The chickens are
coming home to roost. Reckless trade and energy policies and fraudulent banking
have set up Americans for a tough bout with stagflation -- rising prices and
unemployment. Washington offer palliatives but no solutions.
Since 1999, the
U.S. trade deficit has grown from $261 billion to $713 billion, permitting
Americans to spend 5.5 percent more than their economy produced over the last
from China and petroleum account for about 80 percent of the deficit, and it is
financed mostly by foreign governments and investors lending us the $700-plus
billion we spend but don�t earn.
These creditors buy
mostly U.S. Treasuries, other securities and property. This has kept long-term
interest low and permitted a deadly run up of credit card and mortgage debt. It
also financed the housing bubble.
applied loose standards when issuing credit cards and mortgages, rolled those
loans into collateralized debt obligations and sold them in the bond market.
Americans felt rich
but that was false. Most of the foreign money has not been used to start new
businesses or invest in growth. About 90 percent simply purchased American IOUs
Now, Americans owe
foreigners about $6.5 trillion, and the Chinese government, alone, has enough
cash to buy up 10 percent of all the publicly traded companies in the United
To bankroll this
process and keep its exports artificially cheap on U.S. store shelves, China
maintained an undervalued currency. It printed and sold yuan and bought dollars
on foreign exchange markets, which it converted into U.S. Treasuries and other
U.S. debt, but these yuan are increasingly finding their way back into the
Chinese economy, and pushing up inflation there and prices for imported Chinese
Now U.S. consumer
prices for products like apparel, where demand is weak and high energy prices
cannot be blamed, are taking off.
At the same time,
hyper-growth in China and other Asian economies, fueled by artificially
undervalued currencies against the dollar, has pushed the price of oil over
$100 a barrel. Energy prices are up 20 percent for the year ending in January,
and further surges are likely.
Shocked by rising
oil prices, the Congress passed the 2007 Energy Policy Act, which requires
little more in fuel efficiency for automobiles than higher gasoline prices
would compel and propagates the fiction we can feed cars enough corn to end our
oil addiction. Subsidizing ethanol production is pushing up grain prices, and
U.S. food prices are rising 5 percent a year.
Rising prices for
imported consumer goods, energy and food have pushed headline consumer price
inflation to a 6.8 percent annual rate for the three months ending in January,
and the core rate, which excludes food and energy, to 3.1 percent.
mess, we learn the banks really were not really rolling consumer loans and
mortgages into legitimate bonds. Instead they were slicing and dicing loans
into incomprehensibly complex securities, and then selling, buying, reselling,
and writing insurance on these complex contraptions to generate fat fees and
big bonuses for bank executives.
discovered, banks can no longer securitize loans into bonds, and are pulling
back lending to good customers and bad for credit cards, mortgages and business
loans. This negates the effects of Federal Reserve interest rate cuts by
spending less, home prices are tanking and corporate defaults on bonds and
bankruptcy filings are rising briskly. The economy is contracting, and jobs are
package, Federal Reserve interest rate cuts and administration program to help
distressed homeowners are all about getting Americans borrowing again. That�s
like giving the hung over alcoholic another drink.
We need to get the
value of the dollar down, sharply, against the Chinese yuan, mandate realistic
mileage standards for automobiles, and implement banking reforms.
Don�t hold your
breath. Politically courageous Treasury Secretary Henry Paulson, Federal
Reserve Chairman Ben Bernanke and Speaker Nancy Pelosi are not inclined to
endorse that kind of tough medicine.
Last Thursday, the
Federal Reserve forecasted GDP would grow 1.3 to 2.0 percent in 2008, and
headline inflation would stay in a range of only 2.1 and 2.4 percent.
My stalwart wife of
36 years asked, �How could that be?�
I retorted, �Those
Ivy Leaguers at the Fed can�t be that delusionary. Visitors must have put some
recreational drugs in the water cooler.�
Morici is a professor at the University of Maryland School of Business and
former Chief Economist at the U.S. International Trade