Disregard the happy talk from the Obama White House. The stagnant global economy remains at the precipice of something worse unfolding—full-blown deflation. And the so-called recovery in the US economy remains shaky, despite good employment numbers. Here and abroad, the governing authorities seem to have forgotten the most basic nature of our situation. We live now in a globalized economy where one nation’s cold can lead to another country’s heart attack. Their ignorance is shocking, but also dangerous.
In fact, the US and other leading economies are beginning to mimic some of the same grave errors governments committed in the distant past, circa 1929, when spreading collapses of banks and financial markets morphed into the Great Depression. I am not predicting such a catastrophic outcome, not yet anyway. But the risk is present. The road to the Great Depression was paved with similarly myopic strategies. This president is not Herbert Hoover. But he might someday be remembered as Wrong-Way Obama.
The misdirection of government power suggests that many leaders don’t believe things were changed that much by the breakdown of 2007. They are still looking backwards, complacently doing the same stuff that failed sixty and eighty years ago.
First, the United States finds itself once again attempting to be the “locomotive” that pulls the rest of the world out of the ditch. America has done this successfully many times in prior decades to help allies get well. The problem is, the American economy is now much weaker and more wobbly itself, deeply indebted after thirty years of trade deficits and costly wars. There’s a lot less US excess to spread around.
Second, important trading partners—Japan, China, others in Asia—are employing a nasty trade strategy from the early thirties known as “beggar thy neighbor.” They are weakening the value of their own currencies (and boosting the dollar’s value) so their exports will be cheaper than competing American products. The US trade deficit is now rising steadily, especially in manufactured goods, and sure to worsen as other currencies weaken. That means losing good jobs and wages for Americans.
Clyde Prestowitz of the Economic Strategy Institute, a longtime critic of the lopsided trading system, observed: “The whole bloody world has somehow figured they are going to recover by selling exports to the US. While the world is depending on American demand, we are shipping more jobs and industry abroad but we can’t keep it going. I fear we are going to keep playing this game because we think we can get away with it.”
Prestowitz ticked off nations whose currencies have fallen in value—some as dramatically as 20 to 30 percent. They include Japan, China, Singapore, Australia, Canada and the European Central Bank. The ECB’s motive is legitimate—reducing interest rates to provide economic stimulus and fend off deflation—but the economic consequences are the same—more downward pressure on US production and employment. Japan’s currency manipulation cost 896,000 US jobs in 2013, according to the Economic Policy Institute.