US economy is as simple as US CH IOU.

Slide1Person U buys trinket H from Person C and gives a U IOU. Person C doesn’t want trinket S and instead saves U IOU from person U. With no demand for trinket S, person U is laid off. But he still wants another trinket H so he gives person C another U IOU, which Person C saves again.

After a few years, person C has more demand for trinket H and uses U IOUs to buy a factory from Person K, who then uses U IOUs that travel throughout the region but never go back to purchase trinket S from Person U. Meanwhile Person U continues to purchase more trinkets S with more IOUs.

U debt grows. U unemployment grows. U trade deficit grows. U economists suggest that to put person U back to work, government U will put other Persons U to work, pay them more IOUs that they can then give to Person U for trinket S and that then he can go back to work. So now to “fix” the problem, people are put to work in government instead of making trinket S, so that they can buy trinket S, yet the debt still grows.

Economist U says this is a perfect solution for Person U can now buy trinkets from Person C, Government person U can buy trinkets from Person U and the only thing that seems odd is that the U IOUs continue to grow. But IOUs represent work that must be done eventually to compensate those holding the IOUs. And if Person U holds more IOUs than he can possibly repay in his lifetime, person C eventually becomes concerned.

Eventually, Person C figures out that Person U can no longer repay the IOUs with the amount of labor available to Person U. Person C then decides that the IOUs circulating are not worth the amount of repayment labor originally intended. Person C then tells Person U in order to buy trinket H, Person U must give Person C two IOUs.

In this way, person C begins to make person U repay his debt. Person U must now labor twice as long to obtain trinket H. Person U becomes “poorer” due to now having to labor harder to repay decades of IOUs paid to Person C. This perfect solution touted by Economist U as a way to fix unemployment is not so perfect after all.

Person C has profited from not buying trinket S over the years. Person C has grown employment, bought factories, grown GDP, and increased real assets at home. Yet, Person C has paid a price in choosing eventually to not accept U IOUs at the same face value as before. For now, while choosing to make person U give two IOUs for trinket H, person C also accepts that all the IOUs he holds are only worth half of what they were a moment before.

Person C’s economy is now robust but his wealth is a little less now than before. Person U’s economy is now fragile and hollow. Person U must labor twice as hard now to buy trinket H. Even though his labor is worth less buying trinket H, he will still labor the same number of hours to repay his debt. Yet a pyrrhic victory is won for now other countries holding IOUs will buy his labor that is worth less.

In summary, for decades Person U bought trinket H thinking it was inexpensive but in reality it really bought him unemployment and borrowing to pay for trinket H. Then later, to repay his debt, Person U became poorer and sold trinket S cheaply into the market to repay Person C for the trinket H that he borrowed U IOUs to pay for earlier. Going forward, Person U has less GDP and less factories for decades as he attempts to catch up.

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Filed under American Governance, China, Economic Crisis, Foreign Policy, Free Trade, Full Employment

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