(english / italiano)
Il capitalismo è la causa strutturale della guerra
1. Il vero fantasma di Monaco `38 (Luigi Cavallaro / Il Manifesto)
2. The Economist: The risks ahead for the world economy (Fred Bergsten)
=== 1 ===
http://www.ilmanifesto.it/
il manifesto - 21 Settembre 2004
GUERRA
Il vero fantasma di Monaco `38
LUIGI CAVALLARO
Il 29 settembre 1938, i capi di stato di due importanti paesi europei
si recarono a Monaco, a trovare un loro collega che, nel breve volgere
di cinque anni da quando era stato democraticamente eletto, aveva
finanziato su larga scala il riarmo del proprio paese e promosso una
politica estera aggressiva e destabilizzante nell'intera Europa
centrale, culminata qualche mese prima nell'annessione coatta di uno
stato sovrano. Il nobile intento degli statisti in visita in Baviera
era di indurre quel loro collega a più miti consigli, ricercando con
lui una strategia multilaterale che gli consentisse di perseguire
comunque quelli che essi stessi consideravano suoi legittimi interessi;
e certo pesava la consapevolezza che nessuna pacificazione duratura -
nessun appeasement, come si disse - era possibile se non con il suo
consenso. Il 30 settembre dal virtuoso consesso sortì un accordo.
Commentandolo, Winston Churchill disse che le potenze europee potevano
scegliere tra la vergogna e la guerra, e avrebbero avuto entrambe
(Churchill qualche anno dopo avrebbe trescato col padrone di casa di
Monaco e col suo italico servitore per negoziare un ribaltone che
ricacciasse i russi ben oltre l'Elba; ma questo è un altra storia).
Sessantasei anni dopo c'è il presidente di uno stato assai importante
che si proclama war president, ha fatto letteralmente esplodere la
spesa militare, ha mosso guerra a due stati senza esserne attaccato e,
in generale, sta esercitando una funzione destabilizzante in tutto il
Medio Oriente, la cui situazione è ancora più torbidamente complessa di
quanto non fosse l'Europa centrale nel 1938. E ci sono capi di stato
che cercano di indurlo a più miti consigli e a ricercare una strategia
non unilaterale per tutelare i suoi legittimi interessi (inclusi il
controllo dell'approvvigionamento energetico mondiale e un signoraggio
monetario che gli consenta di esportare all'estero le contraddizioni
del proprio modello di crescita). Come i loro colleghi d'allora, essi
sono realisti: sono cioè consapevoli che non c'è oggi alcuna pace
possibile senza il consenso di questo collega dai modi un po' cowboy. E
altrettanto realisti sono gli aspiranti statisti attualmente
all'opposizione nel nostro paese: sperano vivamente che alle prossime
elezioni costui possa essere sconfitto dal suo avversario (un tipo così
progressista da aver sostenuto già sette anni fa, in un libro, quel che
il presidente in carica sta praticando), ma non si tirano indietro
nemmeno di fronte a una (probabile) rielezione del war president
attuale, al punto che hanno intrapreso in patria un dialogo costruttivo
con colui che ne è il più fiero e zelante difensore e alleato. Oggi
come ieri questi eventi non maturano nel vuoto, ma nel pieno di una
deflazione mondiale, che ha sancito il ritorno in auge di una politica
economica che gli inglesi chiamano beggar-thy-neighbour e testimonia
ancora una volta dell'incapacità del capitalismo di risolvere le
contraddizioni prodotte dal suo sviluppo incontrollato, dalla
disoccupazione alla distribuzione arbitraria e iniqua delle ricchezze e
dei redditi. È ozioso chiedersi se avremo la guerra o la vergogna:
abbiamo già tutt'e due. È certo invece che questo è l'unico modo
sensato di evocare oggi lo spettro dell'appeasement. Ogni diverso
paragone, che sfrutti l'emozione creata da un terrorismo brutale che è
solo il ritorno di fiamma di un imperialismo nato molto prima, è frutto
di corta memoria e/o lunga malafede.
=== 2 ===
(dalla lista: marxiana @yahoogroups.com )
The risks ahead for the world economy
Sep 9th 2004
From The Economist print edition
Fred Bergsten explains why policymakers need to act now in order to
avert the danger of serious damage to the world economy
FIVE major risks threaten the world economy. Three centre on the United
States: renewed sharp increases in the current-account deficit leading
to a crash of the dollar; a budget profile that is out of control; and
an outbreak of trade protectionism. A fourth relates to China, which
faces a possible hard landing from its recent overheating. The fifth is
that oil prices could rise to $60-70 per barrel even without a major
political or terrorist disruption, and much higher with one.
