December 9, 2013
Storm clouds ahead
For the Herald
We all know that the US economy, not the still much smaller and as yet relatively unproductive Chinese one, is the mighty engine that is pulling the rest of the planet up the slopes towards those sunlit uplands where everybody will have plenty of money to spend in glittering shopping malls. So if it shows signs of slowing down again, people elsewhere should feel very worried. Right? Apparently not. When Ben Bernanke said that in his view progress was proving much slower than generally expected so he would just have to continue shovelling 85 billion freshly minted dollars a month into the boiler, markets around the world, among them Wall Street, jumped for joy. Do investors want US unemployment to remain unpleasantly high and overall growth to be sluggish? They certainly do. Not for the first time, what is bad news for ordinary folk has made people with money to spend quiver with delight.
The reason is simple enough. If good old Ben and his successors at the Fed keep interest rates as uncommonly low as they have been for the last few years, investors will look for opportunities in the “emerging” markets where they are much higher because of the many risks involved. After it was rumoured some months back that the Fed was about to start “tapering”, as the financial cognoscenti now call cutting back, huge amounts of cash began moving from places like Brazil, India and Turkey in search of safer havens in the developed world.
For understandable reasons, wealthy people in such countries have more confidence in US institutions than in the local ones. But when Ben told fund managers that the printing presses or their digitalized equivalents would continue churning out dollars at a phenomenal rate, a procedure that was once denounced as inflationary but is currently regarded by many as quite innocuous, they decided to linger for a while, thus delaying for a month or so the much feared day of reckoning.
In Europe, easy money did much to overheat the economies of Greece, Spain, Portugal and Italy; when doubts about their ability to pay it back arose, they were left to fend for themselves. Much the same could happen to countries that, thanks to foreign money, recently enjoyed a boom politicians attributed to their own financial wizardry.
Economics works in mysterious ways. Though it masquerades as a science, opinions as to what it would be wise to do have more to do with gut feelings than with the dispassionate objectivity that, in theory, characterizes genuine scientists. Old-fashioned individuals may suspect that a huge financial bubble is in the making and that, when it finally bursts, as all bubbles eventually do, the destruction wrought will be even worse than in that banner year 2008 when those in charge of the “advanced” economies suddenly discovered that getting ever deeper in debt was asking for trouble.
That is why so many in Europe, especially in Germany, became keen on “austerity”. In the US, however, Barack Obama and other progressive-minded people redoubled their bets on “quantitative easing”, the creation of money ex nihilo. Some economists, among them Paul Krugman, think they have not gone far enough. They would like the US national debt, which at the time of writing was fast approaching 17 trillion dollars, to keep climbing until once again their country’s motors are firing on all cylinders. According to Ben and the rest of them, that day has yet to arrive.
Common sense, for what it is worth, would suggest that the penny-pinchers have it right, that centuries of experience should have taught politicians that it is a mistake for governments to spend much more than they are likely to rake in, but the quantitative easers have no time for such unsophisticated notions. While the former assume that the way things are going the US will soon be dotted with cities resembling Detroit, a metropolis that, barely fifty years ago, was the most prosperous in the US, but now is a bankrupt, depopulated, poverty-stricken run-down shell infested by criminals, the latter take it for granted that more money, oceans of it, will take care of whatever problems there may be until, with decent jobs universally available, the poor suitably looked after and productivity soaring, the economy roars ahead again as it did before those greedy bankers set off a financial meltdown.
Let us hope that this time the “Keynesians” win the argument and that, to the chagrin of die-hard believers in the traditional virtues such as Germany’s finance minister Wolfgang Schäuble, pumping untold billions of dollars into the US economy does the trick. If the optimists are proved wrong, many people are in for some very nasty surprises.
As Argentines are, or by now should be, well aware, devastating economic crises have a habit of turning up when it is widely believed that somehow or other they have been averted. Though there are people in the US who have taken to issuing dire warnings of the dangers they say are fast approaching, the consensus seems to be that they are grossly exaggerating for disreputable political motives.
That may be the case. Unless it is, not only the US, but also many other countries are sailing straight into a new financial, and therefore economic, storm that could be just as bad as the previous one or even far worse.