The problem of the United States

To my mind, the only person capable of cleaning up the US financial mess, is Mr Wolfe from Pulp Fiction. For what the US needs now is a person who is focused, not afraid of taking unpopular decisions and doesn't mind getting his hands dirty (although Wolfe delegated the task to Vincent and Jules).

For now, US is content with pumping money into banks to control the panic, which is passable as a short-term solution. But that isn't likely to cure the chronic malady, because it is rooted deep in history, somewhere in the early 80s. The Fed has just been postponing the pain by pumping liquidity after every crisis, encouraging people to spend more, and achieving a temporary illusion of growth. The last time the Fed wisely dealt with a crisis was in the 1970s, when Volcker increased the interest rates to 20%, successfully putting an end to a stagflation scenario. For the US, the going was good from 1950-1970, when the country produced more than it consumed, ensuring healthy employment and a robust currency. Lets go back into history to have a closer look.

After World War II, the US pulled itself out of the Great Depression and was in a much better shape than the rest of the world - the European countries were battered by bomb damage, and the Asian/African ones had suffered centuries of colonization. Not only did the war create over 17 million jobs in the US, the country escaped virtually unscathed compared to its competitors in Europe. As a result, by the early 1950s, Americans owned 80% of the world's electrical goods, controlled two-thirds of the global productive capacity and produced over 60% of its oil and 66% of steel. Resources were plenty, and even a blue-collar worker earning less than $2 per hour could afford a lifestyle that the rest of the world envied. To get an idea of the kind of life an ordinary shipping clerk enjoyed in the 1950s, refer Life magazine's Nov'1951 issue, which published a photo of all the food that the Czekalinski family consumed in an year.

During the early 1950s, US exported more than what it imported, resulting in an impressive trade surplus of about 4% of GDP. The tables started turning in late 1970s, and by 1998, US was running a trade deficit amounting to 4% of GDP. As a result, the highly skilled jobs at factories started vanishing, and US citizens started consuming more of foreign stuff - starting with the Japanese automobiles and electronic goods. Ideally, people should have either started saving more, or built home-grown industries to cater to the growing consumption. But that never happened.
to be continued...