Imagine: U.S. an Emerging Market
The other day, I listened to Latin American economists and business leaders discuss the US recession. The Mexican central bank governor, referring to the carnage on Wall Street, the sub-prime crisis, and the credit crunch, jokingly remarked: ''At least WE didn't cause it this time."
He was referring to the fact that financial crises have a habit of starting in so-called emerging markets. Over the years, western stock markets have been rattled by such episodes as the Latin American debt crisis of the 1980s, the 1997 meltdown in the Asian economies, or the default of Russia in 1998.
All of these stories had one thing in common: the countries were living beyond their means and were over-dependent on foreign loans, which ultimately caused the entire unsustainable edifice to come crashing down.
The reaction from Washington to these crises has always been vaguely puritanical, sometimes distinctly moral in tone. After a crisis, the delinquent countries are told -- like sinners -- to repent and change their ways. Bashing the economic pulpit, the high priests of national probity in Washington advise these deviants to endure the pain, suffer the consequences of their own aberrant behaviour, reform their ways and be cleansed.
The Latin Americans, more than most, have had to accept regular lectures on economic purification from the northern Calvinistic continentals.
However, now that the US is going through its own troubles, resulting from precisely the same reckless behaviour that landed the emerging markets in trouble in the past, the message from Washington is very different.
Rather than telling the American people that they have to purge themselves after 10 years of binging, the American authorities are doing everything in their power to prevent any economic hangover.
The US is scrambling around for financial anaesthetics in whatever form possible. The Federal Reserve is slashing interest rates, the dollar is caught in a free-fall, and George Bush is ramming through yet another tax cutting/government spending package to try to stave off the day of reckoning.
America is trying to borrow its way out of this crisis, despite the fact that borrowing got it into this hole in the first place.
In terms of the consistency of the global economic message, it's one rule for the poor and another one for the rich. How did America get into the position of resembling a huge emerging market, gorging on consumer goods that it cannot afford, and borrowing other people's money to sustain this lifestyle?
In traditional economics, countries are poor because they lack capital. This capital constraint prevents people from getting the best out of their natural talents. Yet countries face a dilemma -- in order to accumulate capital, they need to generate a current account surplus, which usually comes from saving more than they invest.
But the standard of living falls if a poor country saves rather than invests - which is hardly a national objective. To get around this conundrum, traditionally, the poor countries import capital from the rich ones, which they fuse with their own labour to make good for sale.
They can then sell these goods back to the rich countries and generate the cash to pay back the loan and maybe have a bit left over to re-invest. This, in a nutshell, is one of the principal ideas behind GATT, free trade, and the present trends towards more globalisation. (There are others, but let us stick to this for a while.)
In this globalized world, the US -- the richest country on earth -- should be a net lender to the poorer regions of the globe. It should be running a current account surplus, have a very strong currency, have no debts, and enjoy permanently low interest rates, kept down by its huge savings.
But the opposite is the case. The US is sucking in capital from much poorer countries that arguably need it more. It is running the largest current account deficit in economic history and is allowing its currency to devalue constantly - despite the White House suggesting that it is wedded to a strong dollar policy.
At the same time, the US is printing IOUs to the rest of the world in order to finance itself. And, rather than urging the American people to tighten their belts, as it does when other emerging economies find themselves in difficulties, the American authorities are telling their people to borrow even more. To put this in context, the US needs to borrow more than $7 billion a day just to sustain its current lifestyle.
We now have the confusing spectacle of the richest country in the world behaving like one of the poorest and most irresponsible. It is trying to maintain a lifestyle that it simply cannot afford and, in doing so, it is creating the conditions for the decline of American power.
Despite all talk about rectitude, financial probity and the need for transparency and responsibility, the US is behaving like a large emerging market, and no amount of gushing coverage of its presidential election can disguise this. No country ever borrowed its way to prosperity as the US is trying to do now.
Something will have to give.
David McWilliams is author of The Pope's Children (John Wiley and Sons), available now.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
I like this....more please.
