The world’s concern, and China’s immediate focus, is about America’s financial discipline. Its effects will sketch America’s credibility and its economic health in the near and long-term. For China, it is a job of deciphering it all. China is especially worried about the value and potential devaluation of its vast holdings of American debt, which adds up to about 50% of Chinese GDP, as America is its largest export market. Is America going to stop printing dollars, or will she flood the markets with cash (with so-called Quantitative Easing methods) and thus devalue the dollar and diminish the hard, reserve currency?
Many are wondering if it is all a repeat performance of the British economy circa 1960s and 1970s-- when the Pound Sterling lost its sterling, politely became the British Pound and faded away as a reserve currency—after rounds of mass nationalizations (British Leyland Motors, British Airways, banks, IMF loans and the rest). The effect was the diminished role of Britain as a world power in an economic overheating, mindless asset inflation, high levels of debt and currency devaluation.
China’s dilemma is more complex. It hosts the only profitable division of General Motors. It must now reformulate its national priorities, transform an export-driven economy, and subscribe to a domestic spend-and-grow scheme. At least it can afford to spend its own savings. But what will be the value of such savings? Chinese think about the long-term. and they might be warning themselves that rampant domestic consumption might lead to a similar, American-style overheating. This inevitably complicates their analysis of American financial discipline and makes China leery of making long-term directional planning.
The idea of American management of the global economy in this Global Age was always a hyped stretch of imagination. Americans, some 5% of the world population, were the most liberal consumers but are now seemingly unable to maintain such standards. They all face a new era and a long period of adjustment ahead. Concurrently, the world wonders how much more Americans can consume in their developed, if not saturated, economy. Moreover, can America reinvent itself to be an export driven economy, like China, to earn its way back into financial stability without a systemic change to its economic model?
Let’s pretend that this body of 300 million consumers did not have about 100% of its GDP in tangible government debt, and an overall private and public debt of about 350% of its GDP. And let us further assume that the total sum of four trillion dollars of available credit card and consumer finance (in a 13 trillion dollar economy) did not exist. Can the current structure deal with other macroeconomic obstacles down the road—namely the shortfall of private pensions and social security, urgency of a national healthcare plan or Medicaid and Medicare over the next two decades? Some studies of the Federal Reserve, and speeches of Mr. Richard Fisher, the president of the Dallas Federal Reserve and a Fed Governor, estimate such shortfalls at about 3 to 4 times GDP over the next three decades. This is bad news. The only, classic way out would be a programmed devaluation of the U.S. dollar, if only to make the nominal value of the debt incurred smaller. Hence the worries of America’s creditors.
America is stuck in a Catch-22 spiral and a tough circular argument at a defining moment in its history. Although stock markets are on a trampoline of rosy make-believe assumptions, American asset prices (real estate, manufacturing and farm product prices) and wages are falling, unemployment is rising and fundamental demand will not return to levels known a decade ago. It is a process that cannot be stopped by a presidential decree, a statement of the Fed chairman, or the printing of another trillion dollars. More acute and amplified versions of such tough scenarios were experienced in USSR, Eastern Europe (in 1990s), or the serial money printers such as Mexico, Brazil, Argentina, Turkey or the German Weimar Republic after the First World War. Clearly, the lessons from those are that none could have helped the downward trend.
America today resembles France of 1970s. A bout of French consumption over “Thirty Glorious Years” after World War Two eventually deformed the country into unmanageable debts and defaults that stifled the financial system. Two economic master planners, namely president Giscard d’Estaign and his prime minister, Raymond-Barre, came up with the Barre Plan—an early species of Quantitative Easing scenarios, flooding of markets with cash to jump start the economy, devaluation of the national currency making imports more expensive, and the inevitable rise of taxes and the Value Added Tax (VAT), a national sales tax on tax-paid incomes. That deprived the economy. The original goals of the Barre Plan went awry and the socialist Mr. Mitterand had no choice but to nationalize banks, insurance companies, major manufacturers and other economic enterprises and let the national debt explode. A long period of stagnation, high unemployment and taxes, disinvestment and asset devaluations ensued. Some 30 years later, the French economy carries the scars of the presumptive good old days of the previous generation, albeit without wars or massive military spending.
Britain, much of Europe, USSR, India, China and much of Latin America had no choice but to transform their old habits over the last three decades. All charted a painful new course to embrace the Global Age (even though Britain is back to the 1970s fix of finances). Some embraced political cross-dressing to survive, and the rise of Chinese “communist capitalism” is manifest to being the single largest creditor of America, a nation that is trying to maintain a dual system of pseudo-socialist capitalism while nursing a phantasm of relapse to 1950s. This American dual approach is not sustainable and to gain confidence of the world, America must clearly decide and embark on its path of self-reinvention, if only to remind itself that it is no exception to the rules of financial discipline and credibility in markets.
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