In case you hadn't noticed, most of the world's business reporting this week is bylined out of Davos. This is the one week out of the year when all the reporters follow all the bigshots to Switzerland to drink hot chocolate and solve the world's problems.
Over the last few years, Davos has talked about how George Bush would destroy the world in a blaze of gamma rays. This year, the talk is about how Barack Obama will bury the world under an avalanche of trade protectionism.
This is a fascinating theme on several levels. You'd think the world's finance ministers and political leaders would be blaming us for all the overvalued mortgage assets we sold them until the bubble burst. They certainly do blame us for that, and they certainly blame us for the financial cleverness they all tried to emulate until a few months ago.
A global financial crisis featuring badly disordered capital and credit markets is easy enough for the world's political leaders to snipe at us about. But when this one abruptly morphed into a global economic crisis, featuring a collapse of trade, output and employment, it got a lot harder for them to be smug.
That's because our economic problems have turned into a prospective disaster for the rest of the world. Remember the beginning of the financial crisis, a year and a half ago, when everyone with respectable opinions was saying that the world had "decoupled," meaning that our problems wouldn't affect any other country?
Wrong. The global economy turns out to be more dependent on the American economy than ever before. And that's become glaringly obvious because of the one thing that's distinctively missing in the current downturn: consumer demand.
The global economy depends on demand from America like a rich teenager depends on the coupon payments from her trust fund.
Over the last few years, Davos has talked about how George Bush would destroy the world in a blaze of gamma rays. This year, the talk is about how Barack Obama will bury the world under an avalanche of trade protectionism.
This is a fascinating theme on several levels. You'd think the world's finance ministers and political leaders would be blaming us for all the overvalued mortgage assets we sold them until the bubble burst. They certainly do blame us for that, and they certainly blame us for the financial cleverness they all tried to emulate until a few months ago.
A global financial crisis featuring badly disordered capital and credit markets is easy enough for the world's political leaders to snipe at us about. But when this one abruptly morphed into a global economic crisis, featuring a collapse of trade, output and employment, it got a lot harder for them to be smug.
That's because our economic problems have turned into a prospective disaster for the rest of the world. Remember the beginning of the financial crisis, a year and a half ago, when everyone with respectable opinions was saying that the world had "decoupled," meaning that our problems wouldn't affect any other country?
Wrong. The global economy turns out to be more dependent on the American economy than ever before. And that's become glaringly obvious because of the one thing that's distinctively missing in the current downturn: consumer demand.
The global economy depends on demand from America like a rich teenager depends on the coupon payments from her trust fund.
True, the EU generates a large amount of demand. But it's only about enough to absorb Germany's surplus and some of China's. And Euro-zone demand is crippled just as ours is. The Germans aren't prepared to do more to stimulate demand, than the bare minimum needed to allow Angela Merkel to deflect charges of inaction.
The great and the good at Davos are all looking to the United States to pump our consumer demand back up, so they can all start selling goods and commodities to us again, and thus pump their own economies back up.
If you want to know nothing else about the global economic situation, that last sentence is a pretty workable summary.
Where does Obama fit into all this? Well, if you were trying to understand him during the Presidential campaign, it was pretty obvious that he tries to be on all sides of every issue. (He always introduced his inconsistencies with the phrase "I've been consistent about this for many years...")
But he was uncharacteristically consistent about a very small number of things. And one of them was free trade. During the campaign, Obama was consistently against trade, and not just when speaking to union audiences.
So now we're planning to spend trillions of dollars over many years to come, in an attempt to replace consumer demand with government demand.
But the world is watching with great concern for signs that Obama, the protectionist, intends to benefit domestic American industry at the expense of global industry. We'll be buying goods, services and commodities of all kinds, as the grand stimulus program feeds money to state and local governments, to increase teacher salaries and healthcare spending, build roads and bridges to nowhere, buy and distribute condoms, and slap fresh paint on government buildings from sea to shining sea.
In the process, Obama (and a raft of Democratic lawmakers) are clearly feeling the pressure to Buy American. The crowd at Davos is deeply frightened of this, because they want Obama to Buy Global instead. The voices of concern are coming not only from China and Russia, but also from close allies like Mexico and Canada.
Obama will be badly torn by this issue. As a matter of practical economics, he simply can't prevent a certain amount of "leakage" of stimulus dollars. You can't spend $650 million on condoms without benefiting the people in China who make them. The same goes for building materials like steel, asphalt and clinker, some of which we simply have to import.
But the political pressure against trade will be strong. People will say, "Hey! You said you were going to borrow trillions of dollars that MY children will have to repay, to make sure I don't lose my job! And now you want to send MY money to China, so a bunch of Chinese people don't lose THEIR jobs???!!!"
You see the problem.
Let's get into a little bit of capital-flow analysis here. Everyone is assuming that a lot of the money we have to borrow for stimulus will come from existing surplus countries. In effect, we would be taking dollar reserves that are currently doing nothing useful, and move them from foreign central banks into the US economy. More recent analysis suggests that a lot of the borrowing will come from domestic sources.
It's not known whether this model is sustainable over the long term. (And at this point, I can see no alternatives being intelligently proposed, so the question matters a great deal.) But in the near term, over the next two years or so, it's sustainable. If we run $2 trillion deficits this year and next, we'll move our public national debt from about 40% of GDP to about 65%, give or take.
But there is certainly a delicate diplomatic balance at work here. There are structural mercantilists out there, like Japan and the commodity-exporting countries (including sectors of economies like Australia and Canada), who simply depend on our demand. And there are policy mercantilists like China, who manipulate their currency (there, I said it) so as to import demand from us to keep their unemployment manageable.
