Why I am a Classical Economist...

I have a lot to say about the recent issues in the US, but I will try and keep this short.

Lol, I am very opinionated about this because as much as I see the damages to the US economy, this is a fear response for the most part.

Lets review, there has been no damage to capacity to produce in the US, no shock to domestic demand or supply, no large shock to world economies REALLY... all this is is a paper-effect. People see their paper-wealth diminish and thus start to think of themselves as 'poorer' than they were, they then spend less. Some people, who took out risky loans and were idiots (banking they could just refinance them in the future) have to default on them. Yes, there are sob-stories, and yes its a terrible situation, but you signed on the dotted line, and you should have been diligent about your own finances and realised that this was very risky. But, back to my point, there has been shocks to credit markets and to consumer spending, and to housing prices, yes... but there is no long-run effect on the economy here. This is ALL short-term. Yes, there will be a recession, and YES it will hurt, but ultimately even the recession is just a result of Wall Street's over-reaction to what it deems to be a 'crisis'.

However, this does point to a systemic issue in the American economy. America is the consumer of the world's goods. And they do it by spending more than they earn (almost 50% of Americans spend more than they earn, and their government runs huge deficits each year, funded by Chinese banks and worldwide consumers), and by ringing up huge credit card debts (over $1 trillion in total for the USA now). This is the REAL fuel behind the US economy... and sadly, the worldwide one as well.

Its interesting because its been proven that Canadians are much more risk-adverse than our American neighbours. This is a good part of the reason why we also have less inventions-per-capita than the US, its also why we have dramatically lower consumer debt per household, and we have a tiny fraction of the government debt that the US has. Canada is lucky in the sense that we are resource-rich. We have the last great source of oil outside Saudi (the tarsands in Alberta), we have uranium, huge forestry sector, gold, silver and metals mining and a lot of fresh water and huge amounts of grain crops. In fact, there are only two nations in the world that could be self-sufficient if all borders were closed: Canada and Australia.

Despite all this though, we, like the rest of the world, have the USA as the consumer of 80% of our exports. If the US for whatever reason eventually decided to actually start paying off its debt, and cut back on spending, it would create a worldwide recession. Basically, the worldwide economy is banked on the idea that the US will keep on spending like a 13 year-old who just got her first credit card.

If, and when, the US grows up and actually gets the idea in her head to start paying off some of the debt and spending responsibly, thats when we really have to worry... cause there will be a HUGE worldwide recession. And you can quote me on this.

However, after the dust cleared and the economies of the world re-adjust to a less spending-happy US, the health of these economies and the US will finally be stable and solid.

AND, my personal belief is that this is all a result of Keynesian economics... and this is why I am a classical economist. But I will spare you all from describing why....