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2 Physician heal
thyself By Julian Delasantellis
Deep in the middle of another US
Presidential campaign, and the air is muddy thick
with the pieties and promises of politics. Since
it is self-evident that the blood of the D-Day
heroes who scaled the cliffs at Pointe du Hoc
still flows freely through all 300 million
current-day Americans, the country’s politicians
are well justified in promising the voters the
absolute maximum amount of focus-group-vetted
government services to be paid for with the
absolute minimum of taxes.
But, if
Americans ever choose to expose themselves to some
foreign voices and views (which they rarely do -
for most local American news broadcasts, coverage
of train crashes and the displays of 10,000
dominoes set up for a chain reaction just about
does
it for their overseas news coverage), they will
see that some very-informed observers are looking
at the country’s response to the economic slowdown
generated by the subprime mortgage crisis very
differently than do many Americans.
To sum
up these views, here America is being seen as the
wimps of the world, like little boys hiding under
a pediatrician's desk so as to not to have to
suffer an inoculation shot.
Who says the
American government is dysfunctional? You
certainly wouldn’t believe it from witnessing the
alacrity that the US Congress moved with in order
to give US$168 billion of the people’s money to
the people, otherwise known as the "stimulus
package".
True, there was a bit of
partisan bickering leading to its passage. The
Republicans wanted the package to focus on more
tax breaks for business, proving once more that
they don’t understand the subtle difference
between being for capitalist principles and being
whores for capitalists. Some Democrats wanted the
package to include government largesse for
recently released felons unable to find work; the
Republicans would have probably signed off on that
had the felons in question only been guilty of
crimes such as bank fraud and insider trading.
In the end, the two sides worked out a
truly Solomonic compromise. Disabled veterans will
also receive the tax rebate checks to be sent out
this spring - assuring that this fall every
pamphlet and television advertisement produced by
an incumbent will feature the freshly scrubbed
solon handing a government check to a beaming
veteran in a wheelchair.
In the United
States, many prominent economists, including
Clinton-era Treasury secretary Laurence Summers,
are proclaiming that the US economy desperately
needs this assistance. In a January 6 opinion
piece in the Financial Times, he laid out his
argument as to why the US economy was in desperate
need of aid.
Fiscal stimulus is appropriate as
insurance because it is the fastest and most
reliable way of encouraging short-run economic
growth at a time when a serious recession
downturn would pressure American families,
exacerbate financial strains, raise
protectionist pressures and hurt the global
economy.
Like a drunk in a bar
ordering another round because he’s heard that,
since a glass of red wine a day has some purported
health benefits, it’s logical to assume that a
whole bottle of 120-proof Scotch must have even
more, the Congress heard this wisdom, raised a
glass to the fine Dr Summers, toasting, "I’ll
drink to that". Summers' prescription was for a
stimulus package in the neighborhood of $50-75
billion; if the drunk stumbling out of the bar
gets stopped by the authorities and is discovered
to have a blood alcohol reading three times the
legal limit, well, he, as well as the Congress,
can always claim that he just got caught up in the
overall heady intoxicating spirit of the
procedure.
For most of this decade, at the
global economic symposiums where, you know, only
the right sort of drip-dry international economic
bureaucrat and shiny-trophy-wife-festooned
corporate tycoon were in attendance, as the
lobster cracked-crab cocktail and Bollinger Blanc
got wolfed down like hot dogs and Budweiser at a
ball game, the talk that forever pervaded these
events was of the dangers of what is called
"global imbalances."
From the traveling
annual bacchanals of bucks sponsored by the World
Bank, the International Monetary Fund (IMF) , and
the Bank for International Settlements (BIS), to
the annual winter carnival of cash of the World
Economic Forum at Davos, Switzerland, the "global
imbalances" that raise so much concern centered
around the huge budget, trade and, especially, the
massive current account deficits of the United
States.
Rising from about $385 billion in
2001, about 3.75% of gross domestic product, to
over $800 billion, over 6% of GDP in 2006, the
current account deficit, at its moist basic level,
measures just how much more the country is
consuming over what it is producing.
The
mirror image of the US current account deficit is,
of course, the current account surpluses of the
countries doing the exporting to the United
States, currently primarily the oil exporting
countries, Germany, and especially, the new world
factory floor and export powerhouse of China.
Standard economic theory of the floating
exchange rate regime that has governed the world
economy since 1973 states that countries with
current account deficits should see their national
currencies depreciate, and countries with current
account surpluses should see their currencies rise
in value; like water levels in the locks of canals
equalizing when the locks open, eventually, the
deficits and the surpluses would more or less even
out.
