Tough Love...???........
How America went for broke
Simon Nixon says that recession is the price that the
United States must pay for two decades of uncritical faith
in the stock market
There are those who say that the terrorist attacks on the United States
were deserved, that America had it coming, that the attacks will change
the world for ever. To blame the United States for an act of terrorism in
which thousands of innocent civilians lost their lives is morally abhorrent.
But the irony is that if these commentators had confined their comments
to the state of the US economy, they would have been spot-on. If ever
there was anything that was America’s own fault, and that will change
the world for ever, it is the coming US recession.
‘Should I wear shorts or slacks?’
Anyone reading the newspapers during the past week could be forgiven
for concluding that the events of 11 September have changed the course
of the US economy. Within days of the attacks, without even waiting to
see the evidence of a full week’s trading, many of the biggest names in
US industry, including General Electric, Boeing and the big investment
banks, were blaming the terrorists for a dramatic collapse in profits and
the need for swingeing job cuts. UK firms such as British Airways and
Virgin were soon to follow. Meanwhile, many Wall Street economists,
consistently wrong with their forecasts all year, gratefully seized this
face-saving opportunity to pronounce that they now believe that a
recession is inevitable.
This attempt to blame the terrorist attacks does not bear scrutiny.
America has been heading for a nasty recession all year. The cynical
timing of these latest company announcements adds greatly to the
short-term dangers, fuelling investor panic, but they make little difference
to America’s long-term prospects. The state of the US economy is dire,
and it is dire today for exactly the same reasons as were true three
weeks ago.
America is reaping what it has sowed over the last two decades. So
convinced did successive US administrations become that the stock
market was the only efficient way to allocate capital in the economy that
they blew away virtually every safeguard within the financial system.
Financial systems, just like political systems, require checks and balances
to ensure that no part of the system becomes too powerful. But US
policy-makers, driven by an ideological belief in the virtues of unfettered
free markets, sat idly by as capital markets, and the investment banks
that dominate them, systematically eroded every attempt to control them
— culminating in the 1998 repeal of the Glass-Steagal Act, a totemic
piece of New Deal legislation passed in response to the devastation
caused by the Great Crash of 1929.
The result has been the biggest bubble of all time, a grotesque
misallocation of capital leading to massive overcapacity in certain sectors
of the economy and near-collapse in others. Share prices became the
sole measure of economic success in the US economy, and investment
banks became adept at channelling funds to where share prices were
rising fastest, sucking in money from around the world to drive them
higher. The US economy was transformed into a giant pyramid scheme,
the like of which had not been seen since the South Sea Bubble in the
1720s.
The comical excesses of the dotcoms may have grabbed the headlines,
but by far the biggest misallocation of capital took place in the telecoms
sector. It spent an estimated $4,000 billion building new networks to meet
the expected explosion in Internet traffic. So great is the excess capacity,
it is said that if the entire population of the world — all six billion of us —
were to talk solidly on the telephone for a year, it could be transmitted
over existing networks within a few hours. According to industry
estimates, less than 2 per cent of the fibre-optic cable buried under
Europe and North America has even been turned on, or ‘lit’, and of that
which has been lit, only about 10 per cent is in use.
The excesses of the telecoms sector are reflected elsewhere in the
economy; not just in the technology sector, but also in the services
industries — banks, airlines, advertising and public-relations agencies —
that catered to the ‘new economy’. Meanwhile, other areas of US
industry, such as the utilities, have been starved of investment. A bungled
privatisation of the Californian power industry, for example, has left the
state unable to meet the demand for electricity.
For 20 years America has been borrowing unprecedented quantities of
money to play its stock-market casino. Even after the latest falls, the US
stock market is worth 120 per cent of GDP, compared with 40 per cent
for much of the 1980s, and far above its previous peak of 72 per cent in
1972. Meanwhile, the US trade deficit stands at a record 4 per cent of
GDP; no country has ever been able to sustain a deficit on this scale for
long. The US currently absorbs 64 per cent of all global capital flows to
finance its deficit. Capital has been sucked out of the rest of the world,
including many developing countries, to enable America to indulge itself.
It is no coincidence that Citicorp, the giant US bank, has its largest
branch outside New York in Buenos Aires.
For years Americans deluded themselves that they were actually making
this money rather than borrowing it. With the ever-rising stock market
fuelling the illusion of wealth, they embarked on an orgy of personal
spending, building up an average credit-card debt of $7,000 per household
and allowing the proportion of their incomes saved to fall below zero for
the first time since the 1920s. But now the casino has closed for
business, and America finds that it has run out of chips.
The likelihood is that it will take years to pull out of this recession.
Warren Buffet, the legendary US investor, is said to have told friends
that America faces eight years of slump. The Japanese market bubble
burst more than 10 years ago, and its economy has never recovered.
Today, the Japanese financial system teeters on the edge of collapse,
adding to the uncertainty in the global economy. The last time the US
faced a collapse of this nature — in 1929 — it took a decade of slump
and the second world war to pull it out again. It is fanciful to hope that
President Bush’s war on terrorism, coming at the end of the greatest
boom in history, will have a similar effect on the US economy as the
second world war did, coming on the heels of the great depression.
A 1930s-style slump remains extremely unlikely. But, when America
does eventually pull out of this recession, it is likely to find that it will have
changed everything. Its pre-eminence in the global economy will no
longer be taken for granted. At the height of the mania, America
financed its Internet speculations by flogging off its much-derided ‘old
economy’ to anybody who would take it. Already many of its utilities
have been bought by the French and Germans, its supermarkets by the
Dutch and Belgians, its bankrupt steel industry by the Brazilians.
And then there is China. This year its economy will grow by 8 per cent,
and with the vast majority of its GDP dependent upon domestic trade, it
remains well insulated from the downturn in the global economy.
Moreover, earlier this month China joined the World Trade Organisation,
a momentous event utterly eclipsed by events in America. With the
United States spiralling into recession and distracted by its war on
terrorism, much of Asia will now look to China to lead it out of its slump.
A new economic superpower may be about to emerge.
America has only itself to blame for the predicament it finds itself in. It is
paying the penalty for two decades of uncritical faith in the stock market.
For the second time in 100 years, it has sacrificed economic stability to
the greed of the financial community. Surveying the carnage wreaked
upon the US economy in the aftermath of the 1929 stock market crash,
Franklin Delano Roosevelt observed, ‘We have always known that
heedless self-interest was bad morals; we know now that it is bad
economics.’ But there are some lessons, it seems, that we are destined
never to learn. |
