Economists will scoff at the question in the title. But
that�s because they are trying to fit the present into the past.
In the past, recoveries were routine, because recessions
were temporary restraints resulting from the Federal Reserve putting
the brakes on an overheating economy. By restraining the supply of money and credit,
the Fed caused inventory buildup, layoffs, and a halt to price rises and union
wage demands. With the economy cooled by unemployment, the Fed would take off
the brakes. Interest rates would decline, money would flow, consumer demand
would rise and workers would be called back to the factories.
In those days, when workers borrowed to spend, they were
borrowing against rising real wages from rising productivity. In economic
downturns, few workers actually lost their jobs. They were laid off from their
jobs for temporary periods. Workers seldom lost their homes or cars, thanks to
union funds and unemployment benefits.
Today the situation is different. In the 21st century real
wages have not risen. Workers have spent more by accepting deteriorating household
balance sheets. They have maxed out their credit cards and spent the equity
in their homes. Imitators of the US government, American consumers borrow
to pay their bills.
The expansion of household debt relative to income created
the illusion that the economy was sound. But the consumer economy was as much
of a credit-based bubble as the real estate bubble and the financial sector
bubble. The economy has lost its real basis.
Today it is difficult to stimulate consumer demand by
lowering interest rates. Consumers are too heavily in debt to borrow any more. Financial
institutions are too impaired to want to lend to anyone except those who don�t
need to borrow. As the Keynesian macroeconomists used to say, �You can lead a horse to water, but you can�t
make him drink.�
And there�s another problem. Much of what American consumers
purchase today is made offshore. Stimulating consumer demand in America puts
factories back to work, but those factories are located elsewhere in the world.
How does an economy consume more than it produces? Previously,
this question applied only to poor
Third World countries. These countries would consume by the grace of World Bank loans. From
time to time they would pay for their consumption by being put through an IMF
restructuring program that would curtail their consumption to make them repay
their loans by forced saving.
The United States has so far avoided such humiliation,
because its currency is the world money. The US has been able to borrow
endlessly, because it can pay its debts in its own currency.
This ability might be coming to an end. The US has been
using up the bulk of the world�s supply of savings for years in order to
finance its consumption. Considering the outlook for the US economy and dollar,
the productive nations of the world and those with oil have more dollars and
dollar-denominated assets than they want. The US, with its collapsing economy,
its bailouts of financial institutions, and its wars, is facing the largest
government budget deficit in its history, both in an absolute amount and as a
percentage of national income. The easy monetary policy, which the Fed hopes
will arrest deflation, threatens inflation and further deterioration in the
dollar. Foreigners simply do not want to lend more large sums to a country
that, from all appearances, has no way to close its trade and budget deficits.
They certainly do not want to lend when the interest rate offered is close to
zero and the reserve currency status of the dollar is in doubt.
Economists and the policy makers they advise are thinking in
the past, a time when low interest rates stimulated consumer and investment
demand, thus lifting the economy. Today the low interest rates threaten the
dollar, discourages foreigners from lending more to the US, and deprives
Americans of interest income necessary to their ability to pay their bills.
In the second half of the 20th century, American economic
supremacy was a gift of World War II, which destroyed the productive capacity
of the rest of the developed world. American economic supremacy also owes much to
communism in Russia
and China and to socialism in India, which rendered these large countries
economically impotent. The United States did not have to compete for its
economic hegemony. It simply inherited it from the choices made by the rest of
The situation is different today. Unlike the US, other
countries are free of the hubris of being the �indispensable nation.� They know how hard it is to be successful
and do not treat success as their birthright. They do not give away their
economy for nebulous foreign policy goals or for short-term profits. They look
ahead 20, 30 years while America�s CEOs look to the next quarter�s profits.
The United States is walking on quicksand. It is dependent on
foreigners for the funding to conduct the day-to-day operations of its
government. Its economy is a hollow shell reduced to dependence on a financial
sector that is discredited worldwide. America�s government believes that its
foreign wars of aggression are more important than any domestic needs,
including the health care of its population.
Now that its supply route to feed its war of aggression in
Afghanistan is threatened, the American government has the delusion that it
will be able to supply its army in Afghanistan through thousands of miles of
Eastern Europe, Russia, and Central Asia. Only a government totally oblivious
to reality would imagine that Russia�s Putin, whose nose is rubbed in excrement
every day by the US government, will permit America to transit Russian
territory to resupply US imperial legions in Afghanistan.
What we are witnessing is a once great power engaging in
fantasy to disguise from itself that it is a failed state.
Craig Roberts [email
him] was Assistant Secretary of the Treasury during President
Reagan�s first term. He was Associate Editor of the Wall Street Journal. He has
held numerous academic appointments, including the William E. Simon Chair,
Center for Strategic and International Studies, Georgetown University,
and Senior Research Fellow, Hoover Institution, Stanford University. He was
awarded the Legion of Honor by French President Francois Mitterrand. He is the
author of Supply-Side
Revolution : An Insider�s Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the co-author with Lawrence M.
Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for
Peter Brimelow�s Forbes Magazine interview with Roberts about the recent
epidemic of prosecutorial misconduct.