China is taking back it’s historic position as a dominating economic power. Leveling of the wages can occur by wage changes in the US and in China, or by adjustments of the values of the US Dollar and the Yuan. US came under high pressure from competitive forces, but did not lower or not manage to lower the value of the US Dollar. An internal devaluation with lowering prices of assets, labor and products then began. When the prices of the housing markets fell the banks lost money. When banks lose money it means their lending goes down very much more, maybe tenfold. Because of decreased lending we now got a shortage of dollar, and an upward pressure on the US dollar. This is called a negative feedback cycle. Instead of going down to effectively lower the US wages, make the US more competitive and normalize the situation, the dollar is pressed upwards, which makes the situation worse.

Now the US is trying to normalize the situation by increased public spending. This is like if parents employ their unemployed children. The wages of the children are effectively zero, because they will inherit less. Unemployment is lower but family income is low. It is better to get the children to work for someone else, even if their wages are not very high.

So, it seems the US should try to get the dollar down to increase it’s competitiveness, decrease unemployment and stop living on loans.

One thought on “The reasons for the current crisis”

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