If the economy was a person, then the producing sector (agriculture, manufacturing, mining, etc) would be its “income”. If the service sector is much smaller than the producing sector (like China today or the US one hundred years ago), then a country is living below its means (net saver). If the service sector is much larger than the producing sector, then a country is living above its means (depleting savings and going into debt).
Below is a graphic showing the different sectors of the US economy over the last two hundred years.
Here is what needs to happen (and what will happen) in the next two years to bring the US economy back into balance.
GDP is a flawed measure of a nation's wealth
If the economy was a person, then its GDP represents its “spending”. As anyone knows, by dipping into savings and borrowing money, a person can temporarily live beyond their means. This is what the US has been doing big time for the last few decades.
It is ridiculous that economists consider the US to be the “largest” economy in the world based on this flawed economic measure.
It will be worse much worse than the great depression
If you are worried about someone defaulting on their debt, do you:
A) Compared that person’s debt to his “spending”.
B) Compared that person's debt to his "income".
(the answer should be dead obvious)
Now I am sure that most readers of this blog have seen some version of the chart below, comparing US debt to gdp (“spending”). This chart incorrectly suggest that the US is due for a downturn as bad as the great depression.
The reality is that total US debt should be compared to America’s producing sector (“income”). As a percentage of gdp, the producing sector in 1930 was four times the size of the producing sector today. This tells us that the US economic collapse will be far worse than the great depression.
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Eric...excellent article. I agree with you 100%. When this rebalancing takes place do you think it will be a 50% unemployment figure, or do you think manufacturing and agriculture will increase?
I, for one see a disintegration of employment and not a huge uptick in either manufacturing or agriculture. When the US Dollar and US Treasuries imlode,the USA will have no real capital to invest in either of these two sectors.
This indeed, will be far worse than the Great Depression.
Lastly, one more question. Many analysts are saying investors should be getting into farmland. I don't agree to a certain extent. Do you agree that USA farmland's value is tied to cheap energy and water? Both are declining rapidly making this a horrible investment in the future. The falling EROI- energy returned on invested is what is destroying the US suburban economy.
A correction (obvious): is if the service sector is larger.... (like the USA today).
Great article. Two things to notice: the collapse starts with the beginning of the Federal Reserve (1913). We have destroyed our extractive industries in favor of flawed ecologically arguments. AGW is a completely bogus attempt by the left to crush modern industry.
Hmmm. Not *totally* convinced yet. Question: what exactly are the constituents of the yellow and orange parts? Don't they play a significant role in the blue and green parts? (Monsanto in Ag, for example -- maybe not a perfect example)
Reason why Ag is such a small factor of our economy is because we have technology. And technology is founded on knowledge.
So therefore I have an accounting problem (hehe!) with your charts.... :-)))
to greggcwa:
correction is not necessary, greetings from Czech Republic
If you believe in perpetual growth as a percentage of GDP which has been fairly consistent for a long time then there are some grounds for not being too concerned about debt. However if you believe in a thermodynamic economic model which takes account of permanently reduced sources of cheap energy to fuel continued growth you would be looking at the model differently. It is not impossible by any means that new sources of cheap energy to fuel renewed growth will be found. My guess is that what ever happens we will have very serious trouble before that renewed growth occurs. Nice post thanks.
Thanks for the common sense logical post.
Nuclear energy is the only longterm solution to the continuation of capitalism for centuries to come. The wind, sun and geothermal will not offer a quick or proportionately high enough energy source, and fossil fuels have peaked in production;thus they are declining into the future.
Nuclear got a bad rap in the sixties, and the US has faltered in its development. There is no denying it, the nuclear age is upon us, and undoubtedly will help us leave this planet when the time is necessary in the far future.Nuclear Micro turbines are available today.