To the extent that we're importing capital from these countries, they will clearly demand a say in how we use it. That's the diplomatic balance we need to strike.
The Bush Administration, led by Hank Paulson, a man with deep and long-standing ties to China, very effectively kept the diplomatic dance out of public view. A lot of the stranger things that happened last year, including the nationalization of Fannie Mae and Freddie Mac, had international dimensions that were kept quiet, but were intended to keep stable the existing pattern of capital flows, which is admittedly very unbalanced.
A true long-term solution to this problem would be to engender radical improvements in the productivity of the American economy. Today, no one is giving this anything but lip service.
Beyond this, however, the Obama people aren't showing the Bush people's instinct for handling the international trade and capital situation delicately.
Let's be clear. If Obama's New New Deal includes a New Smoot-Hawley regime of soft protectionism, our trading partners will likely retaliate against us. That's why large American companies that operate globally, like General Electric of Fairfield, Connecticut, are concerned. Trade war cuts both ways.
We live in an interconnected world. Until we find a long-term solution for global capital-flow imbalances, we must manage the global economic crisis such that our trading partners benefit from our actions.
Yes, the Davos crowd is substituting harsh rhetoric for leadership. You know, I know, and they know that they can't do diddly-squat to improve their own economies. They need us.
But we need their capital too.
The great and the good at Davos are all looking to the United States to pump our consumer demand back up, so they can all start selling goods and commodities to us again, and thus pump their own economies back up.
If you want to know nothing else about the global economic situation, that last sentence is a pretty workable summary.
Where does Obama fit into all this? Well, if you were trying to understand him during the Presidential campaign, it was pretty obvious that he tries to be on all sides of every issue. (He always introduced his inconsistencies with the phrase "I've been consistent about this for many years...")
But he was uncharacteristically consistent about a very small number of things. And one of them was free trade. During the campaign, Obama was consistently against trade, and not just when speaking to union audiences.
So now we're planning to spend trillions of dollars over many years to come, in an attempt to replace consumer demand with government demand.
But the world is watching with great concern for signs that Obama, the protectionist, intends to benefit domestic American industry at the expense of global industry. We'll be buying goods, services and commodities of all kinds, as the grand stimulus program feeds money to state and local governments, to increase teacher salaries and healthcare spending, build roads and bridges to nowhere, buy and distribute condoms, and slap fresh paint on government buildings from sea to shining sea.
In the process, Obama (and a raft of Democratic lawmakers) are clearly feeling the pressure to Buy American. The crowd at Davos is deeply frightened of this, because they want Obama to Buy Global instead. The voices of concern are coming not only from China and Russia, but also from close allies like Mexico and Canada.
Obama will be badly torn by this issue. As a matter of practical economics, he simply can't prevent a certain amount of "leakage" of stimulus dollars. You can't spend $650 million on condoms without benefiting the people in China who make them. The same goes for building materials like steel, asphalt and clinker, some of which we simply have to import.
But the political pressure against trade will be strong. People will say, "Hey! You said you were going to borrow trillions of dollars that MY children will have to repay, to make sure I don't lose my job! And now you want to send MY money to China, so a bunch of Chinese people don't lose THEIR jobs???!!!"
You see the problem.
Let's get into a little bit of capital-flow analysis here. Everyone is assuming that a lot of the money we have to borrow for stimulus will come from existing surplus countries. In effect, we would be taking dollar reserves that are currently doing nothing useful, and move them from foreign central banks into the US economy. More recent analysis suggests that a lot of the borrowing will come from domestic sources.
It's not known whether this model is sustainable over the long term. (And at this point, I can see no alternatives being intelligently proposed, so the question matters a great deal.) But in the near term, over the next two years or so, it's sustainable. If we run $2 trillion deficits this year and next, we'll move our public national debt from about 40% of GDP to about 65%, give or take.
But there is certainly a delicate diplomatic balance at work here. There are structural mercantilists out there, like Japan and the commodity-exporting countries (including sectors of economies like Australia and Canada), who simply depend on our demand. And there are policy mercantilists like China, who manipulate their currency (there, I said it) so as to import demand from us to keep their unemployment manageable.
To the extent that we're importing capital from these countries, they will clearly demand a say in how we use it. That's the diplomatic balance we need to strike.
The Bush Administration, led by Hank Paulson, a man with deep and long-standing ties to China, very effectively kept the diplomatic dance out of public view. A lot of the stranger things that happened last year, including the nationalization of Fannie Mae and Freddie Mac, had international dimensions that were kept quiet, but were intended to keep stable the existing pattern of capital flows, which is admittedly very unbalanced.
A true long-term solution to this problem would be to engender radical improvements in the productivity of the American economy. Today, no one is giving this anything but lip service.
Beyond this, however, the Obama people aren't showing the Bush people's instinct for handling the international trade and capital situation delicately.
Let's be clear. If Obama's New New Deal includes a New Smoot-Hawley regime of soft protectionism, our trading partners will likely retaliate against us. That's why large American companies that operate globally, like General Electric of Fairfield, Connecticut, are concerned. Trade war cuts both ways.
We live in an interconnected world. Until we find a long-term solution for global capital-flow imbalances, we must manage the global economic crisis such that our trading partners benefit from our actions.
Yes, the Davos crowd is substituting harsh rhetoric for leadership. You know, I know, and they know that they can't do diddly-squat to improve their own economies. They need us.
But we need their capital too.
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