Most of these risks reinforce each other. A further oil shock, a dollar
collapse and a soaring American budget deficit would all generate much
higher inflation and interest rates. A sharp dollar decline would
increase the likelihood of further oil price rises. Larger budget
deficits will produce larger American trade deficits, and thus more
protectionism and dollar vulnerability. Realisation of any one of the
five risks could substantially reduce world growth. If two or three,
let alone all five, were to occur in combination then they would
radically reverse the global outlook.
There is still time to head off each of these risks. Decisions made in
America immediately after this year's elections will be pivotal. China,
the new growth locomotive, is key to resolving the global trade
imbalances and must play a central role in future. Action by a number
of other countries will be essential to maintain global growth and to
avoid deeper oil shocks and new trade restrictions.
The most alarming new prospect is another sharp deterioration in
America's current-account deficit. It has already reached an annual
rate of $600 billion, well above 5% of the economy. New projections by
my colleague Catherine Mann (see chart 1) suggest it will now be rising
again by a full percentage point of GDP per year, as actually occurred
in 1997-2000. On such a trajectory, the deficit would exceed $1
trillion per year by 2010.
There are three reasons for this dismal prospect. First, American
merchandise imports are now almost twice as large as exports; hence
exports would have to grow twice as fast as imports merely to halt the
deterioration. (In the past, such a relationship occurred only after
the massive fall experienced by the dollar in 1985-87.) Second,
economic growth is likely to remain faster in America than in its major
markets and higher incomes there increase demand for imports much
faster than income growth elsewhere increases demand for American
exports. Third, America's large debtor position (it currently is in the
red by more than $2.5 trillion) means that its net investment income
payments to foreigners will escalate steadily, especially as interest
rates rise.
Of course, it is virtually inconceivable that the markets will permit
such deficits to eventuate. The only issue is how they are to be
averted. An immediate resumption of the gradual decline of the dollar,
as in the period 2002-03, cumulating in a fall of at least another 20%,
is needed to reduce the deficits to sustainable levels.
If delayed much longer, the dollar's inevitable fall is likely to be
much larger and much faster. Moreover, much of the slack in America's
product and labour markets will probably have disappeared in a year or
so. Sharp dollar depreciation at that stage would push up inflation and
macroeconomic models suggest that American interest rates could even
hit double digits.
The situation would be still worse if future increases in energy prices
and the budget deficit compound such developments, as they surely
could. The negative impact would also be much greater in other
countries because of their need to generate larger and faster domestic
demand increases in order to offset declining trade surpluses.
Fears of a hard landing for the dollar and the world economy are of
course not new. The situation is much more ominous today, however,
because of the record current-account deficits and international debt,
and the high probability of further rapid increases in both. The
potential escalation of oil prices suggests a parallel with the dollar
declines of the 1970s, which were associated with stagflation, rather
than the 1980s when a sharp fall in energy costs and inflation
cushioned dollar depreciation (but still produced higher interest rates
and Black Monday for the stockmarket). Paul Volcker, former chairman of
the Federal Reserve, predicts with 75% probability a sharp fall in the
dollar within five years.
The prospects for the budget deficit and trade protectionism further
darken the picture. Official projections score the fiscal imbalance at
a cumulative $5 trillion over the next decade, but exclude probable
increases in overseas military and homeland-security expenditures,
extension of the recent tax cuts and new entitlement increases proposed
by both presidential candidates. This deficit could also approach $1
trillion per year (see chart 2), yet there is no serious discussion of
how to restore fiscal responsibility, let alone an agreed strategy for
reining in runaway entitlement programmes (especially Medicare).
Different deficits
The budget and current-account deficits are not “twin”. The budget in
fact moved from large deficit in the early 1990s into surplus in
1999-2001, while the external imbalance soared anew. But increased
fiscal shortfalls, especially with the economy nearing full employment,
will intensify the need for foreign capital. The external deficit would
almost certainly rise further as a result.
Robert Rubin, former secretary of the Treasury, also stresses the
psychological importance for financial markets of expectations
concerning the American budget position. If that deficit is viewed as
likely to rise substantially, without any correction in sight,
confidence in America's financial instruments and currency could crack.
