Obama or McCain: The dollar will weaken 点击查看译文
/ 謝國忠
The US is muddling through in its handling of the crisis. That makes the election outcome potentially very important. 15 years ago, Japan cut interest rate to zero to stabilze bankrupt financial institutions and boost fiscal stimulus to stabilize demand. That led to a 'lost' decade, which allowed businesses and banks to slowly recover their viability. It was actually slow transfer of government money to corporate balance sheet. The equilibrium, however, was made possible by the big trade surplus, i.e., high savings rate, which kept interest rate low depiste high fiscal deficit and yen strong despite zero interes rate.
The US runs 5% of GDP in current account. The government debt level is already too high. Japanese solution is not viable. The only remaining weapon is the dollar. The US can print dollar and share the burden with the world. I think the new administration will use it aggressively. The equilibrium for the US over the next few years is likely negative real interest rate, high inflation, and weak dollar. What upsets the equilibrium is a potential bond market collapse. So, as long as the treasury yield remains low, the US has no incentive to keep dollar strong. Only when central banks dump treasuries that the US would change its policy.
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The US presidential election is entering its final weeks. Both Democrats and Republicans had their conventions and crowned their candidates. Some analysts call the election the most important since 1980. The comparison is certainly apt. The US was facing a foreign policy crisis as Iranian Revolutionary Guards held the US embassy staff hostages and surging oil price caused stagflation. But, today's problems are more intractable. Today's symptoms of stagflation and foreign policy crisis reflect deeper structural problems. The costs of healthcare and social security are the bombs that may explode the US economy. The US property-cum-credit bubble results from the desire to maintain living standard higher than what fundamentals could support. The bursting of the bubble should make the US face reality. But, it is not. The response, so far, is denial. Then current administration is using the central bank to lend to failing financial institutions to keep them alive. Unless political changes lead to a different approach, the US will likely stagnate like Japan before and with inflation.
The takeover of Fannie Mae and Freddie Mac is the latest example of the US's muddling through strategy. It is a bailout and not a bailout. The Treasury promises that it would bring back market confidence in the two institutions, implying government guarantee for their credit. But, it promises no costs to taxpayers, i.e., no bailout. It is hoping that the market would believe the former and start to give them easy money again, which leads to more money for the mortgage market, which might revive the property market, which would reverse the losses. What a marvelous scheme! But, it wouldn't work. The bubble is burst. A little trick like this wouldn't stitch the bubble together again.
The policies that Democrats and Republicans have promised in their campaigns are not really addressing the fundamental problems. One US politician recently asked me at a brainstorming seminar what a foreigner like me thought the US should do. I opined that the US should spend less and produce more. That was taken as a surprise. The policy circle was talking up another fiscal stimulus package then. People who are deep in a situation often fail to see the big picture. The US has got into the current situation from spending too much money. How could the problem be solved by spending more? Unfortunately, both parties are promising more money for healthcare, education, bailouts for delinquent mortgage borrowers, and tax cuts, exactly opposite to what the US should do.
As stagflation takes hold, the US will become much more defensive towards globalization. For a starter, we should forget another global accord on increasing trade. The Doha Round has failed due to opposition from developing countries. The next US government wouldn't look at it kindly, i.e., Doha is truly dead. Further, the US may back away from the existing free trade arrangements. One of the Clinton Administration's big accomplishments was getting the North America Free Trade Agreement ('NAFTA') that introduced free trade among Canada, Mexico and the US. NAFTA became a dirty word during the primaries of both parties. Bill Clinton's wife, Hilary Clinton, opposed it. Obama opposed it. The Republican nominee, John McCain, still defended free trade, even though the Republican Party is more ambivalent towards it. While there is still some uncertainty over the outcome of the presidential election, the outcome for the congressional elections is not; the Republicans will become a diminished minority in the Congress. The direction on free trade is clearly backwards.
I am not suggesting there would be differences between the two. Obama is a traditional liberal in favor of middle and low income classes, while a Republican one would continue tax cuts that favor the rich. This is a traditional battle line between the two parties. For the masses, an Obama administration is preferable. They have fared poorly in the past decade and are losers during rapid globalization. The asset bubble postponed their hardship by allowing them to borrow against rising home values and run up credit card debts. As the bubble bursts, the chicken is coming home to roost. At the same time, gasoline price has tripled. If their mind is clear, they wouldn't vote for the Republican candidate.
