Wednesday, July 04, 2007

Economic Challenges

The trip to Hawaii wasn't all vacation. The impetus for the trip was an invitation to make a presentation to a financial audience on "Economic Challenges: What Have We Learned? What Do We Face?" Here are the slides.

In a nutshell:

I identified three challenges to the U.S. economy that I think are fundamental: low and declining saving in all sectors of the economy, a declining labor force, and a dwindling labor income tax base. In all cases, the challenges make us less capable of absorbing additional pressures, whether unforeseen events in the near term or emerging pressures from population aging and the growth of health care costs persistently in excess of the economy's growth (and their interaction through the government's entitlement programs).

My prognosis:

Absent more prudent behavior, prices—exchange rates and interest rates—will simply change to equilibrate imbalances. The dollar has started to depreciate, but to me, the biggest mystery in the economy is how the U.S. long-term interest rate can stay so low. I cannot see it remaining that way for long, and its rise will take the stock market and (what's left of) the housing market with it. (This is a fascinating chart that didn't make it into the presentation.)

But I’ve been saying this for a while. As an economist, I’m happy to be right, but usually even happier to be wrong.

Enjoy!

4 comments:

Anonymous said...

You don't consider any of the following to be fundamental challenges to the U.S. economy?

If not, why not:

A combination of Peak Oil and a national addition to oil, combined with rising energy prices.

A surplus of 4-5 million housing units more than the economy can absorb, combined with unaffordable housing in many parts of the country.

$59 trillion in future public debts and obligations, according to USA Today.

A manufacturing base that is being steadily decimated and will probably soon see the loss of at least two of the Big Three American car manufacturers?

A stock market that is being manipulated and juiced every day by hedge funds and hot money traders, to the point that the average American investor is going to get fried by it (again)?

A Federal Reserve that has almost completely lost control over the growth of the money supply, due to exotic financial derivatives and foreign currency sterilization?

Anonymous said...

You don't consider any of the following to be fundamental challenges to the U.S. economy?

If not, why not:

A combination of Peak Oil and a national addition to oil, combined with rising energy prices.

A surplus of 4-5 million housing units more than the economy can absorb, combined with unaffordable housing in many parts of the country.

$59 trillion in future public debts and obligations, according to USA Today.

A manufacturing base that is being steadily decimated and will probably soon see the loss of at least two of the Big Three American car manufacturers?

A stock market that is being manipulated and juiced every day by hedge funds and hot money traders, to the point that the average American investor is going to get fried by it (again)?

A Federal Reserve that has almost completely lost control over the growth of the money supply, due to exotic financial derivatives and foreign currency sterilization?

Andrew Samwick said...

It was a 40-minute dinner speech, so I limited myself to 5 points (lower saving, lower labor supply, lower taxable share, aging population, per capita health cost growth) where I would be best able to answer questions.

But I'll try to address your questions in a later post.

Thanks.

Anonymous said...

Link borken: "this is a fascinating chart.."