With market watchers the world over feeling increasingly alarmed by spreading
economic problems, much hope and attention was focused on Japan last weekend as
finance ministers and central bankers of the G-8 (Group of Eight) nations
gathered to apparently map out a coordinated global response.
In particular, all hoped that the delegates would conjure a plan to save the
dollar from the dustbin and stop the price of oil and food from pushing the
world into crisis.
The G-8 includes Britain, Canada, France, Germany, Italy, Japan, Russia and the
United States. With the exception of Russia, the members represent the "Old
West" that has dominated the free-market world economy for almost half a
century. As very little of
promise or substance emerged, I can only hope, against all evidence to the
contrary, that much was accomplished behind closed doors.
What the ministers and bankers did not explicitly acknowledge, but must have
been evident to them all, is that the source of the falling dollar, and global
economic instability, is the United States itself.
Starting in the 1970s, the United States began moving away from its heritage as
a "producer" nation to one in which consumers account for 72% of GDP. As a
result, American wealth has been massively depleted by a combination of
inflation, unsustainable debt issuance and long-term depletion of the US
dollar. Although Americans have in fact lost their wealth, they have yet to
ratchet down their lifestyles accordingly. This disconnect is the source of
global economic instability.
The best way to put America's standard of living back in line with its wealth,
and to relieve the world of its economic imbalances, is through an American
recession and the continued fall of the dollar. In fact, the downsizing of the
American airline industry and the fall of the housing market are symptoms of
this trend. But recession carries unpleasant political repercussions. As a
result, politicians would always prefer to see one boom replaced by another.
Clearly, America, which would largely bear the costs of recession, prefers
serial bubble blowing and dollar devaluation as the best policy going forward.
The question is whether she can hoodwink, bully, or otherwise convince the rest
of the G-8 to go along. The problem is that that the economic stagnation which
is evident in the United States is nowhere to be seen in the rest of the world.
This puts the G-8 delegates into a difficult quandary. If they follow America's
lead to lower interest rates to avoid recession, they risk unleashing
inflation, which is already a major problem the world over. If they indicate
increased rates, to curb inflation, they risk driving America into a severe
recession. Similarly, to engage in a program of currency intervention to
support the dollar (which the United States lacks the means or desire to do
unilaterally) involves the prospect for even greater accumulation of dollar
reserves, which has already proven to be a huge drain on national balance
sheets.
So what did the G-8 do? They talked and did little. Admittedly, they discussed
some laudable issues like world poverty and green alternative energy (which
will most likely be the next government financed asset boom). But there was no
indication of likely action.
Instead, the G-8 policy statement that emerged at the meeting's end included no
mention of lax lending in the United States or of irresponsible central bank
liquidity injections, or even of America's freeze of on-shore oil drilling.
Instead, the G-8 took sideswipes at non-G-8 members, including unbridled
criticism of the oil-producing countries. US Treasury secretary Hank Paulson
had the temerity to maintain that higher oil prices were due not just to
changes in supply and demand, but also to a failure by oil-rich nations to
build enough wells and refineries. Talk about the pot calling the kettle black!
All-in-all, it was deeply concerning to witness the G-8's inability to decide
on real initiatives but, instead, to seek to blame others. It pointed to the
fact that the severe problems currently faced by holders of US dollars are
likely to continue into the future.
John Browne is senior market strategist, Euro Pacific Capital.
Euro Pacific Capital commentary and market news is available at
http://www.europac.net. It has a free on-line investment
newsletter.
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