In a lecture he gave in February and a follow-up column in the
Washington Post last month, Volcker called current economic trends in
the United States "as dangerous and intractable as any I can remember,
and I can remember quite a lot."
From The Sunday Herald, 5/1/05:
http://www.sundayherald.com/49427
Bush is on thin ice -- but it’s not due to global warming
By Alf Young
THIS week a leading pro-Tory commentator, defending the timidity of
the alternative fiscal package Michael Howard has promoted during the
election here, based his defence on what former Federal Reserve
chairman Paul Volcker has been saying about the twin Bush deficits in
the United States.
Volcker, fresh from investigating the Iraq oil-for-food scandal, has
attracted a lot of attention for suggesting the American economy is
"skating on increasingly thin ice".
It’s not the kind of language you expect to drop from the lips of a
veteran central banker with impeccable credentials, like the
77-year-old Volcker.
But in a lecture he gave in February and a follow-up column in the
Washington Post last month, Volcker called current economic trends in
the United States "as dangerous and intractable as any I can remember,
and I can remember quite a lot."
America’s current account deficit is now 6.3% of GDP and rising.
Personal savings in the United States have, in his words, "practically
disappeared".
The resultant imbalance -- with Americans consuming and investing
around 6% more each year than they produce -- is only sustained by a
rising tide of foreign capital, much of it from Asia and China in
particular, flowing in at a rate of more than $2 billion each and
every working day.
Yet Bush’s treasury secretary, John Snow, claims the American economy
is in "a sweet spot".
Apologists for his administration in right-wing think tanks around
Washington go further.
They talk about a "Bush boom".
Some economic interests across the Atlantic are clear beneficiaries.
Despite higher oil prices and weakening consumer confidence, corporate
profits over the past three years have been growing at their fastest
rate since the second world war.
But for the vast majority of Americans who depend on their job rather
than their investments to make ends meet, this has been a largely
jobless and wageless recovery.
Job growth last year was running some 40% below the rate recorded in
previous recoveries.
Real average hourly earnings in 2004 were running at around the same
level recorded in late 2001, the low-point in the last recession.
Little wonder then that, despite claims of a Bush boom, in a
Washington Post/ABC poll last week 57% disapproved of Bush’s handling
of the economy.
Their concerns are reflected in some of the most recent official data.
United States growth slowed quite sharply to 3.1% in the first
quarter, under-shooting expectations of around 3.6%.
This was the slowest rate for two years.
Consumer spending held up quite well, at 0.6% in March, but rising
inflation is eating into spending power and the latest numbers for
wages and benefits show the smallest increases for six years.
As Paul Krugman put it the other day:
"Americans are feeling a sense of dread. They’re worried about a weak
job market, soaring health care costs, rising oil prices and a war
that seems to have no end. And they’re starting to notice that nobody
in power is even trying to deal with these problems."
Apart from the cheerleaders for boom-time, even members of the current
Federal Reserve board, currently engaged in tightening monetary policy
step by quarter-point step, month by month, have chipped in,
effectively dismissing any thought of looming crisis.
One, Roger Ferguson, said recently:
"My sense is that the implications of current account adjustments for
US economic growth and inflation are most likely benign".
Former Fed chairman Volcker has no time for such soft soap.
"The difficulty is that this seemingly comfortable pattern can’t go on
indefinitely," he writes.
"I don’t know of any country that has managed to consume and invest 6%
more than it produces for long. The United States is absorbing about
80% of the net flow of inter national capital. And at some point, both
central banks and private institutions will have had their fill of
dollars."
Volcker confesses he doesn’t know when the crunch will come or whether
it will all end in a bang or a whimper.
But given how little "willingness or capacity" he sees around him to
do anything about the growing imbalances or the plummeting household
savings ratio, he suggests "it is more likely than not that it will be
financial crises rather than policy foresight that will force the
change."
Policy foresight, such as it is, consists of a president still
hell-bent on privatising great swathes of social security in the teeth
of growing public hostility and Congress, like Brussels, weighing up
hefty tariffs on Chinese imports, notably textiles, unless Beijing
stops pegging its currency to the US dollar and moves to an
appreciably higher rate.
The risk of a trade war, even one justified by the loss of millions of
American manufacturing jobs, is obvious.
But a trade war with an emerging economy that holds a growing mountain
of dollar-denominated securities risks triggering major shocks in the
global economy.
___________________________________________________________
Harry
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