Freedom of Expression
An American economist asks
An American economist and investment Guru, Peter D. Schiff, asks his US Government; are we serious about rehabilitating our dwindling economy or just delaying the inevitable. His appeal to the US government reflects upon the present state of that country’s economic condition.
Let us know what he wants to say,
While all the talk by media commentators at present is about economic corners turned and markets charging ahead, no one is paying much notice to an American economy that is deteriorating right before our eyes.
These narrow-minded commentators seem to be simply moving past the now almost-universally held conclusion that, before the crash of 2008, our economy was on shaky grounds. If these imbalances had been corrected, then perhaps I, too, would be joining in the euphoria. But evidence abounds that we have not veered at all from that dangerous path.
The U.S. Bureau of Economic Analysis just reported that consumer spending as a percentage of U.S. gross domestic products (GDP) has risen to 71%, a post-World War II record. At the same time, our industrial output is contracting, our trade deficit is expanding once again (after contracting earlier in the year), and our savings rate is plummeting (after an early year surge).
The data confirms that government stimuli are worsening the structural imbalances underlying our economy. The recent “rebound” in GDP is not resulting from increased economic output, but merely from the fact that we are borrowing more than ever. That is precisely how we got ourselves into this mess. An economy cannot grow indefinitely by borrowing more than it produces. Not only is such a course untenable, but the added debt ensures a deeper recession when the bills finally come due – as they ultimately must.
This soon-to-be-called depression will not end until the pendulum of consumer spending habits swings violently in the other direction. This will be a jarring change, but it is the splash of cold water that we need to return our economy to viability. I believe that consumer spending as a share of GDP will need to temporarily contract to roughly 50% of GDP, before eventually moving toward its historic mean of 65%. Such a move would indicate a restoration of our personal savings and healthy improvement in purchasing power, a decline in borrowing and trade deficits, and an increased industrial output. That would be a real recovery. To this effect actually US based MNCs should contribute but desired impetus is not evident. Most of the money is blocked up in swinging on stock market eventually keeping much less money for concrete growth. One other US investment Guru predicts that, that splash of cold water to awaken the concerned may come up around 2012. Sorry to say, it may be too late.
In the meantime, the higher the spending percentage climbs, the more painful the ultimate decline becomes. This is because; this spending is not out of savings but out of borrowing! Ultimately, increasing burden on the savings.
Consumers and governments must spend less so their savings can be made available to businesses for capital investments. Businesses, in turn, will produce more products and employ more people – increasing domestic prosperity. However, rather than allowing a painful cure to return our economy to health, the government prefers to numb the voting public with a toxic saline-drip of deficit spending and cheap money by printing dollar. On the other hand US based MNCs prefer to reroute production to distant cheaper destinations. To worsen this dismal picture US youth is more inclined to indulging in online trading and stock market speculations rather than hard work.
The primary factor that enables our government to peddle economic snake oil (fraud) is the dollar’s unique role as the world’s reserve currency, and our creditors’ willingness to preserve its status. By buying up dollars and loaning them back to us through U.S. Treasury debt, productive countries give American politicians complete freedom to play Santa Claus with American public. The vicious circle of this exchange of Dollar may end violently to the detriment of both creditor countries and US.
Ironically, as foreign governments finance our spending spree, they are simultaneously scolding us for our low savings rate. At the recent G20 meeting in Pittsburgh, all agreed – including U.S. President Barrack Obama – that resolving the global economic imbalances was a top priority. By definition, this would require Americans to spend less and save more. However, with foreign central banks continuing to buy our debt, President Obama has shown no political will to encourage this change. This amounts to delaying the inevitable consequences.
Normally, if politicians run up the government deficit, voters soon suffer the unpleasant consequences of higher inflation and rising interest rates. Yet, if foreign central banks keep supplying the funds, these consequences are indefinitely postponed. As a result, there is no need for American politicians to ever make the tough choices required to solve our problems. Again I would repeat this amount to delaying the inevitable consequences.
Instead, the burden will definitely fall head-on, on the citizens of those governments doing all the lending. India has lent about $40 billion. The conflict is that within the creditor states, a vocal minority actually benefits from this subsidy (owners of Chinese exporters, as lent money is used to purchase goods of these people) while the overwhelming majority fails to make the connection. Thus, foreign politicians have the same incentives as U.S., to keep playing the game. Even though at present this dangerous game may appear comfortable for both politicians; the situation cannot remain at ease for all the time.
The bottom line is that, foreign governments can lecture us all they want about the need for prudence. But if they keep lending, we will keep spending. Any parent knows that if you give your child a curfew – yet never impose any penalties when it is violated – the rule will not be respected.
My gut feeling is that foreign governments are tiring of our conduct and are on the verge of finally imposing some discipline. That means the dollar’s days as the world’s reserve currency are numbered, and the days of American austerity are about to begin.
The notorious Structural Adjustment Plan that World Bank and IMF imposed on poor countries shall become applicable to US and as a result Dollar shall be devalued; may be, suggestion of John Maynard Keynes to develop a Central bank with its currency will come true and eventually “Bancor” will replacing Dollar for good. In that eventuality World Bank and notorious IMF will dissolve in the Central Bank with the difference that this time U.S. will not hold office in that Central Bank! In other words one can say that is the end of U.S. period.
My intention in giving these excerpts of important people from that country, our economists are madly imitating without second thought; to show my readers that we are in deep trouble, if we continue copying the US policies even where they do not exactly apply.
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