-- Posted Friday, 16 May 2003 | Digg This Article
The Daily Reckoning PRESENTS: Bill Bonner, ruminating on empty containers in New Jersey...
The dollar is dropping in Paris. Is it dropping in New York? It depends on whom you talk to.
"New York city residents are turning their pockets inside out to pay higher income taxes, property taxes, subway fares, rents and (if the cabbies get their way) taxi rates," wrote Jim Grant recently. Grant is skeptical of deflation. Almost everywhere he looks, prices are rising.
And yet, bond buyers - generally regarded as the shrewdest of investors - drive bond prices higher almost every day. They see no inflation.
People hardly know what to think. Today, we offer a suggestion.
We begin, like a good democrat, with larceny. Here is a passage purloined from Bill Gross:
"In any case, let me attempt to outline as simply as possible the global economy's primary problem: It suffers from a lack of aggregate demand and too much supply. Because of globalization and Chinese overproduction; because of high debt levels and its suffocating impact on business investment and personal spending; because of a creeping, almost imperceptible demographic muting of consumption in aging societies such as Japan, Germany, and Italy; because of market bubble popping and the negatives of receding wealth; because of the dragnet of post 9/11 and now SARS, because of all of that and more we live in a world where we have too much relative to what we can afford to, or want to spend."
Bill Gross did not say so, but what the world lacks is not dollars, but spending power. There is an important difference. A man who is deeply in debt may still have a functioning credit card or two. But that doesn't mean he is willing or able to go further into debt. And if he does not borrow in order to spend...two important things never happen. The supply of dollars does not increase - for they have not been created "out of thin air" to satisfy his lust for credit - and the spending that might have happened does not.
The world in which these things don't happen is not the world of Alan Greenspan - it is the world of Eisuke Sakakibara...a world slowing down, not one that is picking up speed.
If you accept this outlook, continues Gross, "then certain private sector behavior becomes more understandable. In order to get out from under the 16-ton sledgehammer of debt, companies use cash flow to build reserves or retire bonds - they don't invest. Consumers begin to put away money instead of spend, which was the pattern of the late 90s. And the combination induces a negative spiral or vicious cycle of even more conservative behavior, including job layoffs, which leads to muted growth in personal income. In combination, this private sector response to a high-debt, reduced-wealth, increased-risk-laden economic environment can produce a slowdown or even a recession - Japan off and on for years now, the U.S. in 2001/2002, Europe in 2003."
"Then there is the problem of our growing current account deficit..." Gross points out.
The magnitude of the current account deficit is about a half a trillion dollars. On that point, there is little disagreement. It is the nature of it that stirs debate.
"At the current level of the current account deficit, I'm not particularly troubled by it," said America's Treasury Secretary recently, "It is really a small part of the size of total U.S. GDP and is certainly manageable."
At 6% of GDP, the U.S. current account deficit may not be completely unique in economic history. But no nation ever had a deficit of such size and managed it successfully. Instead, huge imbalances have a way of causing trouble, no matter which central banker is on watch when the problem comes up.
The real problem is not what appears in the international flow-of-funds reports, but what barely appears anywhere.
"The crucial internal effect," explains Dr. Kurt Richebächer, "is that the spending for the import surplus essentially diverts revenue and profit to foreign producers. On the other hand, the money being spent abroad comes largely from income that has been earned from domestic producers. The end result: these have the cost, while foreign producers have the revenue and the profit. This is the widely unrecognized big problem implicit to the monstrous trade deficit."
How will it end?
Either Americans will have to pay an "inflationary tax" as the prices of imports rise, says Bill Gross, or they will suffer a "negative wealth effect" as they are forced to cut back their expenditures and save their money. One way or another, he continues, there must be a piper around somewhere...and he will have to be paid.
In this regard, America is no Japan. Japan was already a large net creditor to the rest of the world. Instead, America is more like Argentina, as described above, where the "negative wealth tax" wiped out nearly the entire middle class in a single generation.
As in Argentina a few years ago, for every dollar's worth of goods and services America sells overseas, nearly two dollars of imports come into the nation's ports. So great is the imbalance that thousands of empty containers pile up in New Jersey; (they came full, but there is nothing to ship back in them) and trillions of dollars pile up in overseas bank accounts.
One tries to imagine the stacks of containers and money in awe and wonder. How could a system of globalized free trade - in which one must presumably give as much as one gets - get so out of whack?
Earlier this week, Joseph E. Stiglitz, Nobel prize-winning economist was in town. His biography explains that he "has helped explain the circumstances in which markets do not work well, and how selective government intervention can improve their performance." He might as well have hung a sign around his neck saying "humbug," for the message could not be clearer. Everybody knows that markets do not work well...they just work as they work, giving fools a way to lose their money that doesn't require heavy drinking or trips to Las Vegas.
Nevertheless, Stiglitz wrote a book entitled "Globalization and Its Discontents," which we didn't want to read, but we still thought the man might have some entertaining thoughts on the process that has lead to America's huge pile of empty containers. So we dispatched one of our ace reporters to the scene of his speech.
"He said he expected deflation in the U.S.," began the resulting report.
"Why?"
"He didn't say."
What Stiglitz did say is that politicians had to carefully control the process of globalization, or it might get out of hand. He had in mind third-world countries, where standards of living have fallen after the IMF gave bum advice. He was thinking of Argentina over the last 5 years.
We couldn't help but think of America of the next 5.
Bill Bonner
Editor's Note: Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail The Daily Reckoning (www.dailyreckoning.com ).
-- Posted Friday, 16 May 2003 | Digg This Article
