Our minds on media.

[Banapana is undergoing some category changes and reshuffling of content in an attempt to retain more focus — please bare with me] A few summers back I read False Dawn by John Gray and was delighted to find out that a world economic crisis of massive proportions was coming any day now. Then, this week in the Economist, this caught my eye…

The US has been running a trade deficit regularly for 27 years now. This last year it was up to $700 billion. This means that the US regularly imports $700bn more than it exports. And this also means that something called our Net Foreign Assets (NFA) has been increasing negatively every year for the last 27 years. So that our current NFA now stands at -4.5 trillion.

So what? Well, that 4.5 trillion is essentially a credit line from the world. The US Gross Domestic Product (GDP) is approximately 12.47 trillion. See a problem here? Is 36% of your yearly budget in credit? I hope not.

Some economists are wishing this amount away. In the aformentioned article The Economist took a look at the Harvard paper by Ricardo Hausmann and Frederico Sturzenegger that claims that this NFA total is “dark matter” and the US is under-reporting its real income because so many of our international corporations report profits overseas to benefit from lower taxes. The US income is also undervalued by the fact that things like knowledge and other intangibles aren’t taken into account.

But the skeptics, like Martin Wolf, won’t have a bit of it and are claiming “The US is now on the comfortable path to ruin.” There’s a bit of sunshine for you.

Which brings us back to “False Dawn” by John Gray. (To find out more, check out my review) In short, he argues that the international market is essentially unregulated and that unregulated markets lead to chaos. In fact, in one frightening (though not one I have triangulated) statement, he says “transactions in foreign exchange markets have now reached the astonishing sum of around $1.2 trillion a day – over fifty times the level of world trade. Around 95 per cent of these transactions are speculative in nature”.

There’s a limit out there somewhere no one knows where it is and in unregulated markets, panics can happen. I won’t go into the gory details, but should something someday trigger a rush to pull out of US investments because of this trade imbalance, things are going to get mighty mighty ugly.