That has not happened with today’s
"global imbalances", primarily because the US
dollar has not depreciated sufficiently to make
purchases of foreign goods so expensive as to make
them out of reach to American consumers. A major
factor keeping the US dollar artificially high has
been the tendency of the surplus countries to
recycle their export earnings back into US
Treasury securities, rather than letting them be
converted back into their home currencies.
This system, called Bretton Woods II
(after the 1944 Bretton Woods, New Hampshire
conference at which the World War II allies put
forth their plans for the postwar US
dollar-centered international monetary order) by
economists Nouriel Roubini and Brad Setzer, is the
primary reason why the global imbalances have not
equalized and have continued to grow until they
have reached a level many observers think
threatens the continued health of the global
economy. (For financing of the US current account
deficit, see US living on borrowed time - and
money Asia Times Online, March 24,
2006.)
In a February, 2005 speech at
Columbia University in New York, Rodrigo de Rato,
then managing director of the IMF, raised the
concern over global imbalances and what could
happen if they continued to be left unaddressed:
When we speak of 'global imbalances'
in the international economic system, we are
referring to the large current account deficit
of the United States and the corresponding large
surpluses in a few countries, mainly in emerging
Asia. Related to this, the lop-sided pattern of
economic growth in recent years also springs to
mind. Global growth has been, and remains,
unduly dependent on the United States and China.
The euro area and Japan - which together account
for nearly one-quarter of global output -
continue to under-perform. If this trend
persists, it will widen existing imbalances
further, and increase the risks of drastic
disruptions to global growth.
De Rato
expanded on these concerns in a November, 2005
speech in Seville, Spain, and then, with the
bravado easily available only to an international
economic bureaucrat who does not need to face the
voters in November, suggested some remedies that
never had any chance of adoption:
Today's global payments imbalances,
and more broadly, the current geographical
patterns of growth, saving, and investment in
the world economy, should be a major concern to
policy makers. Indeed, communiques of finance
ministers' meetings show that they are a major
concern. Put simply, they are unsustainable.
Higher net savings - private and public - are
needed in the United States, and lower net
savings are needed in a number of other key
countries.
If the US current account
deficit remained at present levels it would mean
ever-growing US external indebtedness, and it is
difficult to see this being accepted by private
investors or central banks of countries that
would need to hold the US assets. I do not share
the view of some policy makers that correction
of global imbalances can be entirely left to the
market. I think the risks are too great ... If
global growth is to be sustained, many countries
will need to share the work of reducing global
imbalances. It is particularly important, and
increasingly urgent, that the United States
tackle its current account deficit by increasing
domestic saving, and this means mainly reducing
its fiscal deficit … So I believe that actions
on the revenue side, preferably through reforms
to broaden and simplify the tax base, are also
needed.
In this, de Rato goes to what
is believed to be the core driver of the world’s
global imbalances, the United States federal
government budget deficit. As the greatest single
unified consumer of goods and services in the
American economy, when the federal government
spends more than it takes in, as it has been doing
for most of the past 40 years with the exception
of the last two years of Bill Clinton’s
presidency, it quickly gets reflected in a trade
deficit with the rest of the world, and that,
along with the financing of that trade deficit, is
what makes up the current account deficit.
A rising stock market pumps revenue into
the US Federal Government, as investors pay
capital gains taxes on appreciated stock sales.
Therefore, it is not surprising that the US budget
deficit has recently been on a declining trend.
According to the non-partisan Congressional Budget
Office, and not including the costs of the wars in
Iraq and Afghanistan, (which, in a bizarre
bipartisan conspiracy to make bad numbers look
better, are not included in the budgetary sums)
the federal budget deficit has declined from $413
billion in fiscal year 2004 to $162 billion in
2007. In response, the global imbalances of the
current account deficit have also declined, albeit
much less dramatically. From an average of $202
billion a quarter in 2006, the comparable average
current account deficit for the first three
quarters of 2007 fell to a paltry $188 billion.
These statistics prove that, although the
Federal Budget deficit makes up the core of the
current account deficit, private spending by US
consumers also represents a significant part of
the problem. With the offshoring of much of
America’s manufacturing base this decade US
consumer spending is now essentially synonymous
with the US trade deficit, especially since
Americans spend as if their dollars burn holes in
their pants pocket.
The national savings
rate has fallen from 2.9% early in 2000, to under
0.5% for most of late 2007; in November of last
year the savings rate actually went negative -
Americans spent every penny in their pockets and
then went on to see if there was any spendable
value in their pockets’ linen linings.
Therefore, it is obvious that increased
savings, by both the federal government through a
lower budget deficit, and by US consumers
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