Spare Change, Anyone?

Last night on C-Span I watched a gentleman give a speech about the current U.S. economic situation. I forget his name and in fact did not catch the entire speech, but what he had to say was impressive coming from a former Reagan economic advisor.

First, he explained why we are in the position we are in today. Developing countries around the world are accepting dollars from us in return for products that they are producing. It is a win-win situation for all of us. We get what we want, a higher standard of living at cheap prices, and they get what they want, an improving economy and increasing standard of living for their populations.

This win-win situation has continued to work far longer than most believed it would. The U.S. in order to keep the party going has continued to increase the supply of money at a pretty consistent rate over the past several years. And because the benefits to countries such as China, Japan, and India outweigh the dangers of such a policy, the game continues. At least for now.

He then made a comment, which caught my ear. He said that Treasury Secretary Snow arrives at work every morning and has to find $2 billion to keep the economy going. That is the amount we are borrowing from our trading partners every day. Most of us cannot fathom how much money $2 billion really is, so lets look at it this way. Imagine that you want to buy a package of Twinkies. You happen to be broke, but you are hungry, so you dig under the cushions of your sofa and manage to scrape together enough change to run down to the corner store and get your Twinkies.

The first thing about this scenario is that most of us do not really need the Twinkies. It is just something we want. It is the same with all of the products we buy from China. We don't really need most of them, but we sure want them, and we have been programmed to believe that we need them so we buy and we keep buying.

The second point is that tomorrow comes and we are hungry again. How many times can we dig under the cushions and find enough to buy another package of Twinkies? Maybe we check the chair cushions, but how long until we exhaust our supply of spare change?

The U.S. is facing a similar situation. The speaker last night simply stated that our current course of action is unsustainable. And at some point we are going to have to face the facts that we can no longer live on the good will of others. We are going to have to pay our way.

When will it happen? Who knows? I do know this. Our trading partners are diversifying their dollar holdings right now. They are doing it quietly so as to minimize any adverse reactions. Why are they being so nice? Because it is still in their best interest to trade with the U.S. The day will come however, when that benefit comes to an end.