Page 2 of
2 Physician heal
thyself By Julian
Delasantellis
through less spending, is the
key to bringing the "global imbalances" to a more
manageable level.
First off, Americans
must spend less. How can this be accomplished?
Probably not through more Sunday morning sermons
evangelizing the world of God over that of Mammon;
Americans live in the most religion-saturated
society on earth, but as soon as they rise blessed
from the pews its off to the malls, bibles put
down, Sunday sales circulars taken up.
One
thing that works in making Americans more
circumspect in fast drawing for their credit cards
like gunfighters in an old west shoot-em-up is the
prospect of economic uncertainty. It was
during
the recession of the early 90’s that America last
ran a current account surplus, falling from a
deficit of over $40 billion a quarter late in 1987
to a surplus of almost $10 billion in early 1991.
This decline in the current account deficit was
totally resultant from consumers pulling back;
over the same time period, the government fiscal
deficit rose from $145 billion to $212 billion.
So now, here Americans are, facing another
economic slowdown, much like in the early 1990’s,
one wholly originating from the credit quality
issues of an over-leveraged real estate sector.
Should America just let this happen? After all,
the phenomenon of a nation, just like that of a
family, living beyond its means could not be
expected to last forever. To paraphrase Samuel
Johnson’s famous quote about the prospect of a
hanging at dawn working to focus the mind, for
millions of financially over-extended Americans,
the prospect of a foreclosure might just focus the
mind away from mindlessly extravagant consumer
spending.
Or maybe not. Recent payment
statistics indicate that many at-risk American
homeowners are paying off their credit cards
before their mortgages - the logic there
apparently being that you can always find another
place to live, but if the plastic maxes out what
on earth will you do on the weekends?
In a
debate conducted on Justin Fox’s Curious
Capitalist blog on the Time.com website, Gilles
Saint-Paul of the Universite des Sciences Sociales
de Toulouse presents his argument why an economic
recession, while harsh and bitter tasting, might
just be the strong medicine that the American
economy needs.
The US economy does not 'need’ a
recession but it needs to cut consumption by
several percentage points to restore its trade
balance. I also think it needs to avoid bailing
out those who gambled on risky loans and
overpriced houses. Otherwise, it will have
another round of financial bubble, which may
again sustain excess consumption because market
participants will reinforce their presumption
that buying the bubble is a one-way bet since
they will be bailed out if things turn sour. And
along with the bubble comes an imbalance in the
composition of investment (for example, a
housing bubble may lead to too much
construction). It would be nice to have these
needed corrections without a recession, but I
doubt it can be avoided. Default on loans will
worsen the balance sheet of financial
institutions and reduce the supply of credit to
the economy. A fall in consumption will reduce
aggregated demand because it takes time for
nominal prices to adjust and for the composition
of demand to be redirected to the external
sector [exports], as it should.
In the
Financial Times, Willem Buiter of the London
School of Economics expands on the recession as
strong medicine theme.
The kind of sustained increase in
the national saving rate (by at least 3% of GDP
to restore external sustainability, and by at
least 6% of GDP to give US citizens hope of a
dignified retirement) cannot in practice be
achieved without passing through a slowdown, and
possibly a recession. Higher saving means lower
consumption or higher income without a
commensurate increase in consumption. I am
sufficiently Keynesian to believe that a
reduction in consumption will lead to (at least)
a temporary slowdown in activity. The kind of
supply-side miracle that would produce an
increase in income without an equal increase in
private and public consumption is hard to
visualize for the US. It's hardly China, after
all. For the past couple of decades, the US
consumer has been saved from the consequences of
undersaving by capital gains. Unfortunately
these capital gains were to a significant extent
bubble-manufactured and have now imploded. After
the tech bubble and bust and the housing boom
and bust, I cannot see another asset bubble
coming to the rescue of the improvident US
consumer. So save you must.
In a
January 31 opinion piece in the Financial Times
briskly entitled "Stop behaving as whiner of first
resort", Ricardo Hausmann, the director of Harvard
University's Center for International Development,
tells Americans to suck in their guts and take the
recession like a man.
The adjustment of private
consumption to sustainable levels is necessary,
but is likely to have a negative influence in
the short run on the growth of aggregate demand,
of which it represents more than 70%. It is hard
for this adjustment to take place without
bringing down the rate of growth of gross
domestic product, possibly to negative numbers …
The US should face its need for adjustment with
courage and reason, not fear. It should stop
behaving as the whiner of first resort, ready to
waste all its dry powder on a short-sighted
attempt to prevent a 2008 recession. Many poorer
countries with weaker markets and institutions
have survived and benefited from an adjustment
that involves a year of negative
growth.
