There is still no shortage of concerns for this economy

  • November 12, 2009 - 10:29 AM
The world's appetite for gold as an investment option is intensifying. Last month, India purchased 200 tons of gold at $1,045 an ounce, before the price topped $1,108 on Monday. China, too, may increasingly diversify from paper -- i.e., bonds -- into gold, the price of which, some experienced investors believe, could soar to $2,500 an ounce in three to five years. One reason for all this is U.S. behavior.

The fiscal year 2009 budget deficit, triple that of 2008, was 10 percent of GDP and, Lawrence Lindsey says, probable policies will produce deficits of 7 percent of GDP for a decade. Ronald Reagan's worst deficit was 6 percent of GDP, and for only one year.

Lindsey -- former member of the Federal Reserve board of governors and director of George W. Bush's National Economic Council (2001-02) -- says Americans' net worth has dropped at least $13 trillion since the recession began in December 2007. What is to be done?

Americans could suddenly begin saving substantially more, but this would deepen and prolong the recession. Alternatively, America could reflate the value of its assets by printing money. Lindsey says it is already doing that -- printing bonds promiscuously and lending money to banks at negligible rates, money banks can use to buy the bonds. This sharply increases the money supply, which sets the stage either for inflation -- too much money chasing too few goods. Or for recovery-snuffing higher interest rates to try to prevent inflation. Or for something like Japan's lost decade -- banks pouring money into government bonds rather than the real economy.

America, says Lindsey, will not become Weimar Germany, where hyperinflation caused people to rush to stores with satchels of rapidly depreciating currency.

But, he adds, no country has successfully behaved the way the United States is behaving.


The U.S. economy that is slowly emerging from recession looks quite different from the one that fell over a cliff. The binge of consumer borrowing and spending, hallmark of the 2007 economy, won't be back any time soon. AlixPartners, a global consulting firm with offices in Dallas, issued a brief analysis recently showing the "new normal" for American consumer spending was off as much as 14 percent from its 2007 high. That's a $1 trillion decline.

Consumers without jobs or worried about losing theirs aren't big spenders. Last Friday, the Federal Reserve reported that consumers in September borrowed less for the eighth straight month. Revolving credit, including credit cards, fell at a 13.3 percent rate and has now declined for a record 12 straight months. Personal savings, meanwhile, increased to an annual rate of $355.6 billion, lifting the savings rate to 3.3 percent from 2.8 percent in August.

On the other side of the world, Chinese consumer confidence is high. Auto sales were brisk again in October. Chinese real estate is also surging. A Hong Kong condominium sold last month for a price equal to $9,200 a square foot. That's the equivalent of $23 million for a 2,500-square-foot home.

But this is all part of what many economists view as a necessary transformation. We were far too accustomed to buying and borrowing. The Chinese were too used to selling and saving. We were linked together by China's desire to lend its savings to the United States so we could keep on buying Chinese exports.

Perhaps the healthiest economic news of late was the unexpected jump in the Institute of Supply Management's manufacturing purchasing manager's index. This rise in manufacturing suggests the economy is growing in ways important to curbing our appetite for foreign credit and foreign goods.


U.S. politicians and Federal Reserve officials are attempting to put the economy back on track with aggressive deficit spending and severely reduced interest rates. Nearly 20 years ago Japan tried the same approach, with little success. What happened in Japan's "lost decade" provides an insight into what Americans may expect in the coming years.

After a credit-induced boom in the late 1980s, Japan's stock and real estate markets tumbled -- sound familiar? -- and Japan's Urban Land Price Index began an unbroken decline that continues to this day. The rate of unemployment doubled during the 1990s and has never recovered.

The Japanese government responded with a succession of deficit-driven stimulus policies, with a similarly aggressive monetary policy from the Bank of Japan. While Japan approved temporary tax cuts, the primary emphasis was on increased infrastructure spending. Consequently, the government's 1990 surplus, equal to 2 percent of gross domestic product, plunged into the red and increased as the decade wore on. By the end of the 1990s, Japan's economy was in even worse shape than it was after the crash in 1990, and the "lost decade" is now stretching into two lost decades.

The United States today stands in an economic position similar to Japan's in the early 1990s. The federal government's and Federal Reserve's response to date is also strikingly similar to Japan's. If anything, American leaders are being even more aggressive.

If one is to go by the Japanese experience, Americans should expect little from the current stimulus policies. Even a prominent proponent and architect of the Japanese approach, Richard Koo -- chief economist of Nomura Research Institute, Tokyo, and a former New York Fed economist -- argues that the best the United States can hope for is avoidance of a worsened recession.


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