The dollar could fall sharply as it did in 1971-73, 1978-79, 1985-87
and 1994-95. Market interest rates would rise substantially and the
Federal Reserve would probably have to push them still higher to limit
the acceleration of inflation.
These risks could be intensified by the change in leadership that will
presumably take place at the Federal Reserve Board in less than two
years, inevitably creating new uncertainties after 25 years of superb
stewardship by Mr Volcker and Alan Greenspan. A very hard landing is
not inevitable but neither is it unlikely.
The third component of the “America problem” is trade protectionism.
The leading indicator of American protection is not the unemployment
rate, but rather overvaluation of the dollar and its attendant external
deficits, which sharply alter the politics of trade policy. It was
domestic political, rather than international financial, pressure that
forced previous administrations (Nixon in 1971, Reagan in 1985)
aggressively to seek dollar depreciation. The hubbub over outsourcing
and the launching of a spate of trade actions against China are the
latest cases in point. The current-account, and related budget,
imbalances may not be sustainable for much longer, even if foreign
investors and central banks prove willing to continue funding them for
a while.
The fourth big risk centres on China, which has accounted for over 20%
of world trade growth for the past three years. Fuelled by runaway
credit expansion and unsustainable levels of investment, which recently
approached half of GDP, Chinese growth must slow. The leadership that
took office in early 2003 ignored the problem for a year. It has
finally adopted a peculiar mix of market-related policies, such as
higher reserve requirements for the banks, and traditional
command-and-control directives, such as cessation of lending to certain
sectors. The ultimate success of these measures is highly uncertain.
Under the best of circumstances, China's expansion will decelerate
gradually but substantially from its recent 9-10% pace. When the
country cooled its last excessive boom after 1992, growth declined for
seven straight years. A truly hard landing could be much more abrupt
and severe. Either outcome will, to a degree, counter the inflationary
and interest-rate consequences of the other global risks. But a
slowdown, and especially a hard landing, in China would sharply
reinforce their dampening effects on world growth.
The fifth threat is energy prices. In the short run, the rapid growth
of world demand, low private inventories, shortages of refining and
other infrastructure (particularly in America), continued American
purchases for its strategic reserve and fears of supply disruptions
have outstripped the possibilities for increased production. Hence
prices have recently hit record highs in nominal terms. The impact is
extremely significant since every sustained rise of $10 per barrel in
the world price takes $250 billion-300 billion (equivalent to about
half a percentage point) off annual global growth for several years. Mr
Greenspan frequently notes that all three major post-war recessions
have been triggered by sharp increases in the price of oil.
My colleague Philip Verleger concludes that this lethal combination
could push the price to $60-70 per barrel over the next year or two,
perhaps exceeding the record high of 1980 in real terms. Gasoline
prices per gallon in America would rise from under $2 now to $2.60 in
2006. Prices would climb even more if political or terrorist events
were further to unsettle production in the Middle East, the former
Soviet Union or elsewhere.
Curtail the cartel
The more fundamental energy problem is the oligopolistic nature of the
market. The OPEC cartel in general, and dominant supplier Saudi Arabia
in particular, restrict supply in the short run and output capacity in
the long run to maintain prices far above what a competitive market
would generate. They do not always succeed and indeed have suffered
several sharp price falls over the past three decades. They are often
unable to counter excessive price escalation when they want to, as at
present.
Primarily due to the cartel, however, the world price has averaged
about twice the cost of production over the past three decades. The
recent price above $40 per barrel compares with production charges of
$15-20 per barrel in the highest-cost locales and much lower marginal
costs in many OPEC countries. This underlying problem also looks likely
to get worse, as the Saudis have talked openly about increasing their
target range from the traditional $22-28 per barrel to $30-40.
There is a high probability that one or more of these risks to global
prosperity and stability will eventuate. The consequences for the world
economy of several of them reinforcing each other are potentially
disastrous. All five risks can be avoided, however, or their adverse
effects at least substantially dampened, by timely policy actions. The
most important single step is for the president of the United States to
present and aggressively pursue a credible programme to cut the federal
budget deficit at least in half over the coming four years and to
sustain the improvement thereafter. This will require a combination of
spending cuts, revenue increases and procedural changes (including the
restoration of “PAYGO” rules in Congress), as well as rapid economic
growth.
