Can America avert a global depression?
By Javed Akbar Ansari
Capitalists all over the world are worried about the state of the American economy - this was the central message of Davos 2003. America has about 4 per cent of the world's population but 22 per cent of the world's income measured in purchasing power parity terms.
It's GNP has been growing at the rate of 3.1 per cent per annum (as against an average OECD growth rate of 2.3 per cent) during 1991-2001. It currently accounts for roughly 15 per cent of world trade and a quarter of foreign direct investment. It's annual military expenditure in defence of global capitalism is approaching $500 billion. It is the only state specially constructed to promote capitalist rights, which represent the core values sanctified by its constitution.
Policy historians such as Brenner and Wood argue that it was the timidity shown by Clinton's economic managers (specially "saint" Greenspan) which laid the foundations of America's present troubles. They permitted the criminalization of the American financial system through policy liberalization.
It is now clear that the stock market boom of the 1990s was artificially contrived and that the world's major investment banks and leading accountancy companies were active accomplices in crimes which led to the wiping out of the life savings of millions.
The Financial Times investigations, covering the period 1999-2001 showed that embezzling one's own company had become an art - thanks to state policy deregulation - for CEOs. (FT, 12-7-2002).
In January 2001 the party of the CEOs got into the White House. Today it controls both houses and Dick Cheney is Vice President. Effective investigation of boardroom crime is frustrated at every step and the state's commitment to deregulation/liberalization has increased. The result is a continued deterioration of investor confidence in the US financial markets.
Wall Street has lost $7 trillion since January 2002 and Standard and Poor's Composite Index has dived from 1500 to about 880 over the same period. Nobody expects a sustainable capital market revival in 2003. According to UBS estimates, US investor confidence has dropped from 180 in January 2000 to about 90 today.
In trade weighted terms the dollar fell by 13 per cent in 2002. Official estimates of unemployment exceed 6 per cent, but this is a gross underestimate since it leaves out those who have stopped looking for a job since they can't find one. It is conservatively estimated that there are currently 12 million unemployed in America. Despite the house mortgage boom expectations of a house price crash are widespread.
Using the IMF parlance one can identify two 'structural imbalances' of the American economy. First there is the problem of astronomical indebtedness. According to Fed. flow of funds estimates aggregate US outstanding debt has increased from $16 trillion in 1994 to over $30 trillion today. The debt GNP ratio exceeds 300 per cent and during the Bush presidency outstanding debt has been growing at twice the rate of GNP. Hence the debt- GDP ratio will continue to rise in the foreseeable future.
About a quarter of this debt belongs to the financial sector. This is now equivalent to three quarters of US GNP. America may turn out to be tomorrow's Japan for much of this debt has been accumulated by leveraged merger and acquisition activity. As corporate profit rates plummet loan portfolio infection rates will skyrocket. Provisioning by US banks has been rising in 2001 and 2002 and this has been a major consideration in Fed. decisions to cut the interest rate in 2002.
Household debt is the second most important component of aggregate US indebtedness. This now exceeds $7.3 trillion - over 70 per cent of US GNP. The personal indebtedness to personal income ratio has risen from 106 per cent in 1993 to 140 per cent today. This has led to a catastrophic fall in household and net national saving which in the third quarter of 2002 equalled just 1.6 per cent of GNP. As the budget deficit grows net national savings will continue to decline. By end 2002 government debt amounted to over 50 per cent of GNP.
America's second "structural imbalance" relates to its external account. America's chronic current account deficit is fast approaching 6 per cent of GNP. Imports in 2002 were more than 40 per cent larger than exports. The trade imbalance was financed by capital inflows which aggregated to over 70 per cent of the world's current account surplus in 2002.
It is estimated that almost $2 trillion of foreign capital inflow is required to finance America's current account deficit on a daily basis. Stimulating foreign capital inflow requires an appreciation of the dollar and/or a significant increase in interest rate - both unviable policy options in present circumstances.
America's rising indebtedness has for the first time in its history made it a foreign dependent economy. Foreigners (including the State Bank of Pakistan) own 45 per cent of its government bonds and about 20 per cent of the total market value of its long term assets.
Since the US mainly borrows in its own / currency it has the option of devaluing its external debt by simply printing dollars - indeed it has already done this to a considerable extent since the September 11 counterattack. But this runs the risk of reducing attractiveness to foreign investors. Since the counterattack foreign capital inflows into America have noticeably slowed down.
Dealing with these structural 'imbalances' is increasingly difficult for the robber barons who dominate the American government. They have drastically cut down the size of the state to plunder the economy. Taxes on corporate profits were 25 per cent of federal revenue in 1950. they are now equivalent to only about 8.5 per cent. Bush seeks a further major reduction in taxes over 2003-2008.
