This is a blog post. Not a thesis on the economy. So, I'll keep it short. How can you describe the current financial crisis on the back of a napkin? Let's start with a concept that everyone hopefully understands. If you spend more money than you make, you are in for a head-on collision with reality and bankruptcy. The only other solution is to increase your cash flow to the point it exceeds your spending.
So, how does it work if you're a country? Well, your exports are your income and your imports are your spending. So, if you continually import more than you export, something's gotta give. In his book "Crash Proof: How to Profit from the Coming Economic Collapse", Peter Schiff starts out by illustrating how, as a country, we've been consuming more than we produce for the last three decades. Written in 2006, the book predicted everything that is happening right now and then outlines what you can do about it.
So, what allows you to spend more than you earn? It's called credit. Just like in your personal finances, there's a tipping point where credit is no longer available. That's why everyone's talking about a credit crisis. But it's about more than just credit. It's about more than what companies are "too big to fail". Anything that Congress does at this point will only push the problem forward. What we need, painful as it may be, is to start producing and exporting more than we import.
