No area of the corporatist major
US media's negligence of the public's interest exasperates me more than
their total silence on the impending economic disaster facing the US.
When the US economy hits the wall, it will take the rest of the world
with it. Meanwhile Fed Chairman Alan Greenspan, a long-time Ayn Rand
cultist, has now been given free reign by the Bush regime to institute
an extremist, ideological laissez-faire fiscal and economic policy that
Senator Paul Sarbanes, one of the few people in Washington with both
influence and economic credentials called "playing with fire, or
indeed throwing gasoline on the fire". So essentially, Greenspan is
saying that the radical experiment in economics now underway will be
allowed to run its course, come what may. No matter that leading
economists all over the world, including conservative economists, are
shouting in alarm. The mainstream media, who don't really understand
economics issues very well themselves, don't think viewers care enough
about them to watch stories about them, and are very sensitive about
upsetting the regime that supports their oligopoly and the shareholders
of their holding companies who don't want anyone blowing the whistle on
market bubbles, are saying nothing, simply not covering the economy at
all -- they just repeat the stock market averages, the monthly
government data press releases, and big corporate earnings reports, and
think that's covering their responsibility on business, financial and
economic reporting.
Regular readers know I try to fill the void, with short analyses that
are intelligible to the average citizen. Here I go again.
The chart above shows something called the Current Account deficit. It
shows that, until the 1980s, the Current Account, which reflects the
difference between what people and corporations in aggregate save and
what they spend, was flat. The Current Account went seriously into
deficit in the early 1980s, but was reined in again, until, during the
Clinton Administration it began to spiral out of control. Under Bush's
watch, and more importantly under Greenspan's watch, this deterioration
has accelerated over the last four years, so that now it's running at a
$700 billion annnual rate, and forecast to hit one trillion dollars
within the next few years, maybe even the next year.
The
chart for the US Trade Deficit is virtually identical to the chart
above. On an annualized basis, this deficit -- the difference between
imports of $1.8 trillion and exports of $1.1 trillion, is also $700
billion, heading quickly towards the one trillion mark. Petroleum
products alone account for $200 billion, close to 30%, of this deficit,
and that proportion is, of course, climbing at an even faster rate. The
cost of oil has risen 50% almost overnight, and further increases are forecast.
What do these numbers mean? Well, the Gross Domestic Product (GDP) --
the total value of economic activity -- of the US is about $10 trillion
per year, which is about 1/4 of the total global GDP. So the current
account deficit means that Americans are spending about 10% more than
they are earning each year, and importing 20% of what they consume
while exporting only 10% of what they produce, and financing the
difference. Meanwhile, the US National Debt (the total amount the US
government owes), after levelling off during Clinton's second term, is
accelerating at an unprecedented rate, to its current level of $7.5
trillion (as much as the entire country produces in 9 months), and its
Net International Investment Position (NIIP -- the net indebtedness of
the US to the rest of the world, is nearing $3 trillion, 30% of GDP.
The US National Debt is capped, and three times Bush has had to go to
Congress to get authorization to increase this cap. The situation will
inevitably get worse no matter who is elected next month, so the cap,
put on to safeguard against reckless spending, will have to be raised
many times more in the next few years. And with Bush determined to make
the tax cuts permanent, or introduce a 'flat tax', the National Debt is likely to accelerate
further as government revenues fall. This is like your mortgage broker
(Congress, echoed by the IMF) telling you your mortgage payments exceed
the maximum safe proportion of your income, then you (the US Government)
replying that you've decided to take a lower-income job, so you'll have
less money to make the payments, and then the mortgage broker (Congress)
replying "OK, well, I guess we'll allow you to increase your mortgage
anyway". This is insanely irresponsible behaviour.
But the press
remains mute.
In short, the American people, corporations and government are all
living well beyond their means, and borrowing at an accelerated rate to
make up the shortfall. And if interest rates go up, and some economists think they could soon hit double-digits, we're all screwed.
What are the implications of these deficits, especially considering
that they are being incurred by an administration that doesn't know or
care about fiscal and economic matters, under the direction of a Fed
Chairman with an ideological bent not to intervene?
- It means the US dollar
will continue to weaken, and may even collapse.
- Wachovia's economist says
"it's just a matter of time before foreigners will become less willing
to lend to the US". That means they will have a choice: Stop selling to
Americans, or at least insist that payment be made in a stabler
currency than the US dollar. "When that point is reached, interest
rates will rise as foreign lending slows." Those rising interest rates,
reflecting the perceived growing risk of repayment, will increase the
cost of the US National Debt proportionally, which will require the US
government to cut spending elsewhere (i.e. defense and social services,
and rollback tax cuts), or run the risk of bankruptcy. It's been said
cynically that that has been the neocon plan all along, but the reality
is that cutting social services alone won't do it -- military
adventures will have to stop, and sharp tax increases will have to be
introduced as well. The alternative is to play a game of "chicken" with
foreign lenders, which appears to be the Greenspan approach -- let's
see how far foreign sellers will let the deficits go, before they're
willing to hurt their own economies by curtailing sales to the US or
demanding they be repaid in a stabler currency. Problem is, in this
game of chicken there are only losers.
