Economics, as everyone knows, isn’t really about money or wealth or business or anything like that. It’s simply the study of mankind’s actions in a world where resources are scarce. The problem of consuming or allocating scarce resources is basically at the core of every issue we face.
But by that definition, modern day US doesn’t really have an economy. Scarcity has meant little to US consumers, who up until recently have known few limits on borrowing. And the government to this day has a seemingly unlimited supply of willing lenders. US bonds have been pushed up to dizzying heights, despite the enormous frailties of the US financial system. It’s why we can talk about trillion-dollar stimuli and trillion-dollar deficits and not really think about the gigantic consequences.
So rather than ask about the health of our economy, we should start calling it an aconomy. A system that exists absent the bounds of economic limitations. For as long as we can exist like this, there’s really nothing we can do wrong. A $1 trillion stimulus can easily become a $2 trillion one if it turns out the intervention wasn’t big enough. A bank bailout program can always be replaced with another one, because there’s no real limitation on what we can be done next.
The real issue at hand, then, is not whether the economy can hold together, but whether the aconomy can, Because if it can’t, the ramifications could be huge. For evidence, just look across the pond to the UK economy. Banks there are evaporating, and the pound is getting destroyed.
Free Exchange explains the lesson here:
DO NOT do as America does, unless you are a very big country (or economic bloc). That seems to be the lesson Britain is learning as the pound weakens and confidence in the credit-worthiness of the country slips. If you have a global reserve currency, if private demand for your debt is strong, if the flight to safety means that government borrowing costs remain low no matter how profligate the central bank, well, then you can do as America has done. If not, better prepare to have your capital dubbed “Reykjavik-on-Thames”.
Meanwhile, anyone proposing a silver-missile fix to save the US should answer whether they believe their solution would still if we had to return to having an economy.