During a recent visit to North America, I experienced an epiphany - a moment of illumination and insight.

 

It was during the so-called "Black Friday" -- the day after Thanksgiving, when stores slash prices to lure Christmas shoppers, a day that sets the tone for the crucial Christmas retail sales. 

 

There were scenes of people sleeping in the freezing cold all night in order to be first in line to buy a flat-panel TV or a Play Station 3 at a discount. There was fierce hand-to-hand combat to grab these appliances from others. Several people were injured. Some fainted and were taken to hospital. The battlefield scenes made an elite commando unit seem like kindergarten. 

 

Watching this insanity, I finally understood two key facts.

 

First, the entire world rests on this madness. Because the three billion new capitalists in Asia do not spend, they only produce and save. And the 300 million American capitalists do not produce, do not save, they only spend - and their spending now drives the whole world economy. America is the only country in the world with a significant trade deficit and it is huge -- $900 b. in 2006. So Asia, a relatively poor continent, lends America, a wealthy nation, the money to continue to spend and incur debt. 

 

America long ago shifted its production to Asia. Manufacturing is now only 12% of US GDP! And in 2006 America's personal savings rate is negative, for the first time since the 1930's. China alone now holds $1,000 b. in dollar assets.

 

When this madness stops, as it must, the system will collapse. Because $900 b. in American spending means up to 100 million jobs in Asia. And at the moment, there is no substitute for these jobs, no alternative. Losing them will mean world recession or worse. 

 

America's mounting deficits and debt must stop, because if they do not, the dollar will collapse. But America cannot STOP its deficits and its spending, because if it does there will be global recession or worse. We have painted ourselves into a corner. Wise people avoid traps clever people escape from. America, it seems, is neither wise nor clever.

 

The second insight I had was that the madness of Black Friday was built on a huge fallacy - that happiness comes from having more things, more stuff, more clothes, cars and TV's. But of course it doesn't. Society is no happier now than it was 30 years ago, when we were much poorer. This was proven empirically. For individuals, the price of earning the income, or incurring the debt, to support excess spending is not worth the alleged happiness it brings. Sooner or later, everyone finds this out. America and Israel are built on a spending psychology that sooner or later leads to misery. 

 

In every country there are two economies. One is real - the economy that makes real goods and services. One is paper - the economy that creates and exchanges pieces of paper - bonds, stocks, and so on. Once, in America and in Israel, the real economy 'drove' the paper economy. The paper reflected the value of the real economy. Today, the paper economy, led by banks and financial services dominates, both in America and in Israel. This is because of misguided policies and because growing debt makes the financing of the real economy more important than the real economy itself. The paper illusion has lost touch with the reality of the real. The paper is not worth its current value. 

 

Consider this. In Europe, the value of paper assets has risen by 56% during 2000-2005. In America, by 13%; in Asia-Pacific, by 75%. When the value of paper exceeds the value of the real economy that underlies it - financial collapse is imminent, to correct the imbalance. Insiders in the capital market realize there is disproportion, begin selling - and the outsiders quickly rush to follow suit. Result: financial collapse, which in turn hurts the real economy, and our jobs and our income.   

 

America is a rudderless ship. The new Treasury Secretary Henry Paulsen repeats the old mantra, "America believes in a strong dollar" -but at the same time goes to China to demand that China strengthen its currency (i.e. weaken the dollar). How long before people begin massively leaving this rudderless sinking ship and dumping dollars?

 

Israel, as always, imitates the folly of America. Like America, Israel pretends that paper is real, overspends, undersaves, and shifts its production abroad. Why?