Evening, Bosco. The "great middle ground" in an expanded perspective.
Before I copy the article in, I believe the PBS report may have intended Chile rather than Argentina. If they did intend Argentina, it's news to this set of eyes and ears.
Chile has for some time captured 10% of offshore investment, or hot, monies and placed them in an escrow account. This, and other Chilean regulatory achievements, were being discussed (over alot of shrimp, undoubtedly) at last week's global conference in Washington, D.C. Argentina has, on the other hand, been fairly free-wheeling and has for that fact become a favorite destination of offshore direct and portfolio investment. It remains one of the very few nations which have no withholding tax. Some of those who participate at SI HK will know of at least one other.
Colombia? Pay no attention.
(Thanks to Bill Fleckenstein for clueing me in on the shrimp.)
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America's Economy Demobilizes
by Robert H. Dugger
Economic analysis in the past two years has consistently underestimated the speed and depth of the global downturn. For so many economists to be so wrong suggests that one or a group of factors has been consistently overlooked. It suggests that in the midst of our "new era," a "paradigm shift" has occurred that we're not considering.
At times like these, the best place to look for such factors is history. Too frequently economists give inadequate attention to the historical context of economic events. We may be in just such a situation.
The United States won World War II by outproducing Germany and Japan. It won the Cold War by outconsuming Russia and China. Now, the country is downshifting from the high-consumption, low-savings crisis levels of the past four decades.
The United States is moving toward a sustainable consumption-savings equilibrium and away from the geopolitics of supporting the Cold War allies surrounding the former Soviet Union and Communist China. This result is an important aspect of the Asian downturns and the stock market sell-offs in the United States and Europe.
In simplest terms, countries and companies that are highly dependent on America's continuing to maintain wartime levels of consumption are in trouble, and until they change their outlooks, they will remain in danger. This observation applies also to the U.S. policy-makers. Monetary and fiscal policies that ignore this post-Cold War paradigm shift will be consistently insufficient in moderating the economic downturn.
The current downturn has a historical antecedent.
During the crucial final four years of World War II, the United States transformed itself into a high-production, low-savings society. Immediately after the war, the United States downshifted from the crisis investment levels of the war years, and, as it did, it slid into a deep recession.
An active fiscal stimulus, including the GI Bill, stabilized the situation. The transition was relatively brief. The Cold War that followed was pursued under a nuclear umbrella. It had to be fought differently.
Rather than four years of war-crisis disequilibrium, the Cold War disequilibrium extended over four decades.
In almost a mirror image of the four high-production, high-savings years of World War II, the United States transformed itself during the Cold War into a high-consumption, low-savings society to support its allies. With policies ranging from the tax deductibility of consumer-loan interest to old-age medical-care assistance, U.S. policy-makers encouraged Americans to spend more and save less.
Through its consumption, the United States supported the commercial and political systems of the front-line countries around the USSR and China, enabling them to keep popular allegiance from migrating to the promises of communism.
The price Americans paid for the Cold War is evident in two measures -- in the inadequacy of American savings to address retirement, medical care and education needs, and in the cumulative current account deficit.
Now the United States is in a post-Cold War transition.
The U.S. economy is beginning to move toward a sustainable consumption-savings equilibrium and a geopolitical framework that emphasizes truer self-determination. The economic effects of this transition in the immediate term are perceived to be universally bad. They include collapses in the economies of our Cold War allies; horrific up-tics in political risk, particularly in the arc of countries that were the outposts of both the Western and Communist sides of the Cold War front lines; and, now, downturns in the economies of the Cold War's "winners."
The effects are not bad, they are just part of a transition. Change is almost always painful and almost always desirable.
In this context, financial-market deleveraging is fully understandable. The most leveraged economies and companies fall first. The Long-Term Capital Management hedge fund is just a canary in the coal mine.
Also, the seeming inadequacy of the rescue efforts of the Group of Seven industrialized nations, the International Monetary Fund and the World Bank is clearer. When the largest economy in the world is beginning to adjust in a way you did not anticipate, restructuring efforts are going to take longer than expected.
Fortunately, the policy prescriptions implicit in recognizing a post-Cold War transition are consistent with IMF and World Bank efforts. That is, the countries in trouble are the ones that depended heavily on the United States for consumption support. The thrust of the restructuring packages is to make these countries develop intenal sources of demand and institutional systems (democratic and financial) to sustain that development.
From here forward, when you think about current conditions and what your company, agency or country should do, ask yourself this: Are Americans really going to continue to consume at levels that put themselves and their families at risk? The answer is, clearly, no. Americans need to save more, and with the Cold War over and fantasies of endless stock-market gains being dispelled like morning mist in the sunshine, they are going to.
Robert H. Dugger, a Washington-based economist, is a founding member of the African Capital Markets Committee and the China Business Lending Project. Article distributed by Bridge News. |