Such a programme would maximise the prospects for maintaining solid
growth in America and the world by avoiding the crowding out of
private-sector investment and by reducing the likelihood of higher
interest rates. It would represent the best insurance against a hard
landing via the dollar, by buttressing global confidence in the
American economy. It should be feasible, having been more than
accomplished during the 1990s. Its absence would virtually assure
realisation of at least some of the inter-related global risks within
the next presidential term.
An energy stability pact
America and its allies must also move decisively on energy. Sales from
their strategic reserves, which total about 1.3 billion barrels
(including 700m in the United States), would reverse the recent price
increases for at least a while and demonstrate a willingness to counter
OPEC. For the longer run, America must expand production (including in
Alaska) and increase conservation (especially for motor vehicles).
Democrats and Republicans must together take the political heat of
establishing a gasoline, carbon or energy tax that will limit
consumption, help protect the environment and reduce the need for
future military interventions abroad.
All three major post-war recessions have been triggered by sharp
increases in the price of oil
The most effective “jobs programme” for any American administration and
the world as a whole, however, would be an initiative to align the
global oil price with levels that would result from market forces.
America should therefore seek agreement among importing countries
(including China, India and other large developing importers as well as
industrialised members of the International Energy Agency) to offer the
producers an agreement to stabilise prices within a fairly wide range
centred at about $20 per barrel.
Consumers would buy for their reserves to avoid declines below the
floor of the range and sell from those reserves to preserve its
ceiling. A sustained cut of $20 per barrel in the world price could add
a full percentage point to annual global growth for at least several
years. The resultant stabilisation of price swings would avoid the
periodic spikes (in both directions) that tend to trigger huge economic
disruption. Producers would benefit from these global economic gains,
from their new protection against sharp price falls and from trade
concessions that could be included in the compact to help them
diversify their economies.
China must also play a central role in protecting the global outlook.
Fortunately, it can resolve its internal overheating problem and
contribute substantially to the needed global rebalancing through the
single step of revaluing the renminbi by 20-25%. Such a currency
adjustment would simultaneously address all of China's domestic
troubles: dampening demand (for its exports) by enough to cut economic
growth to the official target of 7%; countering inflation (now
approaching double digits for inter-company transactions) directly by
cutting prices of imports; and checking the inflow of speculative
capital that fuels monetary expansion.
A sizeable renminbi revaluation is also crucial for global adjustment
because much of the further fall of the dollar needs to take place
against the East Asian currencies. These have risen little if at all,
although their countries run the bulk of the world's trade surpluses.
China has greatly intensified the problem by maintaining its dollar peg
and riding the dollar down against most other currencies, further
improving its competitiveness. Other Asian countries, from Japan
through India, have thus intervened massively to keep their currencies
from appreciating against the dollar (and, with it, against the
renminbi). This has severely limited correction of the American deficit
and thrown the corresponding surplus reduction on to Europe and a few
others with freely flexible exchange rates. China should reject the
US/G-7/IMF advice to float its currency, which is far too risky in
light of its weak banking system and could even produce a weaker
renminbi, and opt instead for a
substantial one-shot revaluation. It should in fact take the lead in
working out an “Asian Plaza Agreement” to ensure that all the major
Asian countries make their necessary contributions to global adjustment.
Countries that undergo currency appreciation, and thus face reductions
in their trade surpluses, will need to expand domestic demand to
sustain global growth. China need not do so now because it must cool
its overheated economy. But the other surplus countries, including
Japan and the euro area, will have to implement structural reforms and
new macroeconomic policies to pick up the slack. America and the
surplus countries should also work together to forge a successful Doha
round, renewing the momentum of trade liberalisation and reducing the
risks of protectionist backsliding.
Risk in our times
The global economy faces a number of major risks that, especially in
combination, could throw it back into rapid inflation, high interest
rates, much slower growth or even recession, rising unemployment,
currency conflict and protectionism. Even worse contingencies could of
course be envisaged: a terrorist attack with far larger economic
repercussions than September 11th or a sharp slowdown in American
productivity growth, as occurred after the oil shocks of the 1970s,
that would further undermine the outlook for both economic expansion
and the dollar.
Fortunately, policy initiatives are available that would avoid or
minimise the costs of the most evident risks. America will be central
to achieving such an outcome and the president and Congress will have
to decide in early 2005 whether to address these problems aggressively
or simply avert their eyes and hope for the best, taking major risks
with their own political futures as well as with the world economy.
China will have to play a new and decisive leadership role. The major
oil producers and the other large economies must do their part. The
outlook for the global economy for at least the next few years hangs in
the balance.
