Tuesday, March 29, 2005

Another contradiction within rightwing coalition

Peter Drucker is always readable, and not even being radically wrong in the past can instilled in him any fear of making bold predictions. (For example, one wonders how he would reassess the prediction he made in 1977 that union pension funds would get together to enforce pro-union policies on the companies they invest in. Oops.) He's certainly been more right than wrong over the years, and I say that despite the fact that he's a staunch conservative and firmly pro-Bush man. In light of those facts, it's especially interest to read his take on the coming global economic crisis:

The next major economic crisis will most probably be a crisis of the U.S. dollar in the world economy. It will put to a severe test the oligopoly of the central banks of the developed countries that now rules over the world financial economy....

The persistent U.S. deficit creates a persistent deficit in the U.S. balance of payments, which make both the U.S. economy and the government increasingly dependent on massive injections of short-term and panic-prone money from abroad. The U.S. savings rate is barely high enough to finance the minimum capital needs of industry. It could, in all likelihood, be raised considerably by raising interest rates. But that is not only politically almost impossible; it would also require that a larger share of incomes go into savings rather than into consumption, with an inevitable collapse of an economy based on consumer spending and low interest rates, as for instance, the U.S. housing market.

The government deficit is therefore being financed almost in its entirety by foreign investments in the United States, mostly in government securities like short-term treasury notes and medium-term bonds. The Japanese are converting most, if not all, of their trade surplus with the United States into dollar-denominated U.S. government securities and have thus become the largest U.S. creditor.

It is often argued, especially in Washington, that the deficit is mostly an accounting mirage. Defense spending—the main cause of the deficit—enables other free countries to keep their own defense spending low, which then generates the surpluses these countries invest in U.S. government securities. But this is a political argument. The economic fact is that the United States increasingly borrows short term (U.S. securities can be sold overnight) to invest long term and with very limited liquidity. This, needless to say, is an unstable and volatile system. It would collapse if the foreign holders of U.S. government securities (above all, the Japanese) were for whatever reason (such as a crash in their own economy) to dump their holdings of U.S. government securities. It certainly cannot be extended indefinitely, which, among other serious drawbacks, calls into question the long-term viability of the Bush Doctrine's goal of defending and extending the "zone of freedom" around the world.

Running an empire requires fiscal prudence. The neocons know this. Does Bush?

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