America Out of Economic Ammunition

Faced with an increasingly uncertain economy, America has ever-fewer means to take action. At the exact moment when the two White House candidates are honing their programs and their teams, this weakness is becoming obvious. The great economic policy levers have already been totally activated, or nearly so, and without really succeeding in stimulating the machine.

That is the case for monetary policy first of all. The Federal Reserve should announce today that it will not move its interest rates. The United States’ central bank is stuck between two symmetrical risks. On the one hand, economic activity is not strong; consumers are depressed; unemployment is rising. So, the Fed should decrease its interest rates. However – on the other hand – interest rates are already low, barely two percent for the Fed’s reference rate. And prices are increasing ever-more rapidly. One of the measures of this inflation published yesterday, the Personal Consumption Index, increased 0.8 percent in June, the strongest rise since 1981. Another measure, the classic Consumer Price Index, grew five percent in a year. Such a gap between prices and interest rates has not been observed on the other side of the Atlantic since the first oil shock. It would be perilous to increase it.

Budget policy is in the same situation. The reductions in taxes the Bush administration granted this spring will have barely offset the erosion in income skyrocketing oil prices have exerted. The deficit will exceed $400 billion in 2008 and could approach $500 billion next year, if one believes the forecasts published last week by the White House. Of course, that’s barely more than three percent of the enormous American GNP. But it is difficult under these conditions to set a vast plan in motion to support the economy while preserving the trust of investors likely to buy the bonds necessary for its financing.

The United States is also not succeeding any better in using the trade weapon that would have allowed it to open new markets for its exporters. The recent injunctions directed at Beijing that Treasury Secretary Henry Paulson has just formulated look like a confession of impotence. America is left with barely any means to pressure China, Russia or the Emirates. All the more so as those countries’ capital is indispensable to America’s financial equilibrium.

The last time an American president took the reins of an economy as stalled as this one was in 1981. But Ronald Reagan changed the rules of the game and created what we in France would call a “break” with the past. For example, he increased military spending by 40 percent in five years. It’s difficult to imagine John McCain – and even less so Barack Obama – following that route. All the more so as problems of colossal budgetary impact loom on the horizon, such as financing health care and retirement costs. In reality, the next president of the United States will have no major economic weapon available. If growth resumes, that’s not very serious. In the opposite event, the whole world will suffer as a result of this American impotence.

http://www.truthout.org/article/america-out-economic-ammunition

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One thought on “America Out of Economic Ammunition

  1. polisci03 says:

    I agree. It’s sort of a damned if you do (raise or lower interest rates) and damned if you don’t kind of economic paradox. Raising rates could bolster the dollar, but stifle domestic growth. Lowering them certainly won’t lessen that inflationary pressure.

    You’re right in that America is too dependent on foreign investment, but I think there’s a point where they’ll want to unload. If I were a foreign bank, America doesn’t seem like a very good buy right now.

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