- Back in 2002, the Institute of International Economics warnedthat
the Current Account deficit could rise to 7% of GDP by 2006 (it
has already reached that level this year), and that only a level of
2-2.5% was sustainable -- anything above 4% will trigger a continued
and sustained fall in the US Dollar until that deficit falls back to
sustainable levels. This suggests that despite its 25% declines in the
past year, it has additional declines of 25-50% in store in the next
couple of years. Now suppose you're a foreign vendor who's sold a
billion dollars worth of goods to American consumers, secured by US
Dollar loans -- with the US Dollar in free fall, are you going to
continue to sell when your profits are wiped out in foreign exchange
losses? The answer of course is no, and when the Arabs or the Asians
move to the Euro as the currency of all transactions, the game of
"chicken" will be called, and the US Dollar will drop through the
floor, making US debt repayment and new borrowing unaffordable (at all
levels -- government, corporate and consumer), precipitating a crash in
US stock markets as the value of $US assets tumbles below the value of
Euro debts, and hence a crash in markets worldwide as one fourth of the
world's buying power stops buying. As the IIE put it two years ago: "The United States must
attract about $2 billion of net capital inflow every working
day to finance the deficits at their current level. Since gross US
capital outflows have been running about as large as the current
account deficit, our gross capital inflows must average about $4
billion per working day—and totaled about $1 trillion in 2000. Any
decline in the level of these inflows, let alone their reversal via a
selloff from the $10 trillion of outstanding dollar holdings of
foreigners, would produce increases in the US price level and higher
interest rates (and almost certainly a fall in the stock market as
well). This triple whammy would severely hurt the US economy."
- In a more recent analysis, the IIE predicted
a Euro soaring past $1.50 USD in value (i.e. a USD worth only 0.66
Euros). What is especially astonishing about this is that the European
economies are not doing particularly well. What we are seeing is the
world embracing another currency not because its supporting economies
are strong, but because they are so worried about the overextension and
unsustainability of the US economy and its underlying policies.
- The Chinese currency is currently overheated, with
inflation there approaching double-digit levels and threatening to lead
to economic collapse. Prevailing view is that if China doesn't
immediately revalue its currency upwards by 20-25% (so much for the
benefits of offshoring!), it will suffer a hard correction and severe
recession. The consequences of that will be a sharp, inflationary
increase in the cost of Chinese goods, and great difficulties for the
many, many American companies that are now utterly dependent on cheap
Chinese goods for their survival. Thanks, Wal-Mart!
- The 50% jump in oil prices is going to start working it's
way through the economy soon. If you look at the cost of materials and
overhead for many businesses:
chemical companies, plastics manufacturers, agribusiness,
transportation, heating utilities, asphalt companies, medi-tech and
pharmaceuticals, clothing companies using man-made fibres, furniture
companies, floor coverings, cosmetics, household products, paints and
dyes, you'll find that oil cost is a key determinant of their product
cost. If half the cost of their products is tied to the cost of oil,
expect retail prices to rise accordingly, adding inflationary pressure
to the economy big-time.
What should individuals do in light of the precarious condition of
interest rates, stock markets, debt levels and trade imbalances? I
caution you that I'm not an investment advisor, but these actions would
appear to be prudent -- and the mainstream media are simply irresponsible for not telling you so:
- Do your best to pay down debts, especially variable-rate
debts, and avoid incurring new ones. I know, that's easy to say and hard to do, but
that's the best protection against interest rate spikes and bubbles.
- Be leery of investments in the stock market, especially in
US stocks, and especially those of companies that have offshored much
of their production or service to China. They're especially vulnerable
to the triple whammy: Falling US Dollar, rising interest rates, and
slowing of consumer demand. That applies to investments in retirement savings plans as well.
- If you're exposed, as an investor from another country, to
volatility in the exchange rate of the US Dollar against your national
currency, consider moving your assets into those denominated in your
own currency, or at least hedging your positions so if (when) the US
Dollar slides further, you don't take a bath.
- If you're running an American public company with cash to
invest, this might not be a bad time to consider buying back your
shares and going private.
- If you're a consumer with cash to burn, consider buying
products that take oil to produce, because they're going to go up in
price; and don't invest in the companies that make these products,
because when prices start to soar, sales will plummet.
The news gets even worse.
For reasons that are historical and purely political, Americans get a
tax deduction for interest secured by a mortgage on their homes, but
not for interest on unsecured or otherwise-secured borrowings. As a
result, a horde of usurous companies have been offering unwitting
American consumers, who, like their governments and corporations have
been living far beyond their means, 'consolidation' loans that convert
a bunch of unaffordable, unsecured debts into one unaffordable debt
secured by their homes. The result, in tens of thousands of cases, is
foreclosure on those homes when consumers, unable to afford principal
repayments, let alone interest at rates that run as high as 30%,
miss payments. One fourth of new US mortgages are now credit card debt
consolidation loans, and victims are losing their homes at a rate of
200,000 per year. But what these hapless citizens are doing pales in
comparison to the policies of Bush and Greenspan, who are doing exactly
the same thing on a massively grander scale -- buying and spending more than they
can possibly hope to repay, and hoping the world doesn't foreclose on
them.
No wonder they call economics the 'dismal science'.
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