@greggcwa
I'd argue the US lost its soul in the civil war, when it became clear the union was not a voluntary arrangement and instead the federal government was prepared to use force in order to hold it together. Lincoln wasn't a hero, he was a monster. The whole slavery issue was misdirection. Slavery was already obsolete and would have faded away soon anyway.
But as usual the "winners" get to write the history books. Americans are spoon fed propaganda from the day they're born.
Thanks for sharing this
Please address these points.
1) The powers that be think that the limiting factor in the great depression was to let the system breakdown (losing businesses, means losing jobs, which means losing businesses). So, they print money and have the govt take on toxic debt to fix the structural problem.
"Problem solved" some might say.
2) Oh sure, one might say "That helps the banks/corps, but the public is still up to it's ears in debt!". Yes it is. However, stopping foreclosure, forcing writedowns, keeping interest rates low, letting people "rent for free"... all magic tricks to keep people working, spending and the cycle continues...
3) Angrily you say, "the rest of the world won't allow this!" Alas, what if per chance the rest of the world is in on it? What if they will allow some inflation, so long as they can go on a spending spree buying companies, oil, and the like...as the terms of repayment for the US dollars they surely have saved up. What if they rest of the world needs us to remain a strong consumer for their production houses? What if the rest of the world has been letting this go on for years already, so this isn't anything new. Haven't we exported inflation in nebulous forms such as polluted air (because we can't pollute here, so we don't make here), or depressed wages abroad, and cheap foreign currencies that keep the standard of living low over there to support us over here.
I think there will be some sort of currency event soon. Banks and hedge funds are expanding their FX businesses. Hiring loads of people.. salaries are going up.
It's a pity the chart at the end of the article shows debt as a percentage of GDP, when the case being made is for showing debt as a percentage of productive GDP.
Dashxdr, I am afraid slavery is not abolished, you, we, I am one and the chains are tightening. Here is a nice simple understanding of how we are beholden to a few.
http://www.youtube.com/watch?v=OMdw24f0XmA&feature=player_embedded
Slavery is alive and well people.
We have all had personal slaves for 20 years at least.They just live in other parts of the world.
Why import Africans, Indians and Chinese to work in our fields when they can work somewhere else and just ship us the goods.
We pay the slavemasters (corrupt goveernments/evil dictators)to controle them for us.
Out of sight, out of mind.
The slavemasters get paid an amount of money , depending how much they can get there slaves to produce.
The thing is, they have descovered that letting there slaves live in a capitalist society increases there production. So they allowed it.
Now, the slavemasters are soo wealthy and powerfull they dont need there old paymasters in the west anymore.The west has run out of money to pay him so what does he do now?
He says i ll keep all the stuff my slaves make from now on , take what i need and let the slaves share the rest.
The slaves get to keep most of their produce and are , well , not slaves anymore.
The slavemaster is now happy keeping all the stuff and becomes a legit. govenmet .
The old paymaster meanwhile has to get of his arse and fend for himself.
Or... Find more slaves a lot closer to home.
Regards
Ozzimandis
The 50-50 service/production balance is pretty bad reasoning, otherwise for most of world history the average person/country/whatever saves 90% of their income. Humanity wouldn't survive that. Most services are just things people used to do by themselves but now pay someone else to do it. A large amount of services is a sign of specialization and is a GOOD thing, as it results in the high productivity we have now as opposed to a hundred years ago.
There will be a decrease in services, but only because people will become poorer and learn to do things tax/license free by themselves. It happened during the Great Depression and is also happening during the Greater one.
Far more important though is the page on Deposit Reclassification - an unregulated average 3% reserve is very low indeed! That places a very high level of confidence in banks to be able to factor accounts receivable (already proven false) or in the FDIC (from a government very much in debt). That's just asking for increasingly lower levels of confidence as banks can't handle typical economic shifts. They wouldn't have any need for bailouts if the reserve actually served its purpose to force banks to keep a buffer of currency. This really is a crisis caused by banks and the Federal Reserve. Thanks for the article on Deposit Reclassification.
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