Enormously wealthy country?

Stephen Den Beste once wrote about electrical power:

…electric power has unique properties, and one of the most important is that at any given instant the amount of electric power being generated will always exactly match the amount of power being consumed. If you don’t deliberately balance the system, the laws of physics will do the balancing for you in ways you won’t like.

Electric power has to be generated at the time it is needed, and the electric power grid overall has to have the ability to add generation capacity as demand rises, and to reduce generation when demand falls again.

But this property is not unique to electrical power. Wealth in general must also be generated at or very near the time at which it will be consumed. Just as electrical power can be stored in batteries, but it’s inefficient, wealth can be stored (durable goods, commodities like gold or oil), but only very imperfectly. Here’s a thought experiment: Imagine you have a million dollars today, and a reliable single-use time-machine. You buy a million dollars worth of gold, cart it into the device, and set the dial to Y3K. When you step out, you find that some apocalypse has occurred. Fortunately, humans are not extinct. The locals still like gold, and they respect your property. You live out your life, but as a very rich man would have in Neanderthal times. Your gold was perfectly storable. But your wealth was not. You are much poorer now than then. The same story would hold with any commodity, or with any practical mix of commodities, by which a person might try to store wealth. An individual’s real wealth is a function of the claims he can muster on the products and services provided by a diverse current economy. Without such an economy, whatever one has, whether financial assets or real stuff, will have only very temporary and limited value.

Americans perceive themselves as very wealthy, and as Alan Greenspan used to say Americans’ balance sheets have never been healthier. But “health”, in this sense, means equity, stored wealth. But this is only the illusion of wealth, truckfulls of gold in a time machine.

The US economy is not producing a sufficiently diverse range of goods and services to support its apparent stock of stored wealth. Foreigners who produce what Americans need have progressively diminishing incentives to exchange their current products for claims on US wealth, as what the US economy produces is increasingly useless to foreigners. There may be all kinds of political reasons, domestic and international, for foreign countries to treat US money as valuable, but there are precious few economic reasons. Thus it is not private citizens in foreign countries who value US claims, but their governments.

Fundamentally, whether a country is wealthy or poor has little to do with what it “has in the bank”. A country’s real wealth is nothing more than its capacity to produce goods and services that make its citizens feel wealthy, or that can be exchanged outside the country for what its citizens want. The US economy is dynamic and productive in the broad range of goods and services. But for the moment, the US is neither producing all that it wants, nor producing what others want in exchange for what it fails to produce. Whether the US is rich or poor is unknowable at the moment. That will be put to the test, when other nations stop providing free goods and services and Americans are asked to actually produce or trade for all that they wish to consume.

There’s a difference between being on an expenses-paid vacation and being rich. And the longer the vacation, the harder it may be to get back to work. Or not. We’ll see.


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