Fred Bergsten
Il capitalismo è la causa strutturale della guerra
1. Il vero fantasma di Monaco `38 (Luigi Cavallaro / Il Manifesto)
2. The Economist: The risks ahead for the world economy (Fred Bergsten)
=== 1 ===
http://www.ilmanifesto.it/
il manifesto - 21 Settembre 2004
GUERRA
Il vero fantasma di Monaco `38
LUIGI CAVALLARO
Il 29 settembre 1938, i capi di stato di due importanti paesi europei
si recarono a Monaco, a trovare un loro collega che, nel breve volgere
di cinque anni da quando era stato democraticamente eletto, aveva
finanziato su larga scala il riarmo del proprio paese e promosso una
politica estera aggressiva e destabilizzante nell'intera Europa
centrale, culminata qualche mese prima nell'annessione coatta di uno
stato sovrano. Il nobile intento degli statisti in visita in Baviera
era di indurre quel loro collega a più miti consigli, ricercando con
lui una strategia multilaterale che gli consentisse di perseguire
comunque quelli che essi stessi consideravano suoi legittimi interessi;
e certo pesava la consapevolezza che nessuna pacificazione duratura -
nessun appeasement, come si disse - era possibile se non con il suo
consenso. Il 30 settembre dal virtuoso consesso sortì un accordo.
Commentandolo, Winston Churchill disse che le potenze europee potevano
scegliere tra la vergogna e la guerra, e avrebbero avuto entrambe
(Churchill qualche anno dopo avrebbe trescato col padrone di casa di
Monaco e col suo italico servitore per negoziare un ribaltone che
ricacciasse i russi ben oltre l'Elba; ma questo è un altra storia).
Sessantasei anni dopo c'è il presidente di uno stato assai importante
che si proclama war president, ha fatto letteralmente esplodere la
spesa militare, ha mosso guerra a due stati senza esserne attaccato e,
in generale, sta esercitando una funzione destabilizzante in tutto il
Medio Oriente, la cui situazione è ancora più torbidamente complessa di
quanto non fosse l'Europa centrale nel 1938. E ci sono capi di stato
che cercano di indurlo a più miti consigli e a ricercare una strategia
non unilaterale per tutelare i suoi legittimi interessi (inclusi il
controllo dell'approvvigionamento energetico mondiale e un signoraggio
monetario che gli consenta di esportare all'estero le contraddizioni
del proprio modello di crescita). Come i loro colleghi d'allora, essi
sono realisti: sono cioè consapevoli che non c'è oggi alcuna pace
possibile senza il consenso di questo collega dai modi un po' cowboy. E
altrettanto realisti sono gli aspiranti statisti attualmente
all'opposizione nel nostro paese: sperano vivamente che alle prossime
elezioni costui possa essere sconfitto dal suo avversario (un tipo così
progressista da aver sostenuto già sette anni fa, in un libro, quel che
il presidente in carica sta praticando), ma non si tirano indietro
nemmeno di fronte a una (probabile) rielezione del war president
attuale, al punto che hanno intrapreso in patria un dialogo costruttivo
con colui che ne è il più fiero e zelante difensore e alleato. Oggi
come ieri questi eventi non maturano nel vuoto, ma nel pieno di una
deflazione mondiale, che ha sancito il ritorno in auge di una politica
economica che gli inglesi chiamano beggar-thy-neighbour e testimonia
ancora una volta dell'incapacità del capitalismo di risolvere le
contraddizioni prodotte dal suo sviluppo incontrollato, dalla
disoccupazione alla distribuzione arbitraria e iniqua delle ricchezze e
dei redditi. È ozioso chiedersi se avremo la guerra o la vergogna:
abbiamo già tutt'e due. È certo invece che questo è l'unico modo
sensato di evocare oggi lo spettro dell'appeasement. Ogni diverso
paragone, che sfrutti l'emozione creata da un terrorismo brutale che è
solo il ritorno di fiamma di un imperialismo nato molto prima, è frutto
di corta memoria e/o lunga malafede.
=== 2 ===
(dalla lista: marxiana @yahoogroups.com )
The risks ahead for the world economy
Sep 9th 2004
From The Economist print edition
Fred Bergsten explains why policymakers need to act now in order to
avert the danger of serious damage to the world economy
FIVE major risks threaten the world economy. Three centre on the United
States: renewed sharp increases in the current-account deficit leading
to a crash of the dollar; a budget profile that is out of control; and
an outbreak of trade protectionism. A fourth relates to China, which
faces a possible hard landing from its recent overheating. The fifth is
that oil prices could rise to $60-70 per barrel even without a major
political or terrorist disruption, and much higher with one.