Bush's economic strategy is fast losing credibility. Even Republicans in the House and the Senate describe his dividend tax cut proposal as "unworkable, unfair and ineffective". Public support for his economic policies has dropped to 47 per cent. The proposed elimination of taxation on savings and the transition to a comprehensive expenditure taxation regime have also been heavily criticized.
Bush expects a budget deficit of 3 per cent of GNP in 2003 and his calculations are fraudulent for he doesn't factor in the cost of the Iraq war and the cost of the minimum tax he intends to introduce - this alone will cost an additional $500 billion over the next ten years. Most blatantly fraudulent are the 'dynamic scoring' methods for assessing the impact of tax cuts on economic growth that the Republicans have forced upon Congress in January 2003.
Bush, by playing at a concoction of Keynesianism, wants to stimulate the market by his tax cuts on corporate profit and by enabling the financial sector to fleece the poor through his saving and health schemes. 'Saint' Greenspan argues that this is not how the market works in post-liberal capitalism. If the fiscal and monetary stimulus failed in 2002 - the rate of growth in the fourth quarter of that year was just 0.7 per cent - it won't work in 2003 or 2004 either. Perhaps we are reaching a watershed in capitalism's history.
Busts are as necessary as booms for capitalism's survival for busts enable a writing down of asset values through a repudiation of the debts incurred during the boom. Global capitalism needs just such a repudiation of the debt accumulated through financial swindles in America during the 1990s. By obstructing this 'correction' of asset prices Bush is actually increasing the eventual cost of 'adjustment'. Who knows he may even be making such adjustment impossible.
A careful reading of his General Theory shows Keynes' awareness of the need for a Herbet Hoover to precede a Roosevelt for capitalism to survive. Bush's unwillingness to play Hoover reflects global capitalism's most important 'structural imbalance' - the non-existence of a global state for managing the global market for capital.
Bush can terrorize defenceless people, bully tinpot dictators, torture and plunder his own 'white trash' but he does not have the power to sacrifice America's "national interests" to save global capital. Will capitalism's amazing ingenuity provide a solution for effectively addressing this increasingly serious disjuncture between the economic and the political organization of global capitalist order or are we at the beginning of the end?
for a non Islamic analysis of the same see:
Chomsky: Budget attacks America's majority
"It should be recalled that for about 25 years, wages have stagnated or declined for the majority ... and incomes have been sustained only by work loads far beyond the norm in the industrial world"
"The administration's opponents are the large majority of the US population. The general 'starve the beast' strategy is hardly concealed, though few are willing to
tell the truth"
Capitalists all over the world are worried about the state of the American economy - this was the central message of Davos 2003. America has about 4 per cent of the world's population but 22 per cent of the world's income measured in purchasing power parity terms.
It's GNP has been growing at the rate of 3.1 per cent per annum (as against an average OECD growth rate of 2.3 per cent) during 1991-2001. It currently accounts for roughly 15 per cent of world trade and a quarter of foreign direct investment. It's annual military expenditure in defence of global capitalism is approaching $500 billion. It is the only state specially constructed to promote capitalist rights, which represent the core values sanctified by its constitution.
Policy historians such as Brenner and Wood argue that it was the timidity shown by Clinton's economic managers (specially "saint" Greenspan) which laid the foundations of America's present troubles. They permitted the criminalization of the American financial system through policy liberalization.
It is now clear that the stock market boom of the 1990s was artificially contrived and that the world's major investment banks and leading accountancy companies were active accomplices in crimes which led to the wiping out of the life savings of millions.
The Financial Times investigations, covering the period 1999-2001 showed that embezzling one's own company had become an art - thanks to state policy deregulation - for CEOs. (FT, 12-7-2002).
In January 2001 the party of the CEOs got into the White House. Today it controls both houses and Dick Cheney is Vice President. Effective investigation of boardroom crime is frustrated at every step and the state's commitment to deregulation/liberalization has increased. The result is a continued deterioration of investor confidence in the US financial markets.
Wall Street has lost $7 trillion since January 2002 and Standard and Poor's Composite Index has dived from 1500 to about 880 over the same period. Nobody expects a sustainable capital market revival in 2003. According to UBS estimates, US investor confidence has dropped from 180 in January 2000 to about 90 today.
In trade weighted terms the dollar fell by 13 per cent in 2002. Official estimates of unemployment exceed 6 per cent, but this is a gross underestimate since it leaves out those who have stopped looking for a job since they can't find one. It is conservatively estimated that there are currently 12 million unemployed in America. Despite the house mortgage boom expectations of a house price crash are widespread.
Using the IMF parlance one can identify two 'structural imbalances' of the American economy. First there is the problem of astronomical indebtedness. According to Fed. flow of funds estimates aggregate US outstanding debt has increased from $16 trillion in 1994 to over $30 trillion today. The debt GNP ratio exceeds 300 per cent and during the Bush presidency outstanding debt has been growing at twice the rate of GNP. Hence the debt- GDP ratio will continue to rise in the foreseeable future.
