Saturday, August 22, 2009

Jackson Hole, Wyo.

On the front page of this morning’s New York Times there is an upbeat story emanating from a conference of the world’s central bankers that is going on just now in the exceedingly expensive seclusion of Jackson Hole, Wyoming. “The prospects for a return to growth in the near term appear good,” says the chairman of the United States Federal Reserve, Ben S. Bernanke (my italics).

It is reported also that sales of houses in America leaped by 7.2% in July; that the Dow Jones Industrial Average has risen 45% since March; that several foreign governments have lately reported quarters of greater growth than was previously anticipated; that the prices of oil, copper, and gold have all risen; that the Governor of the Bank of Israel—who he?—thinks it is reasonable to assume that the worst of the crisis is behind us, while an investor who rejoices in the name of Laszlo Birinyi, Jr., president of a thing called Birinyi Associates, is quoted as saying, “This is a bull market,” and adds that he is therefore investing in large banks, industrial and technological corporations such as 3M and Apple, as well as good old American steel. How nice.

Sometimes the only conclusion you can reach is that senior bankers, economists, and wealthy businessmen think the rest of us are as stupid as we are gullible. Perhaps they are right.

Certainly, what they are not quite so keen to emphasize just now in Jackson Hole, Wyo., is that unemployment in America was 9.4% in July (approx. 14.5 millions, not counting the farm sector), and is certainly going to get worse before it gets better, albeit at a slower rate. The new administration’s current estimate of the ten-year deficit has had to be revised upward from $7 trillion to $9 trillion, which amounts to 69% of this year’s United States G.D.P.—roughly $13 trillion—in other words a medium- to long-term debt so colossal, so overwhelming, that it is simply impossible to imagine how it will ever be repaid.

It is not simply that the United States Treasury can no longer reflate the world economy, as it has regularly done in the past. Rather it is that in a few years’ time, and for the first time in several generations, we may easily face the specter of a United States Treasury default. (The last time was in 1933.) Obviously there is nothing that President Barack Obama or his administration or the present congress could really have done to prevent this, because the alternative, i.e. no radical intervention at all, would have been far, far more catastrophic, indeed literally unthinkable.

But where are we getting the money that will permit us to pursue this dangerous course? The answer is wholly frightening: (1) Partly we are expecting the surplus countries such as China, Russia, India, the oil states of the Middle East, and so on, to participate in the monthly U.S. Treasury bond tenders, knowing full well that whenever these mature the dollars they retrieve will by then be so devalued by the effects of inflation, and so reduced in political clout that the entire exercise could yet become virtually meaningless. And in that event, how will we persuade those great states to keep on buying our bonds? (2) At the same time, we are printing money, lots and lots of money, enough money as is needed to shore up the gap between what is raised through the sale of bonds; what is saved by the not particularly drastic reduction in public spending, and (3) what else we can borrow from whoever is now in the happy position of being able to lend—an exceedingly unsavory mob, the kind of people your mother always warned you to avoid.

Meanwhile, our reserves of gold bullion (approx. $11 billion); foreign exchange (approx. $63 billion), and the so-called strategic petroleum reserve (approx. $67 billion) don’t amount to much more than peanuts compared with what we owe, and that’s not taking into account the $931 billion in accumulated U.S. consumer credit card debt (a figure not much less than the whole sum of Third World debt—$1.3 trillion), and the fact that we are wearing not only a vast budget deficit, but a trade deficit also.

It is hard to see how the action of the printing presses alone will not cause such inflationary pressure that the centralized interest rate mechanism and even a far tighter, better regulated monetary policy may be insufficient to hold it in check. When you plunge your foot on the accelerator so hard, it follows that eventually you’ll have to hit the brake pedal even harder. Naturally, all this puts at risk the dollar’s long-term trustworthiness as a reserve currency for the whole world, let alone its attractiveness as a plain, straightforward, ordinary old investment.

It is also stated in Jackson Hole, Wyo., that such growth as is now cautiously predicted will be for the time being “job neutral,” in other words the unemployed may expect to remain unemployed until further notice; and that, not surprisingly, consumer spending will remain sluggish, in other words that this could therefore actually impede recovery and growth. Notwithstanding the fact that we have thus far spent ourselves into oblivion, the economists want us to start spending again, and borrowing too. But the banks, meanwhile—never hesitating to leap headlong into the comforting, capacious skirts of Mama Treasury, as they always, always do—have packed up their bat and ball, and are presently sulking, refusing to play in the next innings of the game in which they so grievously and so recklessly hurt themselves, and, incidentally, the rest of us. Not since before 1947 has there been a contraction of credit. And a further 300 American banks will close this financial year.

As well, you do have to ask yourself, in a nation besotted with cars, clogged with 140-odd millions of car-dependent motorists and served by no public transportation system worthy of the name that might offer any viable competition with it, how on earth was it possible for the United States automobile industry to fail? In spite of these enormously favorable conditions such a gruesome failure must surely raise questions of basic competence, and numeracy.

So in the present economy the word “crisis,” is wholly inadequate. This is a catastrophe, a calamity, a disaster that is far, far worse for America and the world than anyone has yet been prepared to acknowledge. The positive noises coming out of Jackson Hole, Wyo., are merely the latest and possibly the most offensive examples of spin, maybe even self-deception, because no serious policy-maker does not yet understand that (a) phase two of the slump could very easily be just around the corner (with very little prospect of additional, gigantic sums of public money being made available to soften the impact), and (b) unless we willingly embrace a completely new and adequately representative global structure of economic and political power, there is a very good chance that we will not recover at all. Such are some of the views expressed not long ago by the Hon. Paul Keating, and I agree with every word.

The only glimmer of hope is that you and I, the ordinary American consumer, collectively constitute 16% of global consumption, and it is therefore in everybody else’s interest to keep us solvent. However that may not always be the case. The middle classes are on the rise in many other parts of the world, and are on the whole cannier, better educated, less fat, and far, far less complacent and indebted than we are.

The principal question therefore is: What will we negotiate with our new partners to replace the old G8, the old I.M.F., the old World Bank, and indeed the old Bretton Woods agreement? Where will the new international financial center be? I fear Washington, D.C., may no longer be acceptable to many of the relevant parties; and it is hard to see anywhere other than Washington, D.C., being at all acceptable to Washington.

Before this happened, we and our chums in the G8 were already debtor nations—six of us carrying public liabilities greater than 60% of G.D.P., two encumbered with more than 100% (Italy at 103%, and Japan at 170%) while Britain has done well to keep them down to 47%, while Russia carries only 6.8%.

However, thanks to monetary policy as loose and ill-fitting as an XXL jellaba, most of us were standing passively by while, in the international financial hub of New York City, the banks tossed vast sums of cheap, borrowed money into the ever greedier hands of millions who could never even qualify for an ordinary mortgage.

We are essentially still the same, however the principal difference is that we now have a debt incalculably more enormous—indeed, it would be more accurate to say that the debt has us, and has us by the throat.

So until every one of us learns to save more, spend less, and repay or merely adequately service our mind-boggling debt; and until we successfully persuade the surplus countries that they stand to gain a very great deal from spending more, and saving less, there will, there can be no end in sight.

Indeed, we may well remember the current cheerfulness of those donkeys, those blinkered fools currently talking up the prospects of Wall Street, not to mention the overpaid mandarins just now taking their leisure in Jackson Hole, Wyo., as engaged in perhaps the most spectacular case of rearranging deck-chairs since that regrettable incident involving the R.M.S. Titanic.

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