Two Major Economic Risks In 2011

There are many threats to the alleged economic recovery in the United States. As the Empire declines, it is hard to choose one particular area of concern while ignoring all the others. America's decline is all-encompassing, not piecemeal. It is ubiquitous, not isolated. This makes it almost impossible for most people to see it, even if they were psychologically inclined to accept it, which they almost never are.

Cognitive failure to comprehend our massive societal breakdown is especially prevalent among those who are in some sense "successful" within the current mess, i.e. they have a job of some importance, they make good money, their personal lives are in order, etc. These people want to believe the Empire is still salvageable, even when they admit its deep flaws. They still take America's corrupt politics seriously while engaging (for example) in earnest discussions of whether Obama has "compromised his principles" in recent deals with the Republicans. Obama's principles? WTF?

Another perception problem stems from gradualism. The Empire has been falling apart for three decades now. A fish swimming in polluted water gets used to swimming in polluted water—if that water hasn't already killed it. For example, look at this graph.

Source. Public debt, including government "borrowing" from social security (i.e. intragovernmental holdings)

After the early 1980's, economic (GDP) growth and our Imperial military presence overseas required more and more debt to cover the bills. In the private sector, household debt grew and grew to cover the income deficit required to support increased consumption. See my post Keynesian Delusions. Those born in 1970 were only 10 years old when the debt equation started to change. If you were born after 1980, you never lived in a world which wasn't like this. Those under 40 years old might be forgiven for asking Decline? What decline?

For the successful types I talked about above, regardless of how old they are, it seems that no amount of damage will persuade them that we're up shit creek without a paddle. In the decades leading up to 2008, things fell apart at a sufficiently slow pace to allow them to constantly adapt to new conditions. Even now, after the meltdown, they are still able to put a happy face on unemployment well above 10% and the still-crashing Housing Market. In other words, successful adaptations make it impossible for such people to be insightful observers of contemporary conditions.

Thus when we talk about new threats to the economy, we must remember that many people simply deny that the country is in deep, deep trouble. Moreover, any specific threat must be understood in the context of the Empire's decline. In its proper historical context, a collapse in some new sector (e.g. Muni bonds) should be seen as just another brick in the wall.

With this brief preamble out of the way, we can point to two major risks to our economy in 2011. The first—naturally!—is the debt and pension obligation problem in the 50 states, their cities and other municipalities. This 60 Minutes video highlights those problems.

The other major threat is the continuing crash of the Housing Market, which I reported on yesterday. Tech Ticker's Aaron Task interviewed Richard Suttmeier of ValuEngine.com. If you think I'm a pessimist, listen to Richard, who thinks that there is downside risk of a 15-30% drop in average national home prices. And just like me, he's a level-headed guy

In upcoming days and weeks, I will talk about other threats to our economy in 2011. There's no dearth of things to choose from.

Comments

[Chris in Chicago]

I see first hand everyday what you describe as cognitive failue

I cummute nightly to my part-time job in one of chicagos more affluent suburbs. I have interacted for years with many coworkers
of high school and college age who appear to be completely insulated from what
is going on outside there community or in the rest of the country.

When i pose questions to them about the state of affairs of the economy,debt,unemployment,foriegn adventures of there government,environment etc. They may have been exposed to these topics thru school classes,reading,the computer and so on,but seemingly could care less.

When i ask them about ther personal future,all is rosey.