In spite of all the assurances by the politicians that everything in the garden is rosy, I continue to believe that it is better to face the possibility – or the reality – that it is not, so that we actually start doing something to fix the problem. Otherwise we all sit there like a bunch of children waiting for the teacher to tell us what to do next.

Stephen Roach has an article about economic balancing that I am going to reference here, but this should not be the only metaphorical balancing that we address.

The world is careening along like the proverbial drunken sailor. But drunken sailors are a lot more responsible about their rampaging than most of the bankers, politicians, and frankly the rest of us.

I blogged a couple of days ago about the ecologicial challenges that we face.

I try to avoid blogging about the war in Iraq; all too easy to get dragged into a quagmire of words there. But let's face it – that is part of the problem too. Wars do not solve problems. They cause them. They cost money. They destroy infrastructure. They pollute the environment. And worst of all they exacerbate racial and social hatred and imprint it into the minds of the next generation. The only people that like wars are bankers, because they get to loan the funds to do the rebuild and create a new line of indebtedness…

So back to Roach…

Here is what he says – and it is so blindingly simple and beautifully put, everyone should read this:

It was exactly six years ago when I first coined the term, “Global Rebalancing.” The equity bubble had burst, America
was heading into recession, and an unbalanced, US-centric global
economy was in trouble. A rebalancing was in order, I argued at the
time — and the sooner the better!

The world was in serious need of new sources of economic growth. The United States
– with a massive current account deficit of some $415 billion, or 4%
of its GDP in 2000 — was in no position to maintain its role as the
dominant global growth engine. The laggards needed to step up –
especially Europe, Japan, and some of the bigger economies of the developing world.

That help never arrived. But the global economy never came unglued. Instead, its imbalances continued to mount. America’s
current account deficit ballooned to a record $791 billion in 2005, or
nearly 6.5% of GDP. The gap between the world’s current account
deficits and surpluses expanded to nearly 6% of world GDP in 2005 –
essentially double the 3% disparity prevailing in 2000 when I first
sounded the alarm over global imbalances.

An
unbalanced world was able to buy time. With the benefit of hindsight,
it is not that difficult to figure out how. Fearful of a Japanese style
deflation in the aftermath of a burst equity bubble, America’s
Federal Reserve rushed to the rescue — spearheading a massive monetary
easing that pushed short-term interest rates down to the unheard of 1%
threshold. That prompted a seamless move from one asset bubble to
another, as the property market took over where equities left off.

That
was all American consumers needed. Courtesy of state-of-the-art
financial technologies, US homeowners were quick to extract equity from
an increasingly frothy housing market — and use the proceeds to fund
both consumption and saving. Confident in the sustainability of
asset-dependent growth, American households had no compunction in
drawing down income-based saving balances. In 2005, the personal saving
rate moved into negative territory for the first time since 1933.
Together with outsize government budget deficits, this pushed America’s overall saving to record lows. This forced the US
to import surplus saving from abroad — and expand its already massive
current account deficit in order to attract that capital. The rest of
the world — lacking in internal demand of its own and awash in excess
saving — was more than happy to go along for the ride.

Time has finally run out for an unbalanced world. Just like the demise of the equity bubble over six years ago, America’s
property bubble is now in the process of bursting. Moreover, a sharp
resurgence of equity markets is unlikely as corporate profit margins
now come under pressure. That means the days of asset-driven support to
US
consumption are coming to an end.

…..

Especially at risk are America’s NAFTA partners — Canada and Mexico, where US exports account for more than 25% of their combined GDP. China is also vulnerable; exports account for about 35% of its GDP and the US is, by far, its largest customer. Moreover, China’s supply chain could spread the impacts of a slowing of US consumption to its Asian trading partners — namely, Japan, Korea, and Taiwan — as well as to major resource providers in Latin America (i.e., Brazil), Australia, and even Africa.

This is the problem we face. Total interdependency of both ecology and economy.

If the US increases interest rates – the housing bubble will deflate and create a wave of bankruptcies across the US that will be absolutely spell the end of the Republicans for years to come. This is something that they will avoid. If they let interest rates remain the same, the harm will continue albeit at a slower pace. If they reduce interest rates the housing market continues but the imbalance does too and the train wreck just gets bigger.

And all the time that this is happening in the background the ecology is being harmed even more. Because while the economists play China continues to build factories, roads and infrastructure. Demand for cars increases and therefore oil demand increases against diminishing supply. Thus driving up price, thus putting inflationary pressure on everything.

And remember that oil is not just about transportation. Petrochemicals are at the heart of the plastics industry, the drugs industry and more.

We have to start realizing that people like James Lovelock are right. We are in a no win position. We are past the tipping point. And we are in an era of contradiction. We are part of the flat world and at the same time should expect a rising tide of nationalism.

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Posted in Economics Main Page by Chris Gilbey No Comments Yet