At long last, a good portion of mainstream economists now concede
that a 'double dip' recession is in the cards for the United States.
To head off the pain, sixteen top economists addressed an open
letter to the President urging him to "stimulate" the economy with a
massive new round of government spending. We feel this is a recipe
for driving a recession into a depression. However, there can be few
doubts that such a move is being considered in the highest policy
circles. Flush from victories in financial regulation and
healthcare, the Administration may feel the conditions are ripe to
push through another bold initiative.
If so, the United States may find itself
in a very diminishing bloc of nations who fail to appreciate the
magnitude of the global debt crisis. Its policies will become
increasingly at odds with the drift of other world powers. Given
American dependence on economic support from abroad, the risks of
such isolation are significant.
On July 20th, UK Prime Minister David
Cameron made his first official visit to the US. At a joint press
conference that followed the private meeting, President Obama and
Mr. Cameron papered over the fundamental economic disagreements that
separate both governments.
At his core, Mr. Obama is in favor of
spending his way out of the current recession. Most of the
post-World War II occupants of the White House have followed the
same course. Although the policy is short-sighted, it serves
nevertheless to protect the competitive advantage of keeping the US
dollar at the heart of the international monetary system. Spending
expands global credit and creates the illusion of an invincible
dollar, increasing the system's popularity at home and abroad. In a
self-perpetuating feedback mechanism, the dollar's unique
international position allows it to get away with even more
spending.
Many international economists, bankers,
and politicians now believe the US has overplayed its hand. At the
recent G-20 meetings, America was at odds with the other major
powers, who favored major cuts in government spending even if the
result was a deeper short-term recession.
Part of this can be explained by currency
movements. The Greek debt crisis threw doubt on even financially
sound nations like Germany and ravaged the European common currency.
Wishing to save the euro from the dustbin of history, the Germans
and their allies within the EU have dug in. The sentiment even had
an effect on the UK elections, which put the Conservatives into
power with a mandate to strengthen the government's balance sheet
and buck up the pound sterling.
On the other hand, Washington's profligacy
has yet done little to dent confidence in the greenback. As a
result, the Obama Administration senses no need for caution. This
hubris will prove costly.
On paper, the United States appears to be
the world's richest economy. However, she is also the largest
debtor. If unfunded obligations are added to the $14.1 trillion
official Treasury debt, the total would exceed $60 trillion, or 430%
of 2009 GDP. If deficits and the disguised costs of Obamacare are
included, the bill gets even larger. Despite this, the US government
retains its treasured 'AAA' credit rating, at least in the eyes of
disgraced Western ratings agencies. Meanwhile, according to the
seemingly less-biased Dagong International Credit Rating (DICR)
agency of China, the US has been downgraded to 'AA-'. Given its debt
levels, even that rating may be overly generous.
According to the DICR, only Australia,
Denmark, Luxembourg, Norway, New Zealand, and Switzerland retain
their prized 'AAA' rating. Canada, China, Germany, and the
Netherlands have been downgraded to 'AA+'. France, Japan, South
Korea, and the UK join the US at the disturbing 'AA-' level.
However, if Prime Minister Cameron delivers on his promised 25 per
cent cut in government spending by 2015, the UK may regain a higher
rating.
On the other hand, President Obama has
bragged that Americans should "make no mistake, we are headed in the
right direction." More disturbingly, his Administration has put
forward the absurd notion that government spending achieves a 3:1
multiplier versus private spending (meaning every dollar of
government spending will "pay for itself" by generating three
dollars of private economic activity). Sensible economists suspect
that the reverse is true: every dollar of government spending sucks
between one and three dollars from the wealth-creating private
sector.
It appears that America is now set on the
sanguine 'progressive' path of stimulus and inflation. Our rejection
of the other great powers' newfound maturity will push our recession
into a depression, reduce our credit rating, and raise our already
vast borrowing costs. Meanwhile, the rest of the world may not even
notice we've fallen. Cool heads should plan accordingly
Please note: Opinions expressed are those of the writer.
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