Cause of US Economic Problems

What are the biggest problems the USA has economically?

  • US debt to GDP
  • Federal Reserve mismanagement of money
  • Trade deficit

The root caused could be argued is fiat currency. It causes all three of the above. Fixed exchange rates under the gold standard balanced trade automatically under the price–specie flow mechanism. The Debt was controlled as governments needed gold reserves to spend, and the Fed exacerbates the business cycle.

The trade deficit caused by China is a monetary phenomenon. Two things are happening here an economic downturn which was created by poor monetary management (central bank) and the trade deficit. Of the two problems, the government involvement in credit and money is terrible and is responsible for the business cycle. However, the long-term problem is that the USA cannot compete with other emerging countries in the long-run. Why not? The solution is simple.

The real cause of the economic downturn

What is the root cause of the financial crisis? The trade deficit is the root cause of the economic problems in the USA. In the USA, we import oil and Chinese consumer good and spend our excess capital on consumption rather than reinvestment, and this has resulted in a trade deficit and weakened industrial base.

Consumption and service economy in the US

We are all pressing each other pants and living with a sense of entitlement. I can say this. I am an American, I live in Poland, and I see how spoiled Americans are. There is no way we can solve the long-run problems of the US economy unless we are an export-driven country, instead of a consumption-based service economy. I know this sounds like a mercantilist argument. However, I am no mercantilist. In theory, services should be an extension of the production process, and therefore it does not matter we are a service economy. But look around and use your common sense. We can not be a nation of shop keepers and expect to maintain the standard of living in the past. The US has to create something, whether it be high-tech or old school industries like cars. If it does not, it will be like a house that spends all its money at the mall, but the breadwinner works at Wal-Mart for 8 dollars an hour.

Credit, China, and crisis

An extension of credit in the USA is applied to consumption rather than investment, and this deepens the hole. We can not compete with China because China has low labor cost, and devalues its currency. No one can compete with China with these policies. However, if we invested instead of consumed and did not sell the US to China, and China traded more reasonably, then the US industry would have been able to compete better. Not with labor cost but technologically, the US would have still retained the competitive advantage.

Solutions to the US economic problems

  • Gold Standard will solve most issues today.
  • Get government out of monetary and fiscal management of the economy. Allow weak businesses and industries to fall, including banks and auto manufacturers. Let the markets in the US become more efficient over time. Government involvement makes the US lose its competitive advantage as we become inefficient.
  • Get government out of trying to plan an industrial or technology policy with subsidies. Let the markets determine which is a better sector to invest in. If the private industry did not have to compete with government debt, spending, and get crowded out, the world could not compete with the USA, including China. All roads would lead to the USA for innovation and manufacturing again.
  • The US needs to improve its products through entrepreneurship and creativity, not the government.

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7 responses to “Cause of US Economic Problems”

  1. Fateh

    The USA economics problems with china is easy to solve, if the USA government want to solve the problem with China. In the trade balance there many ways to solve this problem.
    1. The USA customs duty must increase
    At Chinese products up to 39%
    2. The USA customs must make one US standard
    Type of product any Chinese products which have not us standard must reject from the port of USA. If any merchant want to buy a good quality Chinese products from china the good quality products is not cheap in China but more expensive than the USA. The USA custom must make a good quality USA standard type of products for importers of products from China.

    1. Mark Biernat

      You are basically arguing for an increase in taxes on international trade and a simplification of this code. I agree things should be simpler but I disagree with taxes on trade.
      Free trade makes us all rich. The key is how can US industries compete with low priced markets. Perhaps everyone in the USA is over paid or perhaps there is another solution.
      I have been thinking a lot about this trade in balance and the root causes. I think I need to do a post on it.

  2. Noor Mohamad Ismail

    Basically if there is no balance between spending and revenue, any country will face problems. US has been spending so much on defence, war and supporting countries/organizatins [double standards to certain extent] for its interest or interest of certain organizations in US.

    US has so much resources and neglected them so carelessly. Its education and tourism industry is still the best. But most Arabs are coming to my country Malaysia for both reasons beause of change in policy.

    Be more honest with yourself and many poor countries will be your friends.

    1. Mark Biernat

      Politics and economics
      I do not think all US foreign policy is bad nor do I think it is the root cause of the economic problems. It does not help the economy but not the root cause.

