Interesting point Keith, If that is true then why did they make such a mess in places like Yugoslavia, Chile, Argentina etc.
REH ----- Original Message ----- From: "Keith Hudson" <[EMAIL PROTECTED]> To: <[EMAIL PROTECTED]> Sent: Monday, September 01, 2003 9:37 AM Subject: [Futurework] Is America about to go down the drain? > In my opinion, the very best writers on economics these days are not > academic economists or government ones (not that they're allowed to say > much), but those who work for the big investment banks. Such writers cannot > afford to be too theoretical, or speculative, or misleading in the > slightest way because they have the reputation of their firm to consider. > In fact, in the case of two of them, Stephen Roach and Stephen King, a > considerable part of the reputation of Morgan Stanley and the HSBC bank > depends on the balance and grasp of their writings. Whatever Stephen Roach > and Stephen King write one day is always quoted and regurgitated by many > other economic journalists in the following days -- the sincerest form of > flattery. > > In today's article in the Independent, Stephen King writes that the > American economy is *not* too big to collapse. Indeed, the inference is > that it is bound to do so one day. You can be certain that the policy of > the HSBC bank (one of the most successful in the world over the past 20 > years) will depend on Stephen King's words rather than Greenspan's or > Snow's words even though the latter reach the headlines more easily. > > <<<< > IS AMERICA'S ECONOMY REALLY TOO BIG TO GO DOWN THE DRAIN? > > The US will only be able to expand so long as the rest of the world is > prepared to provide the funds > > Stephen King > > "It's too big to fail." A common enough argument, perhaps, but also one > that smacks a little too much of complacency. After all, one might have > thought that the New York power supply was "too big to fail" but fail it > did. A foreigner -- not, though, a jaded Londoner -- might have thought > that the London Underground was "too big to fail" but it, too, gave up the > ghost for a short time last week. The US army is "too big to fail" in Iraq > although recent developments do, somehow, make you wonder. > > The biggest example of all, though, may be the US economy, the $10 trillion > powerhouse that dominates the world stage. Can it fail? The answer, surely, > is a resounding "no". It's not in the interests of US politicians for the > US economy to fail. Nor is it in the interests of beleaguered Europeans, > facing a moribund domestic economy. After all, who else would they be able > to export to? And Asian economies certainly would not want to see the US > economy failing -- they have become increasingly dependent on inflows of US > capital which, in turn, have led to rising incomes and better jobs. > > So, hang out the bunting, get the music on, it's time to party. The US > economy appears to be recovering. US consumers are still spending, the > government has its foot on the accelerator, companies have regained their > appetite for investing and growth is picking up. Europeans can lick their > lips at the thought of more export demand and Asians can look forward to > their own slice of the pick-up in US capital spending. Once again, the US > has come along to save the world. > > There is, however, a little snag with this story. The US did well in the > late 1990s in part because other countries were happy to lend to it. This > can be seen most obviously through the growth of America's current account > deficit. America was spending more than it was producing and it needed > foreign resources to fund the gap. Put another way, America ran a capital > account surplus: there was more capital flooding into the US from the rest > of the world than capital leaving the US to go elsewhere. > > It's not the first time that the US has managed to pull off this trick. The > US has run large capital account surpluses -- or current account deficits > -- in the past. However, previous US recessions have taken away this > dependency on foreign capital: the US would end up back in current account > surplus, no longer dependent on the rest of the world's savings. This "no > such thing as a free lunch" model provided a degree of constraint on what > the US could get away with: a recession was a timely reminder that the US > could not realistically expect to consume beyond its means on an indefinite > basis > > In all previous US recessions, the growth of domestic demand -- > consumption, government spending and investment -- ended up weaker in the > US than in other industrialised countries. Rather than the rest of the > world ending up in bed with a cold as a result of a US sneeze, this was > more a case of US pneumonia with the rest of the world suffering only a few > limited aches and pains. > > This time round, though, the story is very different: the US has only had a > very mild dose of flu; other parts of the world, notably Europe, have ended > up in the economic equivalent of intensive care, growing only at about 1% > last year while the US grew at 2.5% (with Japan at 2.0% and the UK at > 1.75%) The US may have had a recession but, on this occasion, the recession > did nothing to remove America's dependency on the savings being made in > other parts of the world. The usual closure of the US current account > deficit has, therefore, not taken place. Should we worry? > > Let me first make the positive case, the argument that suggests that an > ever-wider US current account deficit is a good thing. > > From a US policy-making perspective, the case for a bigger current account > deficit rests on three foundations. First, there's the simple argument > that, if the rest of the world is not prepared to play its part in > stimulating global growth, the US might as well just get on with it. If the > wider current account deficit can't be financed through foreign capital and > the dollar has to come down, this might also be a good thing: a lower > dollar might, for example, force the Europeans into loosening policy more > aggressively than might otherwise have been the case. > > Second, there's the economic supremacy argument: if the US can offer better > growth than anyone else, it makes perfect sense for foreigners to buy US > assets and, hence, support continued US economic expansion. > > Third, there's the "wise investor" argument: that although capital > continues to pour into the US on a net basis, the returns on US capital > invested abroad are higher than foreign returns invested in the US. As a > result, the cost of financing the current account deficit is not so high > after all. It's a bit like borrowing some money from one bank, spending > some of it but re-investing the rest in another bank at such a high rate of > interest thatyou are no worse off. > > Now let me say what's wrong with these positive arguments. First of all, > the idea that the US can save the rest of the world is a little bit > topsy-turvy The US will only be able to expand so long as the rest of the > world is prepared to provide the necessary funds. The problem, however, is > that an expanding US current account deficit requires more and more funds > each year. No bank, surely, would agree to such an arrangement and it is > difficult to see why the rest of the world will be prepared to plough more > and more of its savings into the US economy in the years ahead. At some > point, the US has got to deliver decent returns to its foreign creditors, > which seems to undermine the "wise investor" argument outlined above. > > Then there's the economic supremacy argument. The main reason for US growth > out-performance in recent years has been consumer spending: overall growth > might be stronger in the US but it is difficult to see why the rest of the > world should see the advantages of funding yet another Uncle Sam car > purchase -- the ultimate depreciating asset. Foreigners will ultimately > expect to see some return on their investments: if the benefits reside > instead with US consumers, it's less likely that capital will continue to > flow into the US. > > As for the wise investor argument, why not just cut out the middleman? It > may be true at the moment that returns on US investments made abroad are > higher than returns on foreign investments made in the US. But it is > difficult to see why the rest of the world should be content with this > arrangement forever. Either the rest of the world will invest the money > itself, thereby cutting out the US as a middleman, or the US will > eventually recognise that its investments abroad have become excessively > risky (and I'm thinking here not just of economic risk but, increasingly > these days, of political risk as well). > > That the US is showing signs of recovery seems to be good news. That "the > recovery is happening against the background of a very large current > account deficit is more disturbing. We may think of the rest of the world > as being dependent on the US but, increasingly, the US itself is dependent > on the rest of the world. This delicate balancing act may not continue > forever: someone may eventually fall off the high-wire and, so far, it's > not at all obvious that there's any form of safety net below. Too big to > fail? I hope so, because failure is just too painful to contemplate. > > Stephen King is managing director of economics at HSBC. > > Independent -- 1 September 2003 > >>>> > > > Keith Hudson, 6 Upper Camden Place, Bath, England, > <www.evolutionary-economics.org> > > _______________________________________________ > Futurework mailing list > [EMAIL PROTECTED] > http://scribe.uwaterloo.ca/mailman/listinfo/futurework _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://scribe.uwaterloo.ca/mailman/listinfo/futurework
