After Collapse, Back to Widgets
Rick Ackerman

This is no mere recession we are entering; rather, it is a darkening prelude to hard times whose eventual depths may currently lie beyond imagining. Since August, the U.S. has thrown more than a trillion dollars of rescue money at the banking system in a desperate attempt to restore confidence. This effort, while unprecedented in scope, if not to say in recklessness, has failed miserably. Lenders and borrowers alike have completely lost their appetite for credit, with the result that yield spreads between government and corporate paper have ballooned to twice their pre-bailout size. Lenders have turned niggardly, consumers have begun to save as though there actually will be a tomorrow, and debt deflation is about to wring from the economy the last, fleeting gasp of speculation-induced commodity inflation.

Although the U.S. and global economies are headed into a perilous void, it is nonetheless possible to see the broad shape of things to come. For one, Americans can put aside any notions about emerging from the downturn as a financial superpower. There won’t be much need for financial titans during the next boom, since the very concept of sophisticated financial products will be dead for at least a generation. A back-to-basics banking system will prevail, and it will find ways to profit by doing things the old-fashioned way – i.e., by making loans to purveyors of goods and services that consumers actually use. Shunning “reverse floaters” and synthetic puts on eurodollar swaps, we will once again be producers and consumers of widgets and better mousetraps.

Only Three Possibilities

Of course, this implies that U.S. workers will have to become competitive with the most efficient widget producers around the world. Only three things can bring this about: 1) a big pay cut for American workers; 2) massive capital investment, presumably from mostly foreign sources; and, 3) innovation. The most immediate of the changes we face is lower wages. Much lower. After all, how much of a pay cut would it take to make a General Motors factory competitive with a car plant in India that can churn out thousands of $2,500 automobiles per week? In theory, we could build an auto plant so efficient that it could be operated by fifty employees. And they could buy parts and materials from U.S. factories that have been similarly transformed. But that would leave millions of workers unemployed. And the money to build those plants would have to come from somewhere – either from savings, which are currently non-existent; or from foreign lenders. In either case, we would have to adjust to a much lower standard of living as we invested out of our own savings, or repaid foreign lenders for the use of their savings.

If there is a bright spot, it will lie in innovation. This has always been America’s great strength, and, unlike the banking system, it is not likely to fail us, even in hard times (or perhaps especially in hard times.) Yankee know-how is our best hope for avoiding penury, and the avenues innovation could take are boundless. We could conceivably solve the energy conundrum with a technology that would make petroleum-based power completely obsolete long before fossil fuels have been exhausted. Or, we could make giant strides in health care and medicine that would lead the world. But even under the best of circumstances, such changes will take at least a decade to become economically significant on a global scale. In the meantime, there is a long valley to cross, and the journey is bound to test our mettle to its very limits.

www.rickackerman.com