In a traditional democracy, politics of economic interests boils down to two sides that represent labor and capital. The competition boils down to tax and welfare. Market competition allocates income in a certain way. It is an efficient outcome in some sense. But, skewered income distribution may reinforce itself and lead to a vicious cycle. For example, children born to poor families may not get proper education and will get low income when they grow up. Hence, income redistribution can improve dynamic efficiency. On the other hand, a prosperous society cannot tolerate abject poverty for a significant share of the society. Hence, income redistribution to some extent is desirable for those who pay taxes.
The above standard case for income redistribution is often overwhelmed by the need for social justice. In many countries, probably most, rich people preserve and expand their wealth by controlling the government policy, i.e., skewered income distribution is due to social injustice rather than market force. Hence, income redistribution through tax policy is quite justified economically and morally.
Thus, labor party should prevail in a democracy. But, ruling party usually becomes entrenched and inefficient after being in power for a long time, changing to the other side can clean up the government. For example, the Labor Party in the UK has been in power for too long. The UK voters are ready to drive it out of power and bring back the conservatives.
The non-economic issues are unusually important in the US politics. Social values or cultural issues drive many voters, especially the energetic ones. Abortion rights and gun ownership are the most potent ones. Immigration and race are also highly divisive. These 'value' voters have grouped with tax cutters in the Republicans in the past two decades. As the 'value' voters are a small minority but are the most motivated, a Republican candidate must pass their tests or else. George W. Bush personifies what the Republican Party is. He is a born-again-Christian, the most powerful religious movement in the US, and a businessman in favor of low taxes. John McCain is in favor of low taxes but was at odds with the 'value' voters on key value issues. He lost the contest against George Bush in 2000 for that reason and has methodically changed his positions to secure the support of the Party's 'value' faction. He picked his vice presidential candidate for that reason.
The presence of the ''value' voters gives the Republican Party more chances to win than on economic issues alone. Most value investors are not economically well off. They tend to be white, live in small towns, poorly educated, own guns, and have many children. They don' have much in common with tax cutters who live in big cities, own businesses and/or substantial financial assets. McCain's choice of Vice President, Sarah Palin, is in the 'value' category. The choice served to energize the 'value' voters for McCain.
The alliance between the tax cutters and 'value' voters is not enough to win the election for McCain. They are still the minority and can win through their energy and passivity of the majority. The Democrats represent the majority. But the majorities are passive. Many don't register to vote. They think that their votes don't make a difference. The Republicans count on their passivity to win elections. But, the current election is quite different.
Obama is black. It has motivated the black community that has the lowest voting tendency. Also, Obama has connected with youth who usually have low turnout. Their increased participation will make a difference. The presidential elections in the past two decades were won or lost on thin margins. Rising turnouts usually favor the Democrats. Obama's ability to do that is a big plus.
Also, the economy is plummeting. A typical blue-collar worker makes under $2,000 after tax per month. He used to spend $120 per month on gasoline but now spends $500. His food bill was $600 per month but has risen to $900. On the other hand, healthcare insurance is $400 per month. His wage is not rising. Even if this person keeps his job, he is under enormous pressure to make ends meet. He is not in a position to support a family. Even though many of such voters like Hilary Clinton better, it is too much for them to vote for McCain who favors tax cuts for the rich.
An energetic minority like the Republican Party can control a country when the economy is in reasonable shape and the majority is not motivated to act. Today's situation is clearly different. The Republican Party has brought the US to its ruinous situation on both foreign policy and economy today. If the American voters choose the Republican Party again, they clearly deserve what's happening to them.
Despite the terrible record that the Republican Party is running on, the polls show a tight race between Obama and McCain. Obama's race and inexperience are often quoted as factors. Certainly, the election outcome is still open. The Democrats are likely to win the Congress big, which may give voters a reason to give the Whitehouse to the Republicans to prevent power concentration. However, a split government will lead to political gridlock, which is very bad for solving big problems. The current crisis requires a unified government. I suspect that the election outcome would not be as close as the polls indicate.
Politically, Barak Obama is a miracle. He announced his candidacy on February 10, 2007. At the time, he had been a senator for two years and was a state legislator, a part time job for seven years before. His executive experience is limited to his years as a community organizer in poor black neighborhoods in Chicago. His inexperience made his candidacy improbable. Seventeen months later, he has won the Democratic Party's nomination and is poised to win the general election for the presidency in November.
