Fred Bergsten - Oped in Economist
Out of respect for the Economist, I will post only the first couple of paras. For those with strong stomachs and a desire for truth read the rest of the article.
FIVE major risks threaten the world economy. Three centre on the United States: renewed sharp increases in the current-account deficit leading to a crash of the dollar; a budget profile that is out of control; and an outbreak of trade protectionism. A fourth relates to China, which faces a possible hard landing from its recent overheating. The fifth is that oil prices could rise to $60-70 per barrel even without a major political or terrorist disruption, and much higher with one.
Most of these risks reinforce each other. A further oil shock, a dollar collapse and a soaring American budget deficit would all generate much higher inflation and interest rates. A sharp dollar decline would increase the likelihood of further oil price rises. Larger budget deficits will produce larger American trade deficits, and thus more protectionism and dollar vulnerability. Realisation of any one of the five risks could substantially reduce world growth. If two or three, let alone all five, were to occur in combination then they would radically reverse the global outlook.
There is still time to head off each of these risks. Decisions made in America immediately after this year's elections will be pivotal. China, the new growth locomotive, is key to resolving the global trade imbalances and must play a central role in future. Action by a number of other countries will be essential to maintain global growth and to avoid deeper oil shocks and new trade restrictions.
The most alarming new prospect is another sharp deterioration in America's current-account deficit. It has already reached an annual rate of $600 billion, well above 5% of the economy. New projections by my colleague Catherine Mann (see chart 1) suggest it will now be rising again by a full percentage point of GDP per year, as actually occurred in 1997-2000. On such a trajectory, the deficit would exceed $1 trillion per year by 2010.
So, to the anonymous who do not seek truth, read again…
FIVE major risks threaten the world economy. Three centre on the United States… Realisation of any one of the five risks could substantially reduce world growth. If two or three, let alone all five, were to occur in combination then they would radically reverse the global outlook.
Does that paint the picture clear enough?
It does not matter WHO wins the White House in a week or so (or months after the Supreme Court sorts out the electoral mess). Bush or Kerry or Nader or Mickey Mouse; top of the new President’s shopping list must be the impact that current US fiscal and economic policy is having on the global scale.
In terms of raw probabilities, the US will suffer the consequences of at least one of the major risks outlined.
Whether the oil price goes beyond USD70 is, in my humble opinion, a relative minor. The oil shocks of the 1970s would equate to current prices in excess of USD100. If we (the world) see prices like that again then no one will land softly.
The impact that China might have – that is I think problematical.
How many times has GWB insisted that deficit economics is good for the US, good for the rest of the world? Every time he mantions the word “capitalism” I suspect. How did the USSR collapse? Not from capitalism or anything like that. The collapse of those economies came from decades of internal deficits; they got to the stage where internally the nation was insolvent. Even then they pressed on, using current income to pay arrears in coal miners wages so that there was coal to manufacture steel.
Believe me, anonymous, I (we in NZ) know what it means to wake up one morning with the head of state appearing on national television, under the influence of two or three bottles of whisky too many, to announce that the nation is “technically insolvent” and that we may default on loan payments due at the end of the week? Believe me, anonymous, that is something that you do not want. Believe me, that is something that the rest of the world does not want either.
Think for a moment... what do you imagine the words "radically reverse world outlook" might mean in the context of the present?
5 comments:
We Americans will be able to survive some of the oil price increase once we realize that GameBoy is not an actual necessity.
The biggest political issue will be partisan politics. This has been one of the most hate-filled elections in a very long time; quite possibly since before the American Civil War. There has been wide spread violence and other crimes associated with this election season. It'll just get worse with each election.
In order to keep the strength of their individual sides, the elected officials will have to do things that may not be fiscally sound. That's just more fuel on the fire.
Unless something notable happens, this nation is on its way out.
LibertyBob
I didn't realize you were such a Dour Dan, LB. [Obscure reference to my eMentor E.G. Ross (RIP).]
This bit needs fisking:
Most of these risks reinforce each other. A further oil shock,
Economists are famous for predicting things that don't happen--or rather, alluding to nasty possibilities; with plausible deniability when they don't happen.
a dollar collapse
Inflation is caused by three things: 1. printing more money than is needed, 2. decreasing interest rates below the natural market level (those two are the government's way of directly and indirectly devaluing the currency, respectively--a foul trick on society - particularly investors and creditors; i.e. those who loan money based on their expected return, but also on those who expect a certain amount of purchasing power in their paycheck) and 3. increases in the demand for a product relative to its supply. The latter is the only one that is dependent on the whims of market players.
and a soaring American budget deficit would all generate much higher inflation and interest rates.This is an equivocation between natural market forces and Fed actions.
A sharp dollar decline would increase the likelihood of further oil price rises.Since oil is the most important commodity in the world right now, "likelihood" is an understatement. They're pretty much synonymous.
Larger budget deficits will produce larger American trade deficits,
In terms of dollars: obviously. By definition.
and thus more protectionism
This is not inevitable. If the country were ruled (I won't say run) by good economists, all protectionism would go the way of the Dodo. People would by what's within their budgets according to their needs--including cheap imports or cheap domestic replacements.
and dollar vulnerability.I don't know what that means, but back to protectionism: unfortunately George Bush got his economics education at Harvard in the 1970s, and there are signs that he hasn't learned all that much since then. That means that he's heavily steeped in Keynesian economics, little modified by our practical experience since. He doesn't seem to have missed the lessons of "stagflation" entirely, but he hasn't taken Supply-Side economics to heart either. Which is to say that subsidies and protections still seem like good ideas to him.
The only thing is, I don't see someone beholden to Big Labor - meaning John Kerry - which, as you can see by their negotiations, clings to a combination of Marxist and Keynesian economic ideas, could be an improvement.
Oh, by the way, the National Debt at the end of World War II was 150% of GDP.
We seem to have managed that okay.
Al, sure did.
But then I have a strong suspicion that a very large part of that deficit was supported by Lend Lease Bonds. Remember those? NZ paid off the last of ours in the late 1970's I believe.
Al, I think that your comment is just a little on the glib side. For example, and to pick just the one hole, under the idea of the dollar collapsing you list three "inflationary" causes which I agree have in the past led to a "collapse of the dollar" in terms of "internal or domestic purchasing power".
That is not what is being referred to in the original article or the commentary that I have put to it.
If a nation overspends its income by too much or for too long, then a number of things happen. In NZ it led to -
The government being forced to remove from the past policies of a "fixed currency" to a "fully floating currency". The immediate effect of that action was to put the value of our dollar on the international market at the tender mercies of the market operators and dealers. As the country was almost insolvent there was very little demand for the NZD and the value went down (by about 30%). That led to better prices (in NZD) for our exports and higher prices (in NZD) for our imports.
In the case of the US, the same thing will happen IF the international investors, who your President claims flock to invest in the US, decide that there is too much risk or insufficient return to cover the risk. At that point the value of the USD - in relation to other currencies - begins to decline. As with NZ, that has its pros and its cons.
What the commentators are pointing to though, is not a small and orderly withdrawal. The closest parallel might be the bank runs of the 1920's. In that case the banks were under pressure through lending long on minimal security (equate that to the US trade deficit), and borrowing short (equate that to GWB's view of international investment).
From that point, the consequences become fairly clear.
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