US Crisis Calls for Structural Reforms
Loading ...To address the growing economic crisis worldwide, the leaders for G-20, representing 85 percent of the world’s economic output, declared in their meeting in England that governments must “take whatever action is necessary until growth is restored.”
But the 8-point strategy in the G-20 conference dwelt on nothing new. These points have been the program of governments since the economic crisis erupted.
The other points that were not taken up are the following:
First, what is the crisis about? It is the increasing unpaid debts of the US economy. These are debts accumulated through the years and, for lack of savings, continue to be rolled over. The US crisis first manifested in defaults in the housing sector. Then, the crisis exploded and exposed the US dependence on complex forms of debt instruments in order to fund its economic growth.
There are two sides to these debts—millions of borrowers without capacity to pay, and million of investors with easy money to lend. There is also a third side—financial intermediaries that marry the first two sides. There are the debt masters who profit from every debt called by another word—investment.
There would have been no crisis if there were no eager borrowers, no crisis without rich lenders so eager to part with their money for greater returns, no crisis without debt masters so eager to make the union of the two parties attractive. The bottom line is, borrowers must have the capability to generate income to pay for future amortization. On a macro level, the bottom line is, an economy must have the capability to produce opportunities fro these borrowers who make up the economy to generate net income to pay for their debts over time.
As it turned out, the US economy did not have such capability. And bubbles burst. How does one determine the US economy’s capacity to generate net income and pay debts? You would think it is gross domestic product. Think again.
In the present global economy, the US economy incurs debt when the value of its exports of goods and services to the rest of the world is less than the value of its imports from the rest of the world. When the combined dollar revenues of Americans are less than their combined expenditures in their business with the rest of the world—exports less than imports—then a deficit is incurred and that deficit is debt. In this case, the rest of the world is lending dollars to the US economy.
The term used for this account is current account balance (CAB).
What des the CAB history of the United States show? The United States has been in deficit for 33 years, and will continue to be so in years to come. A chronic negative CAB of the United States shows that the Americans are not competitive with the rest of the world.
The fiscal stimulus of the Obama administration is grounded on the belief that Keynesian economics will lead to recovery as it did in the Great Depression.In the Keynesian formula, to stir up GDP, the government only has to pour money into the economy. Increased government expenditures would trigger rise in consumption, investments and net exports.But Keynesian theories have been overrun by the new global economy starting in the 1980’s, long after the death of John Maynard Keynes.
With the ability of modern technology to freely move capital across national borders in an instant, the global economy awakened the wealth of the world accumulated through centuries. This enormous wealth is now in the busy hands of financial market operators whose expertise is to match this wealth with needs for debt of voracious borrowers. The debt masters soon identify these borrowers—growing economies with chronic CAB deficits—and the biggest target of all is the United States.
The United States, which has the world’s highest GDP and highest per capita income, has become the center of the global crisis and economic instability.
Is President Obama on the right course in pouring a trillion dollars as fiscal stimulus into the economy?
Every dollar of stimulus will increase GDP and raise employment. But, without structural reforms in international trade and finance, every dollar of fiscal stimulus in the hands of Americans will only result in Americans buying more cheap imports, killing US local industries, raising US current account deficit, increasing foreign debt, employment loss, loan defaults.In effect, it raises greater risks for the global economy. The massive US fiscal stimulus is like drinking salt water to quench one’s thirst. The concept of current account deficits exposes the role of the US dollar as the medium of exchanges for international trade, investment and finance.
Why is this so critical?
The dollar fluctuation is the greatest source of instability in the global economy. It brings incalculable risks to international traders, lenders, investors and borrowers.
Also, the high value of the US dollar is an important reason why US labor cost is high, why US products are more expensive than China products, why cheap imports are killing US domestic industries, and US exports are finding themselves uncompetitive in the world market.
This high value of the dollar is also the reason why the US current account balance has been persistently on deficit for 33 years. The present US government continues to maintain the desirability of the dollar’s high value, but will deny it is overvalued.The world does not have a choice but to keep on buying US dollars. Trading of goods and services in the global economy is done in US dollars. This has been instituted as a way of life since after the World War II.As a result, the US dollar remains strong and does not depreciate even if the United States has chronic CAB deficits and is the center of a financial and economic meltdown.
What is the solution?
The G-20 leaders must now consider the creation of a universal foreign exchange for international trading, investment and finance.The European Union successfully accomplished this type of restructuring in 1999 with the conversion to the euro of the German mark, Italian lira, French franc, Spanish peseta, etc.These leading economies must establish the orderly system of converting the world’s present currencies to these foreign exchanges and retire the US dollar and other local currencies as medium of exchange.With a universal currency, the United States will no longer be saddled with the dollar that makes its imports cheap and exports expensive. It can now compete with the rest of the world on a level field.
Under this regime, the Obama fiscal stimulus can succeed in providing long-term employment to Americans, boosting local industries and enabling the United States to share the boundless reserves of its people’s technology and innovativeness with the rest of the world through unrestricted, open trade.
Under this regime, the United States now has a chance to reverse its 33-year-old history of current account deficits.
Source: Philippine Daily Inquirer by Aurelio O. Angeles
