How to save America

January 18, 2008

The fundamental problem with America’s economy is an obsession with wasteful consumption. Until that is resolved, nothing will change in the long run. It has become normal and acceptable for people to exploit easy credit for housing, cars, appliances, electronics, or anything else you can charge to your plastic card.

I have a difficult time criticizing manufacturers and retailers for being too effective with their advertising, but I have no difficulty blaming irresponsible banks for creating a culture of easy credit in which assuming monstrous debt is considered a right of passage into adulthood. Especially when their primary solution to the inevitable increase in bankruptcies is a deceitful manipulation of the money supply.

I also have no difficulty blaming individuals for allowing themselves to be drawn into such an irrational system. Outsourcing your brain to corporations and governments that don’t care about your best interest will never yield positive results.

The way to create wealth is not by borrowing to consume, it’s by borrowing to invest in income generating assets. Very few individuals will ever make money off an asset that’s almost guaranteed to depreciate, like a car. Of course vehicles can help some businesses and it could be the only reasonable transportation to and from work, but how many people only consider the functional abilities of anything when making a decision to buy?

If America is to survive as an economic force, consumers will need to be taught financial discipline. Regular Americans will have to learn the benefits of living beneath their means, even if that requires a lower standard of living than their parents enjoyed.

As consumer credit begins to dry up in 2008 and beyond, without any interference this process will take place on its own. But the Federal Reserve must stop confusing the markets and clearly make its intentions known. Speak with one voice and determine once and for all the direction of American monetary policy so individuals and businesses can adjust. If the decision is to support a strong dollar, then bring on the recession. If the decision is to inflate the currency, then get on with it and stop pretending to do otherwise.

Either way America will experience recession while the market re-adjusts to accommodate for a less opulent American populace. There is still a lot of talent and innovation in America and it’s always possible new products will once again provide the efficiency or productivity increases required to delay collapse a little longer, but in the long term, regardless of what happens with the markets and inflation, Americans must start saving and investing their excess capital more responsibly or America will ultimately lose its status in the world.

All empires eventually come to an end, some more gracefully than others.