Let me see if I understand the kum-bay- yah theory of Economics?  It goes something like this:  Americans all suddenly gain trust in the US economy, they will stop saving, and start spending money that they are hording.  The problem I have with this theory is that it doesn’t answer the question “Why did they stop spending in the first place?”  

December 5, 2006

by A. Scott Piraino

I have no idea who Mr. Piraino is, but he has a convincing argument about what happens after people for whatever reason stop spending:

People suddenly become poorer, and they spend less money. With less demand for goods and services, production declines and prices fall, causing a downward spiral of unemployment and falling incomes. Our country has endured deflationary periods after numerous boom and bust cycles, most notably during the Great Depression.

But the coming collapse will be different. Debt, and our dependence on imported oil and manufactured goods are the reasons the Third Depression will be different, and much worse. The U.S. ran a $318 budget deficit last year, but that was dwarfed by our trade deficit of $726 billion, a new record high, and an 18% increase over 2004. 

I also think that this part of his argument is sound. If it is not, I’d like to know why. He does explain why he expects the dollar to weaken, and that makes sense to me also.

As our dollar loses value, foreign goods purchased with dollars become more expensive. Since we are now dependent on imported goods, our shrinking dollar means higher prices for those goods.

This argument perhaps uses the term “inflation” incorrectly, if that term is defined as too many dollars chasing too few goods. The final effect is the same. Stuff will cost Americans more. Then if they don’t have money due to unemployment, and prices rise, we have the worst of both worlds.