I’m writing yet another post on the economy not because I think I see more clearly than most experts. I’m writing it because I think it is a terribly important issue for me personally and for practically every other individual in the world whose net worth does not exceed one of those astronomical amounts the press tells us every year that some people are worth.
We have a world-wide dilemma facing us, and certain knowledge about how to deal with it is obvious only to those who don’t understand how complex it is. Unfortunately, talking about fairness, and saying that only those who are responsible should have to pay isn’t going to solve the problem either. Pointing to all the innocent victims – and there are hundreds of thousands, maybe millions – and trying to devise an economic solution which will protect them from the consequences, is, in my view, a formula for useless outrage. It won’t help.
We are – innocent or guilty, informed or uninformed, rich or poor – all in this together. We have to solve it together.
Let’s begin with the debt crisis. It’s not the same in every country, but the list of countries whose debt is greater than their economies can maintain over the long-term is long and familiar. Three of the world’s richest economies – the United States, Japan, and Britain – are on the list. Since the bubble burst in 2008, the band has stopped playing.
What are the options for these countries?
One option is austerity. It’s what the tea-party and the Republicans are arguing for. Austerity is what Britain is trying. So is the EU and the IMF which has been trying fruitlessly to force it on Greece, Ireland, and Portugal. It’s working better here in Britain than it is in Greece because Britain is not part of the euro. The pound sterling has been devalued against other currencies, which has helped improve the export market and reduced imports.
It’s not working in the countries that are members of the euro group because the strength of the euro is tied to the German economy which did not begin in the first place with the kind of debts the government of peripheral European countries have run up. Initially, these countries could borrow at rates appropriate for the German economy. Now rates for these debt-ridden countries are ballooning, making it impossible for them to pay down their debts even with increasing spending cuts. What is happening instead is that their economies are simply running out of gas altogether. Taxes are decreasing and the call for government benefits is increasing.
So austerity might work for countries which can devalue at the same time. Euro countries can’t devalue, unless the euro imploded.
Could it be made to work for the U.S. the way it is more (or less) working for Britain? Only up to a point. The U.S. is constrained from devaluing by the size of our debt being held and still being bought by China. If the U.S. dollar devalues too far, China will simply stop buying our debt, and our interest rates will soar. And that will stop our economic recovery – sickly as it already is – dead. Depression will loom.
The principle alternative to austerity is default. In other words, declare national bankruptcy, say to all those who hold a country’s bonds that they aren’t going to get all their money back. Even sovereign countries have been known to default and have lived to see another day. Argentina did it in 1999. But the price is huge.
For the U.S., for instance, to tell U.S. bond holders throughout the world that U.S. treasures are no longer backed by the strength and good faith of the U.S. government and that they will simply have to accept the loss, will mean that interest rates the U.S. is charged will immediately increase, making economic recovery, as in Greece and Ireland, less likely, if not impossible. The dollar will no longer be seen as a safe haven for investors throughout the world. The loss to our economy will be huge. So will the loss is our position of leadership in the world.
A third alternative is Quantitative Easing – the fancy word for printing money. The Fed has already done this twice in the last three years, and may do it again. This has the effect of simply printing money to pay off some of the debts, but it also results in lowering the value of the dollar. This makes the cost of imports greater but makes exporting easier (although exporting is not nearly as a powerful engine of the U.S. economy as it is for Germany, for instance, or China, or even Britain).
A devalued dollar could help, in the long run, to rebalance the global economy. But printing money and devaluing the dollar too drastically and too rapidly will have the same effect as austerity if other countries – especially China – decide as a result to stop buying dollars and thus stop supporting U.S. debt.
The 4th alternative is for governments to continue to increase both taxes and the debt ceiling in order to stimulate the economy with borrowed money. This tends to be the Democrat position. The Republicans are fundamentally arguing for spending cuts rather than spending increases, and would rather see the country default than increase taxes which they believe will choke off the economy every bit as much as increased interest rates.
The difficulty with the Democrats’ position is first that of getting it through Congress. But assuming they could do so, the danger is that, even for a country as rich as the U.S., the debt can spiral out of control. If interest rates go up as a result of the global market losing confidence in the strength of the dollar, the economy could be choked before it got going again. And then things would be worse than ever.
So what’s the answer? Clearly the only sensible – and only possible – solution lies in a mix of the various options. But what kind of mix? That’s the conundrum.
In terms of spending cuts, the U.S. is already cutting its space program. What about defense? how essential is our presence in Afghanistan and Iraq to our national security? What about public services? I, personally, have been somewhat appalled by the salary and pension rights of some of the public services in the U.S. Could they sustain a small trim? In relation to social security, should be increase the normal retirement age? or size of the pension increases once payments begin?
What about taxes? personally, I cannot see that the economy would falter if the highest paid had to pay a little more. On the other hand, most people over-estimate just how much rescinding the Bush tax cuts would bring into the U.S. treasury. It would hardly solve all our problems. Though it might make some people feel a little better on the grounds that the tax cuts were unjustified in the first place.
Okay, that’s the end of Part I of my Economic Examination.
It’s hard to believe. But that’s only half the story as I understand it.
I hate to end on such a pessimistic note, but I really think things might get even worse.
To be continued. There are some very big decisions which will be made on both sides of the Atlantic within the next two weeks. The consequences, for better or for worse, will be huge.
Well, whatever else, you can’t say human life isn’t interesting, can you?