It is interesting that none of
these voices advocating a cut in America’s
profligate consumption comes from a native-born
American; Hausmann of Harvard (which many
Americans don’t consider part of America anyway)
was previously the Minister of Planning in
Venezuela. Almost as if they were arguing that the
high school football team trade in their shoulder
pads and cleats for pink tutus, or that the
national pastime of baseball be replaced with the
girly commie ballet russe of chess, is
advocating that Americans consume less in the
short term for the benefit of their long-term
national interest now seen as so inherently
unpatriotic and subversive that no informed
observer, at least no informed observer without
the thick shield of sturdy university tenure, can
even whisper the very prospect?
The
nation’s leaders seem to think so. The core of the
"stimulus package" is to have government tax
rebate checks of at least $600 sent out to most
Americans, probably as early as April. The express
intent of these windfalls is that they should be
spent - and fast; happy days will certainly be
here again for Wal-Mart’s suppliers at the
factories of the Yangtze River valley outside
Shanghai. Besides forestalling even the very
thought of less consumer spending bringing down
the US current account deficit, the stimulus
package, along with increased government spending
on unemployment benefits and other countercyclical
spending programs that rise in times of economic
hardship, will also once again bloat up the US
federal budget deficit. The non-partisan
Congressional Budget Office predicts that the
budget deficit will more than double in fiscal
year 2008, to over $400 billion.
It is
important to note that many countries do not
accept that you have to make a choice between
economic growth and being in current account
balance. Germany, which derives its economic
growth overwhelmingly through high-quality high
value exports, and where the current economic
concern is still centered around fears of
inflation arising from out of its too fast
economic growth, last year registered a current
account surplus of 162 billion euros, about $235
billion at the current rate of exchange. German
economic officials are not worried about an
economic slowdown; they’re the ones keeping euro
interest rates high in hopes of engineering a mild
one.
But in the United States, the right
to enjoy continuing and uninterrupted high levels
of domestic consumption is so sacrosanct that,
applied to the private consumption of housing, it
forms the core definition of what is called the
"American dream." The country can worry about
paying for it later - preferably much later.
Hausmann brings up another point that must
be obvious in most of the countries of the
developing world. When it comes to dealing with
economic crises, America’s attitude is definitely
do as I say, not as I do.
The same voices that supported tough
macroeconomic policies to deal with the excesses
of spending and borrowing in east Asia, Russia
and Latin America are today pushing for a
significant relaxation in the US to deal with
the so-called subprime crisis. Interest rates
should be slashed quickly and $150bn put into
taxpayers' pockets by April at the latest, they
say.
Following upon the fall of the
Soviet Union came a new American attitude as to
how developing nations in economic distress should
be handled. During the Cold War, these countries
were treated gingerly, for the fear was that if
these societies were pushed into deep penury they
might be tempted to "flip" over to the side of the
Communists. With the end of the Communist threat,
that fear disappeared, as did the velvet glove.
Out came the iron fist.
For about 20 years
now, poorer nations in economic distress seeking
assistance have had the misfortune to have been
subject to what is called the "Washington
Consensus."
The core mandate of the
Washington Consensus demanded that the supplicant
nations severely cut their government social
welfare spending in order to generate budget
surpluses. Also, the depreciation of these
countries’ national currencies, and the Washington
Consensus demand that the governments stop
subsidizing prices of necessities such as imported
food and medicine meant that the less fortunate in
these societies were subject to substantial
hardship in meeting their needs for the daily
necessities of life.
Hausmann’s quip about
the "same voices" advocating the stimulus package
for America is a particularly pointed jab at
Summers who, as Treasury Secretary, was the
hanging judge who sentenced the poor unfortunate
nations caught up in the East Asian financial
crisis of 1997-98 to the Washington Consensus.
At its core, what is the entire subprime
economic meltdown but yet another crisis of
American overconsumption, in this case, the
overconsumption and resulting misallocation of
housing finance capital? The names and the faces
may change, but, at its core, the song remains the
same. The basic financial mendacity that displayed
itself in the loans to the less-developed world in
the early 1980’s, in the Savings and Loan fiasco
in the late 1980’s, in the Long Term Credit
Management hedge fund collapse in 1998, in the
bursting of the dot-com bubble in 2000-01, is now
being displayed again in the subprime sector.
Like an obese man not willing to change
his lifestyle but still expecting his physician to
heal him, unless America shows itself willing to
address its real, core underlying problem, its
never-ending desire to consume more than it
produces, in another 10 years or so the country
should expect to be precisely back where it is
now.
Fiscal prudence and fiscal discipline
may be all well and good for the wogs and gooks
carrying the crosses of the Washington Consensus,
but as for applying the same dour principles and
policy prescriptives to the namesake nation of the
Washington Consensus.
Well, American
Protestant fundamentalists consider their country
to be uniquely blessed and chosen by God, a
gleaming city on a hill, a shining light onto all
the nations. Good deal, if you never have any
intention of paying the light bill.
Julian
Delasantellis is a management consultant, private
investor and educator in international business in
the US state of Washington. He can be reached at
juliandelasantellis@yahoo.com.
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