Happy New Year!

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. -- J. M. Keynes "General Theory of Employment, Interest, and Money".

The question at hand, is what parts of the American economy, if any, have been destabilized by the Fed's recent monetary policy (1999-2002)? Possible candidates are:

  1. trade deficit
  2. current account deficit
  3. personal debt load
  4. personal saving rate
Our analysis will rely completely upon our ideas of how the American economy and the global economy work, so this author is cognizant of Keynes' warning.

Currently, our trade deficit is balanced by our current account deficit, as the dollars, which we exchanged for foreign goods, pour back into this country in the form of investment. Luckily, the U.S. is still the best (risk/reward) place to invest on the planet, thanks to our unparalleled institutional infrastructure.

Our personal debt load is high, which relates directly to our low personal saving rate, as we continue to spend more than we earn. This will change as more of us realize that our retirements will be working retirements, unless we save more. But dealing with social security is a lose/lose political proposition (changing an entitlement program means taking money from someone (recipients will scream) or spending more money (fiscal conservatives will scream)), so the politicians will be loathe to tackle this issue.

The resultant shift in saving will affect our current account deficit, but this will probably be a gradual change over time, as people become aware of the problem. If the government mandates saving, then there will be a sudden shift. That won't be fun, but hopefully this won't happen any time soon.

Regulatory risk seems to be the biggest factor.