About a quarter of this debt belongs to the financial sector. This is now equivalent to three quarters of US GNP. America may turn out to be tomorrow's Japan for much of this debt has been accumulated by leveraged merger and acquisition activity. As corporate profit rates plummet loan portfolio infection rates will skyrocket. Provisioning by US banks has been rising in 2001 and 2002 and this has been a major consideration in Fed. decisions to cut the interest rate in 2002.
Household debt is the second most important component of aggregate US indebtedness. This now exceeds $7.3 trillion - over 70 per cent of US GNP. The personal indebtedness to personal income ratio has risen from 106 per cent in 1993 to 140 per cent today. This has led to a catastrophic fall in household and net national saving which in the third quarter of 2002 equalled just 1.6 per cent of GNP. As the budget deficit grows net national savings will continue to decline. By end 2002 government debt amounted to over 50 per cent of GNP.
America's second "structural imbalance" relates to its external account. America's chronic current account deficit is fast approaching 6 per cent of GNP. Imports in 2002 were more than 40 per cent larger than exports. The trade imbalance was financed by capital inflows which aggregated to over 70 per cent of the world's current account surplus in 2002.
It is estimated that almost $2 trillion of foreign capital inflow is required to finance America's current account deficit on a daily basis. Stimulating foreign capital inflow requires an appreciation of the dollar and/or a significant increase in interest rate - both unviable policy options in present circumstances.
America's rising indebtedness has for the first time in its history made it a foreign dependent economy. Foreigners (including the State Bank of Pakistan) own 45 per cent of its government bonds and about 20 per cent of the total market value of its long term assets.
Since the US mainly borrows in its own / currency it has the option of devaluing its external debt by simply printing dollars - indeed it has already done this to a considerable extent since the September 11 counterattack. But this runs the risk of reducing attractiveness to foreign investors. Since the counterattack foreign capital inflows into America have noticeably slowed down.
Dealing with these structural 'imbalances' is increasingly difficult for the robber barons who dominate the American government. They have drastically cut down the size of the state to plunder the economy. Taxes on corporate profits were 25 per cent of federal revenue in 1950. they are now equivalent to only about 8.5 per cent. Bush seeks a further major reduction in taxes over 2003-2008.
Bush's economic strategy is fast losing credibility. Even Republicans in the House and the Senate describe his dividend tax cut proposal as "unworkable, unfair and ineffective". Public support for his economic policies has dropped to 47 per cent. The proposed elimination of taxation on savings and the transition to a comprehensive expenditure taxation regime have also been heavily criticized.
Bush expects a budget deficit of 3 per cent of GNP in 2003 and his calculations are fraudulent for he doesn't factor in the cost of the Iraq war and the cost of the minimum tax he intends to introduce - this alone will cost an additional $500 billion over the next ten years. Most blatantly fraudulent are the 'dynamic scoring' methods for assessing the impact of tax cuts on economic growth that the Republicans have forced upon Congress in January 2003.
Bush, by playing at a concoction of Keynesianism, wants to stimulate the market by his tax cuts on corporate profit and by enabling the financial sector to fleece the poor through his saving and health schemes. 'Saint' Greenspan argues that this is not how the market works in post-liberal capitalism. If the fiscal and monetary stimulus failed in 2002 - the rate of growth in the fourth quarter of that year was just 0.7 per cent - it won't work in 2003 or 2004 either. Perhaps we are reaching a watershed in capitalism's history.
Busts are as necessary as booms for capitalism's survival for busts enable a writing down of asset values through a repudiation of the debts incurred during the boom. Global capitalism needs just such a repudiation of the debt accumulated through financial swindles in America during the 1990s. By obstructing this 'correction' of asset prices Bush is actually increasing the eventual cost of 'adjustment'. Who knows he may even be making such adjustment impossible.
A careful reading of his General Theory shows Keynes' awareness of the need for a Herbet Hoover to precede a Roosevelt for capitalism to survive. Bush's unwillingness to play Hoover reflects global capitalism's most important 'structural imbalance' - the non-existence of a global state for managing the global market for capital.
Bush can terrorize defenceless people, bully tinpot dictators, torture and plunder his own 'white trash' but he does not have the power to sacrifice America's "national interests" to save global capital. Will capitalism's amazing ingenuity provide a solution for effectively addressing this increasingly serious disjuncture between the economic and the political organization of global capitalist order or are we at the beginning of the end?
for a non Islamic analysis of the same see:
Chomsky: Budget attacks America's majority
"It should be recalled that for about 25 years, wages have stagnated or declined for the majority ... and incomes have been sustained only by work loads far beyond the norm in the industrial world"
"The administration's opponents are the large majority of the US population. The general 'starve the beast' strategy is hardly concealed, though few are willing to
tell the truth"
posted by Alghazalians at 9:46 AM
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