International Perspective, by Marshall Auerback
Debt Trap Dynamics: Time To Think The Unthinkable
February 15, 2005
With the government and external deficits both so large and the private sector so heavily indebted, it is said that satisfactory growth in the US cannot be achieved without a large, sustained and discontinuous increase in net export demand. After perusing the trade data from last year, it is doubtful whether this will happen spontaneously through a continuous fall in the external value of the dollar, and it certainly will not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world.
The truth of the matter is this: Across three decades, only one economic event has been guaranteed to produce balanced US trade: a recession. When the economy is contracting, people naturally buy less of everything, including imports. Historically, on the four occasions when the line of exports briefly converged with the line of imports in the post-war period, the country was in recession. Each time economic growth was restored, the trade deficits resumed. A more ominous contradiction occurred during the 2001 recession: The trade gap was so enormous it persisted throughout. Again, in 2004, despite a significant fall in the dollar’s trade weighted index, the external account continued to haemorrhage. This suggests that American dependency on foreign producers has advanced to a dangerous new level.
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If a full-blown crisis does occur, the macroeconomic challenge would be unlike anything the United States has faced in more than half a century. While this would be a time of wrenching, painful change, the new adverse circumstances might also inspire a great shift toward radically different political solutions than have hitherto been considered within the realm of acceptability.
The first imperative--an unavoidable necessity--would be to suppress consumption through credit-restraining measures, fiscal caution or tax reform, and to stimulate greater domestic savings, yet somehow to keep the economy growing. If this great adjustment is left to market forces alone, the predictable consequences will be to punish the innocent--struggling households and small businesses--first.
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It is true that such actions on the part of the US may well provoke reactions in kind. On the other hand, given the lack of restraint evident in the country’s current foreign policy aspirations, it is hard to envisage that an economic response to the Americans’ abrogation of existing obligations would come without some possibility of a robust military response (or at least the threat of one). The US has already show itself willing to address the problem that it does not make enough of what the rest of the world wants by going to war to monopolise control of the supply and distribution of what the world needs, petroleum. There are other war aims, of course, but control of the global hydrocarbon net is certainly the most important. As market strategist Chris Sanders has noted, “The truth is that the dangerously destabilising idea has rooted in Washington that, in the words of Vice President Cheney, ‘deficits don’t matter (we proved that in the 90s).’ He is right of course in pure power terms; a fuller expression of Cheney’s dictum might well add, ‘as long as we are able to force everyone else to accept them (deficits).’”
Already, it appears clear that the US is driven to rely more on military adventure because the economic house is in disarray and "overstretched". They can't just bludgeon their way economically anymore. They have to use the stick. Any close look at the inauguration speech bears out the reliance on forcing the world to conform to us dictates. Why should this not extend ultimately to existing debt arrangements if the US finds itself facing an Argentina-like predicament? All these outcomes may sound quite improbable at this moment. Certainly, the establishment would brush them aside. But do not dismiss the possibility that dramatic change and epic political reforms lie ahead. As we have said many times before, Washington’s elites will not go down without a fight.
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