What Can We Learn from the U.S. Economic Debacle?

Many things got the U.S. into the mess it is now in: greed, corruption, ignorance, complacency, failed policy, and so on. The U.S. is facing over $100 trillion in debt and still counting. We may have to worry about deficit problems as quite a few countries face sovereign debt problems, yet one of the most significant lessons we can draw from the U.S. experience may be the deterioration of its manufacturing base.

The U.S prospered from the 1950s to the 1970s largely because it was the only industrial power left standing after WWII. The U.S. had shipped much of manufacturing out of the country for several reasons as discussed in prior posts. While some Asian countries have been platforms for globalized production (for instance, Japan exports $60 billion of autos and auto parts to the U.S. each year and 70% of Wal-Mart’s products are made in China), the U.S. has engaged in crony capitalism. The U.S. has borrowed, spent and created massive credit expansion. This deindustrializing process in the U.S. has hampered its job foundation. There have been no jobs to take the place of the manufacturing jobs that are lost in the U.S. This also means that the U.S. has been losing one of its most critical competitive edges, innovation since innovation is based on the robust production capacity. (I’ll address again how the emerging economies including Korea and now China and India have accumulated its production and design capabilities on another post).

A country shouldn’t replace financial engineering with manufacturing operations in the pursuit of short term gains, period. The case of America shows us that if a nation loses its productive capacity, it would be a basket case. As Elizabeth Warren notes in many occasions, the U.S. middle class has been subjected to a dismantling.

Furthermore, instead of addressing the root cause of the problems, the U.S. is propping up the economy by employing various means for the time being.

Perhaps another lesson to be learned is that sophisticated checks and balances should be in place to make sure that the system is not gamed.

The U.S. should beware that the international currency regime is changing as many countries are choosing to protect their reserves in anticipation of the USD devaluation.

For the U.S., time seems to grow short to act upon its problems.