Most of these risks reinforce each other. A further oil shock, a dollar
collapse and a soaring American budget deficit would all generate much
higher inflation and interest rates. A sharp dollar decline would
increase the likelihood of further oil price rises. Larger budget
deficits will produce larger American trade deficits, and thus more
protectionism and dollar vulnerability. Realisation of any one of the
five risks could substantially reduce world growth. If two or three,
let alone all five, were to occur in combination then they would
radically reverse the global outlook.
There is still time to head off each of these risks. Decisions made in
America immediately after this year's elections will be pivotal. China,
the new growth locomotive, is key to resolving the global trade
imbalances and must play a central role in future. Action by a number
of other countries will be essential to maintain global growth and to
avoid deeper oil shocks and new trade restrictions.
The most alarming new prospect is another sharp deterioration in
America's current-account deficit. It has already reached an annual
rate of $600 billion, well above 5% of the economy. New projections by
my colleague Catherine Mann (see chart 1) suggest it will now be rising
again by a full percentage point of GDP per year, as actually occurred
in 1997-2000. On such a trajectory, the deficit would exceed $1
trillion per year by 2010.
There are three reasons for this dismal prospect. First, American
merchandise imports are now almost twice as large as exports; hence
exports would have to grow twice as fast as imports merely to halt the
deterioration. (In the past, such a relationship occurred only after
the massive fall experienced by the dollar in 1985-87.) Second,
economic growth is likely to remain faster in America than in its major
markets and higher incomes there increase demand for imports much
faster than income growth elsewhere increases demand for American
exports. Third, America's large debtor position (it currently is in the
red by more than $2.5 trillion) means that its net investment income
payments to foreigners will escalate steadily, especially as interest
rates rise.
Of course, it is virtually inconceivable that the markets will permit
such deficits to eventuate. The only issue is how they are to be
averted. An immediate resumption of the gradual decline of the dollar,
as in the period 2002-03, cumulating in a fall of at least another 20%,
is needed to reduce the deficits to sustainable levels.
If delayed much longer, the dollar's inevitable fall is likely to be
much larger and much faster. Moreover, much of the slack in America's
product and labour markets will probably have disappeared in a year or
so. Sharp dollar depreciation at that stage would push up inflation and
macroeconomic models suggest that American interest rates could even
hit double digits.
The situation would be still worse if future increases in energy prices
and the budget deficit compound such developments, as they surely
could. The negative impact would also be much greater in other
countries because of their need to generate larger and faster domestic
demand increases in order to offset declining trade surpluses.
Fears of a hard landing for the dollar and the world economy are of
course not new. The situation is much more ominous today, however,
because of the record current-account deficits and international debt,
and the high probability of further rapid increases in both. The
potential escalation of oil prices suggests a parallel with the dollar
declines of the 1970s, which were associated with stagflation, rather
than the 1980s when a sharp fall in energy costs and inflation
cushioned dollar depreciation (but still produced higher interest rates
and Black Monday for the stockmarket). Paul Volcker, former chairman of
the Federal Reserve, predicts with 75% probability a sharp fall in the
dollar within five years.
The prospects for the budget deficit and trade protectionism further
darken the picture. Official projections score the fiscal imbalance at
a cumulative $5 trillion over the next decade, but exclude probable
increases in overseas military and homeland-security expenditures,
extension of the recent tax cuts and new entitlement increases proposed
by both presidential candidates. This deficit could also approach $1
trillion per year (see chart 2), yet there is no serious discussion of
how to restore fiscal responsibility, let alone an agreed strategy for
reining in runaway entitlement programmes (especially Medicare).
Different deficits
The budget and current-account deficits are not “twin”. The budget in
fact moved from large deficit in the early 1990s into surplus in
1999-2001, while the external imbalance soared anew. But increased
fiscal shortfalls, especially with the economy nearing full employment,
will intensify the need for foreign capital. The external deficit would
almost certainly rise further as a result.
Robert Rubin, former secretary of the Treasury, also stresses the
psychological importance for financial markets of expectations
concerning the American budget position. If that deficit is viewed as
likely to rise substantially, without any correction in sight,
confidence in America's financial instruments and currency could crack.