The assumption in this piece is that our looming domestic recession is caused by international balance deficits. I don't think it is at all that simple. And I don't think it is clear yet that it will have disastrous long-term consequences. Yes, the next five to ten years will be shaky. And if the effort to keep Iraq using the petrodollar proves to be a failure, the shaky can become more painful.
It is not clear to me that more competition from developing nations, as a consequence of our purchases from them allowing their increased financial stability, will not be good for all of us. Who can deny that the increased cooperation of massive international trade helps lay the ground for the kind of political cooperation our warming world will need?
We may be in over our heads. It wouldn't be the first time. But don't blame our recession on global trade. Our domestic economy has been thrown to the wolves for the past 30 years. But if it is domestic, then we can clean up our own mess.
The bottom line is... we needed to listen to the highest-ranking American General at a time when he was President. That would be, January of 1961. (If you want to see what he said, read the WikiPedia article on "military industrial complex.")
As "Ike" predicted, the military money-machine is an out-of-control metastasizing cancer. It has no priorities other than its own: no purpose but to divert more and more of the country's essence and strength toward more military spending. The fact that it has long-ago outstripped the country's supply of actual strength is of no consequence: it dived right into debt, and the fact that next year's budget is supposed to be $3 trillion does not concern it at all. (Borrowing about $96,000 per SECOND...) No problem.
But you know, a cancer never produces growth. It can't rebuild a city, and furthermore, it does not care to.
It won't spend money on a highway bridge even though hundreds of people literally got dumped into the river beneath tons of steel.
It won't spend money on health care that actually works. (What calls itself "health care" in this country is well on its way to becoming exactly the same sort of public parasite.)
For a number of years, a solitary light burned unheeded in the tower of Christ Church: "One if by Land" was outshone by "Eat, drink and be merry."
But what the United States of America can no longer ignore is that, even as its present leaders have driven it to the edge of ruin (and are prepared to give us all the Faustian choice of "either the devil or beelzebub or satan," the REST of the world community is quite determinedly moving forward ... around us, and quite without us. As well they should.
"Tonto! We're surrounded by injuns!"
"Whaddaya mean 'we,' paleface?"
So... is anyone ready for a REAL election to begin? For a REAL candidate to step forward and win office, not by spending hundreds of billions of bucks, but indeed winning DESPITE the hundreds of billions of bucks that will be arrayed against him-or-her and perhaps even BECAUSE OF it? The only "so-called candidate" that we have right now, hundreds of billions of dollars later, is "none of the above," and this nation literally cannot afford that.
Impeachment? Absolutely. Lots of 'em and right now. Turn on all the lights and don't try to catch all the rats... just start stompin' em and shovin' 'em into a bright yellow jumpsuit. Clean house, the American way. Carefully, oh so carefully, read them their Miranda rights and show them that no matter how heinously they treated their own enemies, they will wind up at the end of America's rope after a scrupulously fair trial.
Yet, "wind up at the end of America's rope" they will do. Just as the world community has no need for these people and the harm that they do ... neither do We the People.
shut the borders for a while, the rest of the planet has our money, so tell em to get out there and deal with their own @%@ for a while, we need to keep our own house, nationally, for a while. This Florence Nightingale run-amok stuff is going to kill us, if it hasn't already...
To begin to bring these deficits under control tariffs must be implemented ...
Without addressing the trade gap all else fails.
We also need to stop spending 12 billion a month on an occupation of Iraq that gains us nothing.
Yep ...
-We need to cut the military budget in half. We'd still be spending many times our nearest competitor.
-We need to implement single payer healthcare. This would immediately give states and businesses extra cash to weather the coming crisis.
- We need plug in battery electric cars that use domestic energy, while preparing the grid for renewables. This would substantially reduce our trade deficit, pollultution, transportation costs and increase the security of our economy against oil shocks.
