Wednesday, August 18, 2004

NYMEX oil prices hit $47/barrel today. So, what else is new?

Well, I'll tell you. Martin Wolf has an interesting column in today's Financial Times (sub. only) titled "America is now on the comfortable path to ruin". That pretty much tells you what you need to know.

The gist of Wolf's argument is that a combination of "the rest of the world's surplus output and the US goal of full employment" are at the root of the remarkably swelling US fiscal and current account deficits. The emerging Asian countries desperatly want giant CA surpluses so they can sock away reserves against another 1997-esque rainy day. Japan and Germany and running big CA surpluses, too, thanks to weak domestic demand. The US wants to avoid recession at all costs and thus uses fiscal and CA deficits to stave off a nasty fall in domestic demand. The result? A current account deficit of 8% of GDP and a fiscal deficit of 9% of GDP by 2008. Yikes!

I quibble with Wolf over his assumption that US policy-makers give a damn about "full employment". Clearly they care nothing for it. They do want to prop up domestic demand, however, and thus are pressed into tax cuts (Bush) and property bubbles (Greenspan) as substitutes for income growth.

I also quibble with him over his belief that the United States' current path is "likely to generate an unmanageable increase in US protectionism". Yes the amazingly large (but in light of current experience, quaintly manageable) CA deficits under Reagan provoked strong protectionist pressures, leading to Japanese auto factories in Kentucky and the Canada-US Free Trade Agreement among other things. However, productive capital, industrial labor unions and farmers have been so profoundly thrashed over the last 15-20 years that there is hardly anybody left with political clout to really resist. Note how the debates over "free trade" are mostly about things that have nothing to do with trade, e.g. intellectual property rights.

Wolf is right about one thing, though: the US is on the road to ruining the international position of the dollar as well as its own domestic economy, and there is nobody willing to do anything about it. Those that will, can't; those that can, won't.


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