Yesterday on STB.com I posted on the first of three news articles I read over the weekend that I wanted to write about; a story about a small town and their overwhelming infrastructure liabilities. The second article is about China and their reaction to some of the things we are doing with our economy (I told you these were random articles). It ties in with the "An Economic Recovery?" notes I strung together last week.
First let me reiterate why the overall economy is extra important to America's Small Towns. Besides the obvious (it is our economy), the financial health of small towns for the past 20 years have depended on 1) new growth, 2) government subsidy and 3) the Small Town Ponzi Scheme. With the economy in recession, new growth is non-existent. Government subsidy seems unlikely to continue (more on that point in a moment). The Small Town Ponzi Scheme is catching up to many communities.
Enter China, a country that is "alarmed by US money printing", largely because they hold $2 trillion in US debt. Chinese official Cheng Siwei is quoted as saying the following:
"If they [the United States] keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China has made no secret of its desire to diversify its holdings and ending the United State's run as the world's reserve currency. Cheng summed up the problem, and the imbalance between our countries, succinctly by saying:
"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
In a related article also in the Telegraph, this is elaborated on further and brought into context beyond simply federal action.
The US economy suffers from a growing culture of indebtedness that has increasingly contaminated the federal government since 2001 and has spilled over dramatically into private household behaviour. The combination of the ill-conceived fiscal-furnace fired by President Bush and the US Congress and the reckless monetary-furnace fired by Alan Greenspan and Ben Bernanke throughout the period 2001-2007, created unsustainable housing market and stock market bubbles whose collapse brought on the financial crisis and economic contraction of 2008-2009.
This "culture of indebtedness" has fueled inefficient and financially unsustainable growth in small towns across the country. As the market bubbles systematically collapse, the government bubble remains and keeps this system afloat. But how long can this last?
In 2019, the national debt will represent 76.5pc of the US national economy, the highest proportion since just after the Second World War. In such circumstances, the international reserve status of the US dollar will not survive. As it fades, so interest rates on government securities will rise and the real burden of servicing the debt will increase. In such circumstances, the US economy will teeter on the edge of a black hole.
It is not clear if this can be avoided or, if it can, whether or not we have the political will to do it. Our addiction to spending "tomorrow's dollar" exists at every level of government and throughout many of our households and private businesses. As Cheng said, quoting Benjamin Franklin,
"He who goes borrowing, goes sorrowing," said Mr Cheng.
Small towns can and should adopt a Strong Town approach and seek to become more financially independent and viable. Monies received today (through grants, taxes or other programs) should not be used to improve cash flow at the cost of long-term financial viability (Ponzi Scheme). Our small towns need to make tough decisions and work towards becoming Strong Towns.
It should be clear to everyone that the traditional federal and state government safety nets can't be counted on to bail out our small towns in the coming years.