The dollar could fall sharply as it did in 1971-73, 1978-79, 1985-87
and 1994-95. Market interest rates would rise substantially and the
Federal Reserve would probably have to push them still higher to limit
the acceleration of inflation.
These risks could be intensified by the change in leadership that will
presumably take place at the Federal Reserve Board in less than two
years, inevitably creating new uncertainties after 25 years of superb
stewardship by Mr Volcker and Alan Greenspan. A very hard landing is
not inevitable but neither is it unlikely.
The third component of the “America problem” is trade protectionism.
The leading indicator of American protection is not the unemployment
rate, but rather overvaluation of the dollar and its attendant external
deficits, which sharply alter the politics of trade policy. It was
domestic political, rather than international financial, pressure that
forced previous administrations (Nixon in 1971, Reagan in 1985)
aggressively to seek dollar depreciation. The hubbub over outsourcing
and the launching of a spate of trade actions against China are the
latest cases in point. The current-account, and related budget,
imbalances may not be sustainable for much longer, even if foreign
investors and central banks prove willing to continue funding them for
a while.
The fourth big risk centres on China, which has accounted for over 20%
of world trade growth for the past three years. Fuelled by runaway
credit expansion and unsustainable levels of investment, which recently
approached half of GDP, Chinese growth must slow. The leadership that
took office in early 2003 ignored the problem for a year. It has
finally adopted a peculiar mix of market-related policies, such as
higher reserve requirements for the banks, and traditional
command-and-control directives, such as cessation of lending to certain
sectors. The ultimate success of these measures is highly uncertain.
Under the best of circumstances, China's expansion will decelerate
gradually but substantially from its recent 9-10% pace. When the
country cooled its last excessive boom after 1992, growth declined for
seven straight years. A truly hard landing could be much more abrupt
and severe. Either outcome will, to a degree, counter the inflationary
and interest-rate consequences of the other global risks. But a
slowdown, and especially a hard landing, in China would sharply
reinforce their dampening effects on world growth.
The fifth threat is energy prices. In the short run, the rapid growth
of world demand, low private inventories, shortages of refining and
other infrastructure (particularly in America), continued American
purchases for its strategic reserve and fears of supply disruptions
have outstripped the possibilities for increased production. Hence
prices have recently hit record highs in nominal terms. The impact is
extremely significant since every sustained rise of $10 per barrel in
the world price takes $250 billion-300 billion (equivalent to about
half a percentage point) off annual global growth for several years. Mr
Greenspan frequently notes that all three major post-war recessions
have been triggered by sharp increases in the price of oil.
My colleague Philip Verleger concludes that this lethal combination
could push the price to $60-70 per barrel over the next year or two,
perhaps exceeding the record high of 1980 in real terms. Gasoline
prices per gallon in America would rise from under $2 now to $2.60 in
2006. Prices would climb even more if political or terrorist events
were further to unsettle production in the Middle East, the former
Soviet Union or elsewhere.
Curtail the cartel
The more fundamental energy problem is the oligopolistic nature of the
market. The OPEC cartel in general, and dominant supplier Saudi Arabia
in particular, restrict supply in the short run and output capacity in
the long run to maintain prices far above what a competitive market
would generate. They do not always succeed and indeed have suffered
several sharp price falls over the past three decades. They are often
unable to counter excessive price escalation when they want to, as at
present.
Primarily due to the cartel, however, the world price has averaged
about twice the cost of production over the past three decades. The
recent price above $40 per barrel compares with production charges of
$15-20 per barrel in the highest-cost locales and much lower marginal
costs in many OPEC countries. This underlying problem also looks likely
to get worse, as the Saudis have talked openly about increasing their
target range from the traditional $22-28 per barrel to $30-40.
There is a high probability that one or more of these risks to global
prosperity and stability will eventuate. The consequences for the world
economy of several of them reinforcing each other are potentially
disastrous. All five risks can be avoided, however, or their adverse
effects at least substantially dampened, by timely policy actions. The
most important single step is for the president of the United States to
present and aggressively pursue a credible programme to cut the federal
budget deficit at least in half over the coming four years and to
sustain the improvement thereafter. This will require a combination of
spending cuts, revenue increases and procedural changes (including the
restoration of “PAYGO” rules in Congress), as well as rapid economic
growth.
