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America's perpetual Christmas

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.

Kenneth Rogoffby Kenneth Rogoff

Has the United States transcended the laws of economics? As the New Year begins, the US continues to race ahead of its rich-country counterparts. The gargantuan US trade deficit? No problem. In 2005, it widened further, and the dollar only strengthened. Low investment and a deteriorating primary education system? Not to worry. The super-flexible US economy keeps managing to produce more with less.

Nor are there any signs of America’s economic hegemony starting to fold under the weight of maintaining its unilateral military dominance. Instead of feeling the pinch of wartime privations, like in any ordinary country, American consumers are binging as if it were Christmas all year round.

There are those who truly believe in the idea that America is exceptional. Those true believers argue that America’s consumers can long pursue their spendthrift ways because their country’s economy is better than everyone else’s. The US labor market is more flexible than Europe’s, enabling it to react more nimbly to the ever shifting sands of globalisation. And, unlike most countries, especially in Latin America and Asia, the US system ruthlessly prunes weak corporate leadership.

Moreover, the true believers cite America’s better-funded and hyper-competitive university system, which sucks in a disproportionate share of the world’s top students and researchers. Many ultimately choose to immigrate to America permanently, and it is relatively easy for them to do so, thanks to a society that still welcomes outsiders with open arms (even if things have become more difficult since 2001). On top of all this, the US military, rather than being a burden, feeds the country’s technological superiority by subsidising basic research.

By contrast, skeptics hold that the US economy already contains the seeds of its own socio-economic decline. They point to worsening income inequality, as images beamed worldwide from post-hurricane New Orleans illustrated all too clearly. Poor children do not have reasonable access to health care. Nor are the non-poor faring particularly well, as wage growth has remained virtually flat for a very long time, even as corporate profits are booming.

Indeed, this disconnect may explain why polls do not give President Bush the credit for economic management that his strong record would seem to merit. Nor does it help Americans’ mood that they spend far more of their lives working than do citizens in Europe or, these days, even Japan. All of these factors place deep stresses on the social fabric which, so the skeptics argue, will ultimately play out in the political arena.

Interestingly, both sides cite America’s gaping trade deficit – believe it or not, the US is soaking up two-thirds of global excess saving – to support their arguments. The true believers view the deficits as evidence that the world recognises how special the US is and wants to buy in. Skeptics see an empire living on borrowed money and borrowed time.

So which is it? In my view, those who think that America is about to collapse are likely to be disappointed. Nevertheless, I suspect that the age of American exceptionalism is near an end, and soon per capita income in Europe and Japan will approach that of the US, rather than falling farther behind. Though the next few years are likely to underscore some of the weaknesses that the skeptics highlight, the end will come mainly because other countries will find creative ways to mimic the most effective US institutions, albeit within their own legal, political, and social frameworks.

We would do well to recall how, at the beginning of the 1990’s, book after book was still being written urging US and European corporations to imitate Japan or face certain doom. The last 15 years have of course revealed deep flaws in Japan’s financial system. But another major factor contributing to Japan’s decline was that firms elsewhere began adopting Japanese methods, such as just-in-time supply chains. Surely, imitation will someday impinge on superior US growth performance as well.

Perhaps the biggest weakness in the true believers’ argument is the trade deficit. For the moment, America’s ability to borrow vast sums at low interest rates acts like a huge dose of steroids on the economy. It artificially props up consumption growth and allows the government to defer hard choices between taxes and military expenditures. At some point, the party is going to end.

The unwinding of the US economy might even begin in 2006, particularly if Japan continues to grow out of its doldrums, the US housing market softens dramatically, and Europe’s economic recovery accelerates. Individually, these are each highly plausible scenarios, and collectively they would hit the US trade deficit like a perfect storm.

Perhaps the end will come in a different way, but it is difficult to imagine the age of US exceptionalism lasting indefinitely. Can the end come abruptly in 2006? This is not the most likely scenario, but it is not unthinkable.

Copyright: Project Syndicate, 2006.
www.project-syndicate.org
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V.E.Collins "This is why, or

V.E.Collins "This is why, or so I have read elsewhere, they ['they' being mainly China and Japan] do not call in the loans, because they realise that to do so would cause unnecessary hardship for the economies that are now so dependant on the goods that they produce, so they let the rope run and give us enough to hang ourselves".

Which loans are you referring too?

"What really interests me though is the way that some economies have thrived and prospered as soon as they threw off the shackles of debt repayment to the IMF, such as Argentina".

Argentina thriving? Please explain? This would seem to contradict this statement  "Refusing to re-value the yuan [except tokenistically] is producing a trade imbalance the likes of which puts Japan into the shade. Why fight a war with us when they can just own us?

Argentina de-valued their Paso a few years back in case you missed it. Perhaps Australia should re-invent the large factory footwear and clothing industry? I don't know, I guess we would not want a Chinese company like NIKE taking us over now would we?

Something really scary this way comes

Something really scary was said recently that has stuck with me even through the torrents of information that flow through my brain courtesy of the internet. That is, do you realise that China [which is where the majority of the funds borrowed by America and Australia are sourced from at the moment] owns every loungeroom in the country? They are also known to have made plans which stretch strategically into the future as far as the horizon. Refusing to re-value the yuan [except tokenistically] is producing a trade imbalance the likes of which puts Japan into the shade. Why fight a war with us when they can just own us?

 

This is why, or so I have read elsewhere, they ['they' being mainly China and Japan] do not call in the loans, because they realise that to do so would cause unnecessary hardship for the economies that are now so dependant on the goods that they produce, so they let the rope run and give us enough to hang ourselves.

