OK. See if you can follow the logic: Means testing = the road to serfdom. Promising to have Uncle Sam underwrite everyone's private investment accounts = capitalist utopia... Ryan and Sununu essentially are talking about extending the federal deposit insurance concept to the stock market. It would turn the Social Security system into an even bigger version of the Fannie Mae/Freddie Mac mortgage consortium, in which the gains are all privatized while the risks are socialized.
Even so, although the size of gross portfolio flows allows America to run bigger imbalances and although valuation effects may make adjustment easier, these factors do not render adjustment unnecessary; nor do they eliminate the risk of a hard landing. More important, even a gradual reduction in the current-account deficit, which the sanguine governors all expect, could feel unpleasant. That is because America's domestic demand growth will have to grow more slowly than its GDP.
A recent analysis by Macroeconomic Advisers, a consulting firm, suggests that halving America's deficit over a decade, with GDP growth at its recent average, will require that annual domestic demand growth slow to 2.6%, more than a full percentage point below its average in 1994-2004. For America's consumers, that will be an unpleasant shock. Prudent central bankers should be preparing them for it.
I've no doubt that if left on autopilot the current system (i.e. "Bretton Woods II") would lead to a great big debt/dollar crisis -- eventually. At some point, the bubble would simply become too big and too absurd to protect, even for a cartel of Asian central banks. But, given the structural and institutional obstacles to change (both here and abroad) that point might not be reached for years.
Long before then, however, the weight of the global savings glut might bring the U.S. locomotive to a halt -- or even start pulling it backwards. And the "tough love" remedies proposed by the bears, while inevitable in the long run, could make things much worse in the short run, by further sapping global aggregate demand.
Given the underlying trend in personal income and the rock-bottom household savings rate, it was always inevitable that consumption would slow at some point. If (when?) the housing bubble finally pops, it almost certainly will slow enough to pitch us into recession. Right now, though, we don't seem to be at that point.
However, even if home prices and personal consumption hang in there, a prolonged slump in business investment (i.e. one that lasted beyond a single quarter) could also tip the recessionary bucket -- assuming, of course, the Bushies don't dial up another war.
A major slowdown in capital spending would be profoundly demoralizing, since there would be no obvious scapegoat, other than the high price of oil. And while $50 a barrel oil is definitely a drag on profitability, it's hard to construct a scenario in which energy prices single-handedly drag capital spending (and economic growth) into the toilet and beat the crap out of them...
That being the case, a U.S. investment slump could force investors and analysts to look up and see the deflationary imbalances hanging over their heads. (Based on today's stock market action, this may already be happening.) This could pull one of the other effective triggers for recession -- collapsing equity valuations...
What the U.S. bubble economy needs, then, is for even more speculators to take even larger unhedged positions in the bond market financed with borrowed yen. And the best way to persuade them to do that is to convince them short-term yen rates will remain close to zero; that the ODIC cartel will defend the dollar to the death; and that long-term U.S. bond prices are unlikely to fall dramatically. It also helps to make alternative uses of speculative capital look less appealing.
A U.S. slowdown would seem to fit the bill nicely. Which means the Fed may not be completely boxed in -- at least not yet. If private capital can be coaxed into the bond market, yields can continue to decline as the economy slows (they're already down almost 40 basis points since the beginning of April.) The housing bubble can be protected, the stock market will have a cushion to break its fall, and capital spending will be more likely to revive later in the year. A stable or only gradually depreciating dollar would also help keep the "flation" part of stagflation under control.
Of course, this won't correct the underlying imbalances, although it should at least keep the current account from completely shooting the moon. At some point, U.S. interest rates will stop falling -- even if the economy remains weak -- because the risks will seem too high (even to carry traders) compared to the rewards. At that point even ODIC may not be able to hold the doors open.
But a slowdown now could conceivably buy us another year or two before the bubble bursts -- allowing the upper 10% to keep on partying even as the bottom 90% increasingly feels the bite of a slumping economy.
Not great, but not doomsday, either. As I told a friend the other day, the supply side hag may be aging rapidly, but she may still have a few more, um, carnal moments left in her yet. And at this late date, that may be about the best we can expect.
« Older Creative Commons decides to partner with BzzAgent.... | Interesting followup on this ... Newer »
This thread has been archived and is closed to new comments
Buy a Shirt