Commentary > Bid and Ask
Out of kilter
The global economy is badly unbalanced. This needs to be fixed sooner rather than later.
May 30, 2003: 2:18 PM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - It is wonderful, really, to see the way U.S. officials are all working to try and get the economy going.

One can nit-pick, yes -- say that the tax plan is remarkably inefficient and is damning our future, for instance, or point out that by spurring another bout of mortgage refinancing-led spending, the Fed encourages households to eat their seed corn -- but you can hardly discredit these people for effort.

All this heavy lifting could come to naught, though, if the major imbalances in the global economy are not taken care of. The world has become dangerously dependent on the incredible voracity of the U.S. consumer and has slowly begun to seem like a restaurant with a huge kitchen staff all jostling to serve its one, gluttonous customer. But there will come a point where, like Monty Python's Mr. Creosote, the U.S. will not be able to swallow even a wafer-thin mint more of what the world is trying to feed it.

Gaston! A bucket for monsieur!

How does one fix this problem? The natural solution is to have some of the kitchen staff sit down at the table and start to tuck in -- that is, to have Japan and the richer European countries spur consumption at home and thus become less dependent on their exports to the United States. Let the developing industrial countries of the world, with their eager young workers and low cost-bases, be the world's exporters. It's going to happen eventually in any case -- when people in places like China and India are quite willing to put in 70 hour work-weeks and people in Europe want to punch out after 35 hours, you can see where things are going.

At the same time, it would be good for the United States to hit the treadmill. The country's rate of savings remains alarmingly low, and given the aging population of baby boomers and the sorry state of Social Security, one worries what the future will look like.

So far, though, there have been no real signs that the world is ready to adjust. The United States and Britain -- both net importers -- have been the two major countries most willing to goose their economies. But Europe and Japan have not.

"The guys with the big deficits want to stimulate policy," said Trilogy Advisors chief investment officer Bill Sterling. "And the guys with the big surpluses remain very tight. There's only one thing that can give in that situation, and that's currency."

And so the dollar has been weakening, putting the United States on something like a forced diet -- imports are becoming more expensive -- and putting U.S.-dependent countries in something of a lurch.

Europe has so far looked on rather benignly as the euro has strengthened, but, distressingly, its central bank has been slow to drop rates, worrying more over the last war against inflation than the present one against deflation. And the Japanese, who persistently hope that export profits will somehow bail out their broken banks, have been intervening in the currency market mightily.

In May, Japan sold about $34 billion worth of yen, bringing their tally for the year up to around $56 billion. So far it's worked -- although the yen has fluctuated, it's around where it was at the beginning of the year.

But while such tactics may work as a temporary salve, they can hardly fix Japan's economic woes -- particularly since there will come a point when Europe may begin to take a less-than-benign view of its currency's appreciation.

"Everybody would like to have their exports grow fast," said John Llewellyn, chief global economist at Lehman Brothers. "That's how you get these competitive devaluations."

The world where everyone tries to get their currency lower is ultimately a zero sum game, points out Llewellyn. But ultimately he believes some good could come of it because sometimes, the things that are done to weaken a country's currency are the same things that will make its economy strong. The European Central Bank, for instance, looks set to finally cut rates next week, and Llewellyn forecasts that it will continue to cut substantially through the year. Japan, no longer having even the hope of depending on export-led growth , may finally let bad businesses fail.

But there are obstacles to this scenario, points out Credit Suisse First Boston economist Jason Bonanca. Europe and Japan both have greying populations that, unlike in the United States, have a penchant for saving. For these folks, the idea of reflating the economy -- which would mean the money they've put away would buy less -- isn't particularly appealing.

"These people don't want to hear about inflation," he said. "They want their stock of savings to be protected."

So, thinks Bonanca, the dollar is going to weaken substantially more, continuing to batter countries that have become dependent on the United States until they finally take action or, more likely, until U.S. assets begin to look so cheap that foreigners cannot help but buy. Either scenario may take time.  Top of page

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