Such a programme would maximise the prospects for maintaining solid
growth in America and the world by avoiding the crowding out of
private-sector investment and by reducing the likelihood of higher
interest rates. It would represent the best insurance against a hard
landing via the dollar, by buttressing global confidence in the
American economy. It should be feasible, having been more than
accomplished during the 1990s. Its absence would virtually assure
realisation of at least some of the inter-related global risks within
the next presidential term.
An energy stability pact
America and its allies must also move decisively on energy. Sales from
their strategic reserves, which total about 1.3 billion barrels
(including 700m in the United States), would reverse the recent price
increases for at least a while and demonstrate a willingness to counter
OPEC. For the longer run, America must expand production (including in
Alaska) and increase conservation (especially for motor vehicles).
Democrats and Republicans must together take the political heat of
establishing a gasoline, carbon or energy tax that will limit
consumption, help protect the environment and reduce the need for
future military interventions abroad.
All three major post-war recessions have been triggered by sharp
increases in the price of oil
The most effective “jobs programme” for any American administration and
the world as a whole, however, would be an initiative to align the
global oil price with levels that would result from market forces.
America should therefore seek agreement among importing countries
(including China, India and other large developing importers as well as
industrialised members of the International Energy Agency) to offer the
producers an agreement to stabilise prices within a fairly wide range
centred at about $20 per barrel.
Consumers would buy for their reserves to avoid declines below the
floor of the range and sell from those reserves to preserve its
ceiling. A sustained cut of $20 per barrel in the world price could add
a full percentage point to annual global growth for at least several
years. The resultant stabilisation of price swings would avoid the
periodic spikes (in both directions) that tend to trigger huge economic
disruption. Producers would benefit from these global economic gains,
from their new protection against sharp price falls and from trade
concessions that could be included in the compact to help them
diversify their economies.
China must also play a central role in protecting the global outlook.
Fortunately, it can resolve its internal overheating problem and
contribute substantially to the needed global rebalancing through the
single step of revaluing the renminbi by 20-25%. Such a currency
adjustment would simultaneously address all of China's domestic
troubles: dampening demand (for its exports) by enough to cut economic
growth to the official target of 7%; countering inflation (now
approaching double digits for inter-company transactions) directly by
cutting prices of imports; and checking the inflow of speculative
capital that fuels monetary expansion.
A sizeable renminbi revaluation is also crucial for global adjustment
because much of the further fall of the dollar needs to take place
against the East Asian currencies. These have risen little if at all,
although their countries run the bulk of the world's trade surpluses.
China has greatly intensified the problem by maintaining its dollar peg
and riding the dollar down against most other currencies, further
improving its competitiveness. Other Asian countries, from Japan
through India, have thus intervened massively to keep their currencies
from appreciating against the dollar (and, with it, against the
renminbi). This has severely limited correction of the American deficit
and thrown the corresponding surplus reduction on to Europe and a few
others with freely flexible exchange rates. China should reject the
US/G-7/IMF advice to float its currency, which is far too risky in
light of its weak banking system and could even produce a weaker
renminbi, and opt instead for a
substantial one-shot revaluation. It should in fact take the lead in
working out an “Asian Plaza Agreement” to ensure that all the major
Asian countries make their necessary contributions to global adjustment.
Countries that undergo currency appreciation, and thus face reductions
in their trade surpluses, will need to expand domestic demand to
sustain global growth. China need not do so now because it must cool
its overheated economy. But the other surplus countries, including
Japan and the euro area, will have to implement structural reforms and
new macroeconomic policies to pick up the slack. America and the
surplus countries should also work together to forge a successful Doha
round, renewing the momentum of trade liberalisation and reducing the
risks of protectionist backsliding.
Risk in our times
The global economy faces a number of major risks that, especially in
combination, could throw it back into rapid inflation, high interest
rates, much slower growth or even recession, rising unemployment,
currency conflict and protectionism. Even worse contingencies could of
course be envisaged: a terrorist attack with far larger economic
repercussions than September 11th or a sharp slowdown in American
productivity growth, as occurred after the oil shocks of the 1970s,
that would further undermine the outlook for both economic expansion
and the dollar.
Fortunately, policy initiatives are available that would avoid or
minimise the costs of the most evident risks. America will be central
to achieving such an outcome and the president and Congress will have
to decide in early 2005 whether to address these problems aggressively
or simply avert their eyes and hope for the best, taking major risks
with their own political futures as well as with the world economy.
China will have to play a new and decisive leadership role. The major
oil producers and the other large economies must do their part. The
outlook for the global economy for at least the next few years hangs in
the balance.
Fred Bergsten