American Economy Approaches Stall Speed

An economy is movement of money between buyers and sellers.

An airplane flies based on movement of air past its wings to create lift.

Exact understanding of economics or aerodynamics is not necessary to visualise that a plane does not fly when it is not moving, or an economy vanishes if there is no money movement.

On the other extreme, we realise that there is an upper limit to a plane's speed – and that an economy is limited to the amount of products and services which can be produced and sold. Somewhere between the upper limit of a plane's speed and zero is the minimum speed a plane can fly.

If the plane is already flying, this minimum speed for the plane to continue to fly is called the “stall speed”. When a plane's speed falls below stall speed, it is no longer controllable and it begins to fall.

In some ways, an economy also has a stall speed. Every economy is different. Each economy uses a different type of plane – flying at different speeds with different flight characteristics. To further complicate matters, economies are not precise. Unlike planes, there are no specific specifications on how they work.

Economists talk about economies in generalities. Most economists agree that there are points where the economy will stall and begin to contract. These points are called tipping points.

The advanced economies went through a tipping point beginning with the global recession which began in 2007. I and many other analysts believe that cause of this tipping point was debt – even though other factors caused the debt to collapse.

Most advanced economies were able to speed up their economies for the last 60 years using an continual expansion of credit. Economies were borrowing money and spending before they had the real income to afford that purchase. It should be obvious that there is a real upper limit to how much people can borrow – and at some point it is no longer practical to borrow.

Another way of saying this is that each additional dollar borrowed is less effective in growing the economy.

When economic growth falls below population growth, money flows will contract faster. There is a negative multiplier in play. It is like a plane spiraling towards earth out of control. It keeps increasing the rate of speed as it falls downward. This is why Central Banks and governments intervene when an economy starts contracting to artificially stimulate the economy to restart.

As a generalisation, an economy grows consistent with its population growth rate plus or minus some secret multiplier. As money flows in an economy, the higher the flow – the economic growth becomes a growing multiple of the population growth. The same thing occurs in an airplane. Higher speeds correspond to higher lift.

Over the past month, more and more economists are revising downward their forecasts for USA economic growth. Several are predicting 1.5 per cent annual growth. Population growth in the USA is a little over 1 per cent. The population growth will almost be equal to population growth.

As an airplane approaches stall speed, control of the airplane becomes more difficult. The United States has never recovered from the last recession, and is approaching equal population / economic growth. Consider that the economic airplane is damaged and has less lift characteristics of a new plane.

Adding to the uncertainty, the European economy is slowing down. This can be visualized as a plane approaching stall speed flying through a storm. One big, bad cloud in the sky with a lot of wind inside can literally push a plane out of the sky.

Additionally, the USA's Central Bank – the Federal Reserve – has already stimulated the economy and its policies are already fully targeted on stimulating the economy. There is little more monetary adjustments they can do if the economy begins to decline.

The American government is faced with mid-term elections in November. At this point, it looks like the legislative branch of government will be changed to one that will try to bring government spending under control. The $1,000,000,000,000 government spending to stimulate the economy did not work, and the electorate is angry.

China is not ready to help grow the world economy. The fruits of China's growth is aimed at benefiting China. America's ability to act as a catalyst to the global economy may be over for the short and medium term until the debt crisis resolves..

It looks today, that the IMF growth figures of 4.2 per cent global growth for 2010 and 4,3 per cent for 2011 are way to optimistic. Real global growth may only be 2 to 3 per cent in 2011.

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