      I tend not to be an ideologue. That is, besides the idea of liberty for the individual (in the enlightenment sense), which is contrary to most governmental ideologies, I do not think abstract political ideologies are worth much and certainly do not think nations need to impose their ways through war, including democracy which is not the same as individual rights.

      This is the cause of the US double standard.
      It is the attitude that causes the world to pretend to look up to us and yet dislikes under their breath.

      The US believes it is the policeman of the world, yet it is the policeman that has one hand open to economic benefits, bribes if you will. Do you like this type of policeman? I mean come on Iraq, Kuwait,Libya (Gaddafi’s our economic ally until he wanted to renegotiate oil contracts, he ruled for countless years and the US did nothing, like the fommer leader of Iraq). These wars were about, the free flow of oil. Yet we have greater political injustices in the world and turn our heads. So the US should be honest and the world would respect us more. However, that is not the cause of the economic problems.

      Our nation building drags the US economy down with excess military bases, I think in about 150 countries.
      Our policies some countries can dislike but it is not the root of the economic problems. I might not agree with all the US foreign policy but ultimately it is nto the root cause.
      The root cause, and this might be a revision of my provious stance is this:

      What causes the US economic problems

      • Government, via the central bank causes the business cycle, a boom or bust through excess credit expansion and then the hangover after the party.
      • Govermnet via bailouts, and fiscal spending do not let markets to adjust.
      • The US is losing its relative competitveness, not because Americans are lazy they are not. Americans are hardworking and clever people, but the rest of the world is also and we now must compete. Technology has made it a global market places so we all have to compete with the guy in India, China and Malaysia.
      • The only way we can is not through protectionism and stimulation the economy with government dials and switches, but by building a better mouse trap.

      This is so clear, my qustion is why do so few people in Washington or the world see this? This is the cause of the US economic problems.

  3. Bruce Colquhoun

    A lot of people hate it when you talk about trade because they feel it makes America rich and keeps the economy going good. Well it hasn’t been so for a while. We have full employment and only half the people pay taxes, either don’t make enough or use tax breaks to wipe out any obligation. The scary part is the national debt keeps climbing, I think it is due to the inclusion of mainland China’s entry into the World Trade Organization in Dec 2001 during the Bush presidency. It was widely lobbied for by President Clinton. He said it would avoid a cold war with China, cause them to like our way, and he also set about some wild changes in economic policies self-inspired he was by the genius Greenspan. Clinton led effort to repeal Glass Steagall–bank law that limited bank speculation (lower required cash reserves as well), re-institution of so called bucket laws of 1907–the gambling on what stocks will do in future (without government oversight like what is done in Las Vegas to keep mob out), and creation of this gambling stock of same. With China trade, it all sounded like a gamble. Then came the great recession. Wall Street said it wasn’t the real estate bubble it was the swap problem. Appears to me the cause was the government trying to avoid getting caught flat footed as China took over trade and left US with no replacement industry. Happened quietly as China moved in to US retail, our WTO obligation now runs trade, the Fed spends without restriction because it knows more (3 trillion for stock for what?), and Wall Street brags on its new frontier success in volatile new world. The real investment isn’t happening apparently with low wholesale lending rate and the stock buyout because who can compete with $2/hr and devalued currency (issue politicians run to instead of import taxes). Right now I don’t think the issue is saving the middle class as much as it is saving America from bankruptcy. Car sales are up, home buying, it is a recovery but the trend is government debt fuels the economy. Get China to profit from export taxes if we lack moxy to levy import taxes. Then you have US industry that sees opportunity (investing opportunity hard to turn away from) in manufacturing.

    1. Bruce Colquhoun

      Correction: Clinton repealed (not instituted) the bucket laws of 1907 in the Commodities Futures and Moderization Act. And Glass Steagall combined types of banks that lowered cash reserves requirement, not raised, and took away restriction on regular banks from speculating in stock.

    2. Mark Biernat

      Aside from the a business or trade cycle of boom and bust, the key issue in the USA is government is out of control. On one level everything seems fine. But under that, calm is a mountain of debt that keeps rising.

      People can pull out statistics about the debt to income ratio and compare it to the WWII era etc, but the world has changed. The US is under stiff competition and we can not replicate that economic model to help us pay for government.

      Government crowds out private investment by raising the cost of capital and reduces the marginal productivity of capital.

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