Potential

There comes a point when you have to consider what the potential is of this economy. If you think about potential energy in a spring, you greatly increase potential if you contract it. Once the force creating the contraction is released, the spring will, well, spring back.

On the other hand, if the spring is stretched you also build up potential energy and as long as the spring is not stretched beyond its fatigue point it will return to its normal position after oscillating. However, there is a danger that the spring can be stretch beyond its fatigue point after which it loses its potential.

So in 2007 and early 2008 the economy was stretched like a spring and the force that was stretching it was the great amount of credit and apparent real estate and stock market wealth. This force was removed and the economy contracted. The only real question is was the initial force so great that the economy has lost its ability to spring back?

Some think it has. They argue that the apparent recovery is deceptive and that the economy is not going to behave in a "normal" fashion because the financial crisis was so much greater than normal. Generally, people who make this argument argue the conditions of the last 10 years were so different from prior periods that effectively the economy was stretched beyond its "fatigue" point and the contraction is not the normal sort of contraction but more in the way of a collapse. Any minor oscillations, such as the one we are in now will ultimately fail because the economy no longer produces value. This argument generally is related to the exportation of manufacturing and the creation in this country of a service economy.

There is a fundamental element to this argument that has validity, but I believe it is overstated. After the two world wars the United States effectively entered what may aptly be considered a golden age where our prior industrial rivals were crippled and the third world was a supplier of cheap commodities. This led to a higher standard of living in this country than anywhere else in the world. This situation has changed and the great force acting on us today is the spread of wealth to the third world. The world has only so many resources and we don't have any intrinsic right to consume so much more of them per capita than anywhere else. It will equalize over time. This equalization has to result in slower or negative growth here while the rest of the world catches up. However, slower growth is still growth and it clearly is preferable to negative growth. However, this scenario does not lead to a collapse of our national economy and while we would have less potential than countries that have to grow more to catch up to us, we would still have potential.

What should be considered is what is actually the new normal? There are still significant avenues of potential growth in changing this country from overuse of non-renewable resources to renewable resources. If you really look at national fundamentals, you create wealth by extracting or creating resources or by increasing the value of those resources. Every year a certain amount of wealth is created in this country. A large amount of that wealth is used to purchase commodities with oil being the biggest drain. Of course, cheap manufactured goods and services also drain wealth to countries like China and India. Over time this will reduce the standard of living in this country because the dollar will lose value and imported goods will increase in cost until the new normal is achieved. I'm convinced that for this normal to be near the level most Americans have been used to, we need to greatly reduce our reliance on foreign oil and develop clean renewable energy sources.

Perhaps the current economic crisis is a recognition that the wealth accumulated in this country over its existence is moving from surplus to deficit? I don't think we are there yet, but you can't keep spending more than you earn (create) for ever without having to pay the bill at some point.