 

Armageddon for the Western world will no doubt come when they decide to call in the loans knowing full well that we will be unable to repay them; then they will demand their quid pro quo. Though we appear to be going down their road already with the new IR changes, so maybe they will just take over when all the hard work has been done for them and we are subjugated into wage slaves and the wealthy who control us  from our own population will be just doing that job for global capital to protect their own investments.

What really interests me though is the way that some economies have thrived and prospered as soon as they threw off the shackles of debt repayment to the IMF, such as Argentina.

Future Shock

It has occured to me that technology really lets governments of the hook these days. I hear so often about how we have never had it so good and that must because of whoever it is governing us at the moment but if you delve further and ask why people perceive their lives to be so much better than 10 or 20 years ago invariably it is because of the vast material benefits we have gained through technolgy and invention.

No matter that many of the wonderful new inventions that make our lives easier are also available to many third world countries these days as prices almost half every year for luxury goods, but in many cases, particularly with Australia's terrible lack of support for scientific ventures, we live beter lives despite our government.

Death chants, breakdowns and forecasts for 2006

See Bill Bonner's article at The Daily Reckoning:
[extract]

So, today, we begin by describing the world, not as it will be, but as we think it is. It is a world where individuals who mind their own business can live better than at any time in history. Painless dentistry, air-conditioning, automobiles, the Internet - we are humbled by the majesty of our own creations. Year after year there are more of them. Now we can eat pineapple in London in the wintertime. We can read books written by dead Chinese scholars in our native languages. We can chat with a friend on the other side of the globe, at almost no expense. And we can have an erection where and when we want one (so we are told), thanks to the wonders of modern biochemistry, rather than the mysteries of old-fashioned hoochie coochie. The thought of it is almost too much for us. We swoon, and ask the gods: what next?

While the progress of the world swells up before our eyes, we turn our eyes to the newspaper and wonder what has gone wrong, for there is the story of 100 dead in Iraq. Reading more carefully, we find that the news from Iraq could have been written 100 years ago, when the British Empire was fighting insurgents in the area. It could have been written nearly 1000 years ago, when Baghdad was under assault from the Great Khan. We also might have read it 2,000 years ago, when similar battles were fought with the Romans.

Has nothing changed? Why is our own Texas Tiberius repeating the errors made by virtually every empire that ever was: pushing beyond the limits of its resources, until it finally falls apart? And he does so at the very moment when life seems so sweet in so many ways. We Americans can barely brush our teeth often enough.

Alas, dear reader, while we enjoy real progress in matters of technology, in matters of psychology we remain the same as we always were: prone to panic, backsliding and humbug.

Which is why we expect little from 2006. Technology improves with the passage of time; psychology oscillates like the seasons. While we are sure that the year will bring marvelous new gadgets, we doubt that it will bring marvelous improvements in our mental state. We have enjoyed a long season of calm, comfort and conceit. Bitter weather must follow, as it always does.

[snip]

Home sales will be down 6% to 8% in 2006, says Fannie Mae. Wal-Mart just reported its smallest December sales gain in five years. Auto sales for the Big Three were all off in December. And even, "truck sales stumble in '05," says AFP.

It may be true that the new, globalized economy helps everyone get richer. The trouble is that the riches do not fall on all voters equally. The rich - those who own financial assets, and those whose labor is protected from Asian competition - are getting richer. The poor are getting poorer. When the poor finally realize it, they aren't going to like it, and 2006 may be the year they begin to wise up:

"Millions brace for credit card crunch," says a CBS headline.

But the lower and middle classes can do nothing about it. They are the ones who have borrowed too much - often taking out interest-only mortgages, with no income verification. They cannot work their way out of the hole; their wages are under constant pressure from Asia. They will have to suffer, along with those who hold their mortgages.

Technology inches forward, but changes in mass psychology can happen by leaps and bounds. That is why the financial markets are prone to panics. Of course, they do not happen frequently. That is why forecasters are usually right when they predict that next year will be like the last. Extraordinary events, like panics, happen rarely. Otherwise, they would be common events. And since they do not happen very often, people generally think they never happen. People build their houses on low ground...knowing that a flood is possible. But they rate the odds so low as not being worth worrying about. Likewise, who worries about a panic out of the dollar? Who worries about a stock market crash? Who tosses and turns at night, sweating the risk of a real estate collapse? After so many years of stability, investors come to think these things can't happen. They imagine that the monetary authorities have made some fundamental progress - like the progress in microcomputers or gene therapy - that makes these extraordinary events obsolete. They think they will never happen again.

Imagine what they would think...imagine what they would do if the dollar sinks by 5% every day for a week. Imagine how hysterical they would become if their neighbors house stays on the market, even after they cut the price by 50%. Imagine how panic-stricken they would be if interest rates shot up 2%...or 4%...or even to 18% as they were in 1981. All of these things are possible. All are likely, maybe not in 2006, but certainly before the end of time. All are human, psychological reactions...completely foreseeable and completely unpredictable at the same time.

More On Iraqi Democracy

I note that ‘Democracy’ continues to raise its head in Iraq since the ‘overwhelming’ success of the elections there on 15 December of last year.

In a demonstration of America’s supreme desire to show exactly how ‘democratic’ the system they have placed in Iraq can be, Chalabi, who was unable to even win a seat in the new parliament, has been made Minister for Oil!

Why am I not surprised?!

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