Exclusive to STR
November 14, 2008
What would the U.S. be doing now if the rest of the world wasn't infected by our credit collapse?
Probably a good imitation of an old fashioned emerging market collapse, which is a good imitation of a fire in an over-crowded roller skating arena, just after the concession has spilled a vat of popcorn machine butter in front of the only unblocked exit.
Right now the U.S. economy is getting an odd, two pronged support from the export of the credit crisis--demand for dollars from foreigners struggling to support and pay down dollar denominated debt, plus foreign central banks throwing up their hands and cutting interest rates, narrowing the differential with U.S. rates. (I recently saw business analysts debate whether the Bank of England would cut a half point or three-quarters of a point-- they cut one and a half points.)
If not for the remnants of the dollar's reserve currency status, the credit collapse in the U.S. would have much more of that emerging market bubble flavor (possibly without the imitation butter)--among the primary features, a crashing currency and soaring interest rates.
The circulation of the credit collapse has to seem pretty sickening overseas, but the apparent high dollar, low interest boon for the U.S. is in fact a slow motion tragedy. Our leaders are grabbing the wrong signals with desperate enthusiasm, trying to recover the past and oblivious to the future.
As bailout and stimulus trial balloons expand absurdly, but with little or no reaction yet from the U.S. dollar and interest rates, a new level of hubris sets in. Astoundingly (or perhaps typically, it's hard to choose), most politicians and market players are again getting trapped by a perception of limitless American government power.
Charts of the U.S. monetary base at this point basically show a line going straight up--disinflationary head winds better not let up for a second, or we'll need Zimbabwean advisors at the U.S. Bureau of Engraving and Printing.
On the subject of U.S. interest rates, Michael Pento from Delta Global Advisors says, 'One of the major ramifications of having our national debt move above the $10 trillion mark is that the sustainability of the government, consumer spending and the economy rests on the continuation of artificially low interest rates. In fact, low rates that are the result of money printing have become our addiction...it is only because interest rates are at record lows that the debt service is still manageable.' Pento doesn't believe this can last.
The temporary artificial strength from U.S. dollars and bonds means that these key yardsticks are being misread by our leaders. There should be huge storms smashing these markets every time there's a prominent discussion of another hundred billion of stimulus or bailout--dramatic signals that even politicians and Wall Street bankers could understand. Instead, by the standards of the times, these markets remain placid.
If American politicians were giving any consideration to what could happen if foreigners turn away from the U.S. dollar, they couldn't possibly contemplate any more 'stimulus' or bailout packages. The mindset of American leaders is that of complacently snooty parents; the U.S. dollar their sheltered spoiled brat who's about to launch into real world competition brimful of bratty misplaced confidence.
Sometime soon there won't be enough economic actors able to suspend disbelief at the mismatch between the fatuous talk of ever expanding bailouts and stimulus plans, and the reality of destroyed real capital and already unmanageable (to say the least) debt. We're looking at another pop, and as scary as a stock market collapse or even a credit collapse can be, a currency collapse can be worse.
Politicians have been saying that 'of course' the current economic crisis is not analogous to America 's Great Depression. I think that secretly most now believe that this crisis is like the Great Depression, but they're actually taking a kind of comfort from it--to many of them, the New Deal is familiar ground.
Certainly if we're talking about its expansionary credit causes, this crisis is indeed analogous to the Great Depression.
While there are some ways in which this situation is better thus far than the Great Depression (not exactly a point of pride), there's at least one potentially scary difference. The New Deal programs that didn't work the first time when government was smaller, 'only' causing an unprecedented 'double dip', have no theoretical basis to work better when the size and debt of government is bursting at the seams. The New Deal scaled up to today's size of government may provide, instead of analogues to the old junior New Deal, nothing but venomous 'black swans.'
Swans, (the internet advises me), can come in herds, games, banks, bevies, teams, or lamentations. Our credit storms could gather strength enough that for our black swans, we try them all, but the crisis may remain damped until the alpha pair flutters into view'a plunging U.S. dollar and soaring U.S. interest rates.