Failure of U.S. Economic System Could Mean End to ‘Outsourcing’
By John W. Lilburne
The U.S. economy is now in a deflationary spiral caused by dumping of cheap foreign goods without equal export of U.S. goods; the deflation was triggered when construction of houses had to be terminated. These matters and the reason outsourcing must be terminated will be discussed.
Outsourcing of goods and services and their subsequent sale or dumping in the U.S. market involves many corporations. Wal-Mart is one that everyone knows. In the discussion here, goods and services are referred to simply as goods and the transnational corporations selling goods in the U.S. from outsourcing are referred to as dumpers.
Goods of value X, for example those resulting from a trade deficit, when dumped into the U.S. economy would cause deflation unless some workers are paid money X to buy the goods. (In 2007 the U.S. trade deficit was $815 billion.) Then supply and demand would be equal. Deflation is a situation where all goods cannot be sold because consumers do not have enough money; prices of unsold goods such as autos and houses would fall in an attempt to recover the costs of production.
The needed demand X was produced when the banks temporarily created money out of thin air by fractional reserve banking to fund construction of houses which were then sold on credit. The resulting mortgages were sold to Wall Street or to one of the government-supported enterprises, Fannie Mae or Freddie Mac,
where they were bundled and sold as mortgage backed securities.
Thus the banks got paid cash to nullify the short-term money they created; they then repeated the process. The mortgage-backed securities were sold by Wall Street, Fannie Mae and Freddie Mac to investors worldwide who paid with dollars backed by physical savings.
In essence those investors were the ones financing the construction of houses to supply the needed demand X. Naturally, this did not produce inflation at that time. Junky corporate bonds were also bundled and sold as collateralized default obligations, CDOs. Incredible greed drove the mortgage business and Wall Street. Subprime mortgages resulted when houses were sold to unqualified buyers. Prime mortgages resulted when houses bought for $300,000 two years prior were refinanced for $900,000. A housing bubble was produced.
Inevitable defaults on the mortgages and difficulty selling the bundles forced Wall Street to call a halt. Wall Street, Fannie Mae, Freddie Mac and the banks were left holding a bag of mortgages they could not unload. Adequate reserves did not exist so the banks went bust. (The resulting financial crisis will not to be discussed here).
Banks had to stop making construction loans to build more houses in 2008. Construction workers were laid off and the prior demand which supported dumping vanished quickly. A deflationary spiral began to produce a glut of unsold autos, houses, etc. Prices could not be lowered enough to permit supply and demand to become equal.
(Issue # 18, May 4, 2009)