Obama belongs to the African American minority. No major country has voluntarily picked a leader from a minority in modern history. Combining his minority status with his inexperience, someone like him wouldn't have a chance in any other country. His rise reflects the dynamism of the US's political system and the risk taking appetite of its voters. Indeed, when a country is in so much trouble, it doesn't make sense to pick anyone from the establishment. Someone out of the establishment is by definition inexperienced. In a well functioning system, a leader gives directions, doesn't engage in detailed executions. The risk with someone like Obama is actually a lot less than it appears.
Regardless of who wins, it would be extremely difficult to turn the economy around. The US has been living in a debt bubble. There are many reasons for that. Greenspan was probably most responsible. He leaned towards easing during his 18 year reign at the Fed, didn't rigorously regulate derivatives, and tolerated sub prime surge. We can blame greed. Wall Street concocted complex products with assumed, not real reduction in risk and sold them to credulous but equally greedy investors. But, the bubble-conducive environment wouldn't necessarily lead to a bubble unless American households were eager to borrow. Why did they borrow and spend beyond their means for so many years?
The root cause was that many, possibly the majority, of Americans tried to defend their living standard during the rapid pace of globalization that decreased their earnings power. Economic theory says free trade is almost always beneficial for every economy, i.e., making pie bigger for every participating economy. However, how the pie divides within an economy changes with trade. There are absolute losers in free trade. The theory says that redistribution in each economy would make everyone better off. This is where politics comes in. How successful the political process goes depends on how quickly the pie expands and if the system is flexible and responsive. America's economy hasn't been expanding fast, but income distribution has. The Gini coefficient for income distribution rose to 0.469 in 2005 from 0.428 in 1990. It has probably ticked up significantly. The sharp rise in the Gini coefficient suggests declining living standard for a significant share of the population.
Rapid inflation of healthcare cost has played a more important role than globalization in raising inequality. The US's healthcare cost has surpassed 16% of GDP or twice as high as one quarter century ago. The high cost of healthcare imposes harsher burden on low income than high income groups as low income households pay bigger share of their income for healthcare. This is the reason that 15% of the US's population doesn't have insurance, because they can't afford it. Indeed, adjusting for healthcare cost, the median income for the US's middle class has been stagnant in real terms for the past decade.
The headwinds from globalization and healthcare made it difficult for an average American family to raise living standard from income growth. But, Americans still believed in ever rising living standard. Debts borrowed against overvalued properties served to support the fiction that everyone was better off. Indeed, the bubble boosted economic growth rate and made rising living standard more real. The giveaway was the large trade deficit and rising foreign debt. This is where financial 'innovations' came in; they understated risk through diversification and/or dynamic hedging and decreased equity capital for debt funding. Of course, all things are correlated in a crisis and diversification does add value, and dynamic hedging stops working exactly when you need it.
In addition to the financial crisis and the healthcare crisis, a social security crisis is looming. The baby boomers are retiring. The social security system is a pay-as-you-go system, i.e., one's contributions have not been saved but spent on someone else. The system generates 'surplus', when more people are joining the labor force than retiring. The reverse is also true. The shortfall of the system is estimated between 2-3 times GDP. The US government may be technically bankrupt. The next government has to do something about it.
What are Obama and McCain are offering for the crushing problems like financial crisis, skyrocketing healthcare cost, and bursting social security system? Not a lot. The few that they offer don't solve but may compound the problems. Both have supported financial bailouts. The Bush administration has just taken over Fannie Mae and Freddie Mac to stabilize the mortgage market and to probably boost McCain's election chance. But the government said it wouldn't cost taxpayers. They are still waiting for a miracle. Many financial institutions are kept alive by the Fed. They threaten to become zombies like in Japan during the 1990s.
On healthcare care, for example, every candidate is trying to widen the insurance coverage with government spending, but not cutting cost. While widening coverage improves social justice, it will compound the healthcare crisis in the coming years. The US's healthcare cost to GDP ratio is increasing by 0.25% per annum. The proposed programs will accelerate the trend. With healthcare cost escalating like that, the US economy cannot regain dynamism.
On social security, the Republicans want to privatize, i.e., suggesting to retirees to gamble in the stock market to make up for the shortfall. The Democrats want to tax the high income groups to boost their contributions. Neither is talking about cutting benefits, which is the only solution. The age to qualify, for example, has to be raised from the current 63. Otherwise, the government is burst.
The US economy is facing the biggest crisis since the Great Depression. It requires considerable sacrifice to solve. But politicians are talking the other way and promise more goodies. What gives? The dollar. Printing money spreads the pain for all dollar holders, and many are foreigners. This is the last tool that the US has to not pay for the full cost. Eventually, foreigners will realize this and run. This game stops working when the dollar free-falls.