US fails to take own medicine as guard changes
July 23, 2009
By Geoff Blount
According to the Centre for Economics and Business Research, the US, Canada and Europe will generate less than half of the world's economic production this year as the recession accelerates a shift in wealth towards China and other developing nations. The figure was as high as 64 percent in the mid 1990s, and may move to 45 percent by 2012.
This dramatic shift of economic power is particularly interesting in terms of how developing economies respond to their new power. The debate about the dollar as a reserve currency is but one example.
The US and Europe are now the principal exporters of economic risk. And politically and socially, emerging markets have been subject to the hypocritical management of the world economy by the US (and, to a lesser extent, Europe) through their political wings, as well as the International Monetary Fund (IMF) and the World Bank.
This is evidenced in the ultimate irony that the exact austerity measures that the US, via the World Bank and the IMF, have foisted on developing countries in the past when they have mismanaged their economies, is the exact opposite of what the US is implementing itself. These standard policy prescriptions were so pervasive that they became known as the Washington Consensus.
In the past, through these institutions, the US has forced the following medicine on troubled economies, no matter what the social cost:
Balance the government budget. Yet the US will run a budget deficit of 13 percent and take on national debt of between $5 trillion (about R40 trillion) and $7 trillion when all is said and done.
Reduce the size and role of the state in the economy. By contrast, bigger government and more intervention is on its way in the US.
Cut money supply. However, money supply growth in the US is now running 100 percent year on year. Inflation has not yet reared its head because the velocity of money has halved. However, as soon as banks start lending again and money velocity moves back to normal levels, inflation of 100 percent is theoretically possible, unless the authorities expertly mop up liquidity. But remember, these are the same expert authorities that created the mess. Hence inflation of 10 percent to 20 percent in the US in the medium term is not an impossibility.
Of interest, inflation may be perceived as a good thing politically as the government inflates itself out of debt by way of effectively devaluing the nominal value of the $5 trillion to $7 trillion debt it has just borrowed (on top of the rest of the national debt). Brazil in the 1980s and the Weimar Republic in the 1920s tried the same thing with disastrous consequences.
Raise interest rates to remove excesses in the system. The US is trying to encourage people to take on more debt to fix a problem created by too much debt.
Devalue the currency to export more to reduce the trade deficit. The US has not managed the currency down, but markets will probably do this in time.
Drop tariff protection, deregulate trade and make industries more competitive to cut the trade deficit. Bailouts, government assistance, or whatever you wish to call it, are all methods of protectionism by another name - high on the US political agenda right now. In addition, there is a "buy American" provision in the stimulus package - the American Recovery and Reinvestment Act of 2009.
Privatise industries. Through bailouts and assistance, the US has essentially nationalised large parts of the financial and industrial sector. The argument for this was to prevent systemic risk, particularly in the financial sector, but this has perhaps gone too far. What systemic risk would the failure of a company like General Motors create?
Reduce the trade deficit by cutting domestic consumption. US policies are aimed at pushing domestic consumption up.
And finally, force economic recession, high unemployment and massive hardship on your population while your country "structurally adjusts" and, most importantly, tolerate the political consequences of a hungry and angry populace. They "deserved it" for getting themselves into the mess in the first place.
Imagine the reaction from the US, the IMF or the World Bank if Argentina or Brazil had behaved the way that the US currently is behaving when they faced previous economic crises.
The rub is not that conservative or prudent economic management and policy making is not appropriate in times of crisis, or times of normalcy for that matter (I would argue that they largely are), but the aggressive nature of their implementation by these institutions in other countries.
The duplicity of not taking ones own medicine, as evidenced in current US policy, goes a long way towards explaining the US's characteristic unpopularity in the world order.
Fortunately President Barack Obama brings a breath of fresh air and tremendous domestic and international goodwill. But perhaps his hands are tied and he was given a "hospital pass", or do US politicians simply not have the political will to foist on their own populace what they have done to the rest of the world?
Of interest, almost all of the current US populist policies have some parallels in Zimbabwe (before its economy imploded). An extreme example obviously, but look at the typical poor internal economic policies in all economies before Washington Consensus measures were put in place.
The perverse irony of this would almost be amusing if the consequences were not so tragic. The reality is that the US probably had little policy choice but to do what it did (if one believes that the systemic risk of the US falling over is too great), to get itself out of the mess that it created for itself.
Perhaps the world should breathe a sigh of relief that the US is avoiding depression, no matter what the long-term negative economic and political cost is from its current policy errors, which are just attempting to fix previous policy errors.
The likely outcome of this is that it has further accelerated its own decline in the world order from superpower to just another country fighting for its place in the sun, the result of too much greed, excess and an unsustainable standard of living.
Now it is payback time. What a tragedy, because for all its many faults, the US had - and still has - many virtues that the coming world order's new powers don't have. Even if often implemented in a horribly misguided fashion (or for national gain), it was perhaps the most altruistic empire the world has seen, or is likely to see for many, many years. We may yet lament the decline of this empire, all the more tragic because it is self inflicted.
Geoff Blount is the chief executive of Cannon Asset Managers. He writes in his personal capacity and these are not necessarily the views of Cannon Asset Managers.
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