The Bush family and all their fatcat pals are doing just dandy in this economy. What's happening is, as the author says, just like what has happened to the "emerging market" economies cited. The US is now being raped just like Chile, Argentina, Uruguay, Poland, Russia, Korea, and many others in the past few decades, and largely by the same cadre of billionaires. Read the Shock Doctrine by Naomi Klein.
here's a rank order of countries by current account balance:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html
(there is quite a distinction between capital and capital goods...a tractor is a tractor, while capital. . .has the generic of "equity" or investible funds that come in to buy up your mineral estate etc. You'll remember our boy George and his reference to "political" capital)
Dead friggin' last.
Appalling!
The GOP needed money badly after they realized that they had been caught in a trap of their own making in Iraq.Trying to be responsible would have meant admitting their lies and treachery and making us pay for the war.The public would have rebelled and since many of the Democrats had also voted with Bush,mostly out of ignorance,we had nobody to point out the truth.The poisonous and antidemocratic atmosphere created by the Bushies and the Press prevented anybody dissenting.This excellent posting only makes clearer our predicament and the solution.Lots of luck with anyone applying it though,False patriotism is a powerful platform and the public does not want to hear the truth.What will it take?total collapse:it's probably pretty close.All the liars and Neocons who got us into this will come out with their ill gotten gains stashed in a safe place and we will eat it,there were too many crooks to ever hold anyone responsible.The final bill-trillions and who is going to loan us that.
PADDYWHACK, great point to a good blog. I have been asking myself, "What will it take? " for the last several years, and my answer has always beed "total economic chaos". The only way Americans will change is if you hit them in the wallet. 70% of the country thinks we're headed in the wrong direction/on the wrong track, but we keep electing the same re-treads to office. We need people who think outside the box, not Clinton or McNuts. We need people who care about average Americans, and I don't see any on the horizon. "Total collapse" is the answer.
"All of these stories had one thing in common: the countries were living beyond their means and were over-dependent on foreign loans, which ultimately caused the entire unsustainable edifice to come crashing down."
I have loaned out the book so I'm going by memory, but according to "The Shock Doctrine" this did not apply to the Asian crisis, at least in Thailand. The powers that be let their market crash even though they did not have deficits. People patriotically even sent their government their own gold, but having a solid financial country did not stop the sharks from crashing the market and then buying everything up cheap.
I do agree with the rest, however. I am constantly amazed at how ignorant most Americans are about the severity of the problem even though there have been constant stories for a year in the news. We are not even half way through all the necessary financial write downs and there isn't much more the feds or the world lending institutions can do to help.
You miss a mega-important part of the comparison to the bannana republic. We have been running close to a $trillion in trade deficits per year. During a conservative presidency and government when you consider the republican house and seanate majorities for six years, this is akin to being a law and order governor caught with a prostitute. It just does not work.
IOUs misstate what has really happened. The countries of China and Japan have not let their respective currencies "value" in the market place vis-a-vis the dollar. They have entered the market to keep their respective currencies cheaper than they would otherwise be (i.e. they have cheated, broken WTO rules) if they faced the free market determinant, supply & demand. The Chinese and the Japanese do this, keep their currencies low, so they can keep their industrial markets employed, selling goods to Walmart etc. The Yen and the Yuan should be 40% stronger (debatable but in this range) to the dollar. This market valuation would do a lot to resolve the Bush problem we've been sinking into. Yet little George talks about a strong dollar. Lies, all lies. I believe it has been part of their plan to keep inflation low (cheaper consumer goods...after all it is cpi) and permit lower interest rates at home while exploding the the Wall Street valuations.
These are not IOUs we have been floating. It is a calculated economic policy with quid pro quo amongst the bigger players on each side. Heard of Goldman, Money Changers In Chief (for a biblical ref)
And just how many of those chinese and japanese products will we be able to afford afterwards? And more importantly WHO will lend us the money to continue after we cut our number one and two buyers of U.S. treasuries off at the knees?
I cannot believe how naive some folks are. China and Japan have PURCHASED the right to devalue their currencies, and we go along WILLINGLY.
Indeed, the only answer is tariffs, large tariffs ...
And pretty soon you won't have to imagine any more.
You must be logged in to comment. Log in or connect with
