Watchman Newsletter

The Danger of a Global Double Dip Recession Is Real

U.S. News and World Report (Link) - Mortimer B. Zuckerman (November 29, 2010)

The modern world has for centuries been dominated economically, intellectually, and physically by the civilization that arose in Western Europe in the wake of the Renaissance and Reformation and spread across the Atlantic.

Will that one day be seen as a passing phenomenon doomed to ascend ever upward and then slowly fizzle out like a firework?

It is nearly a century since that gloomy German mathematician and philosopher Oswald Spengler published his 1918 classic The Decline of the West. His arguments were complex, but basically he suggested that the future of the West was not as limitless as his peers imagined after the ghastly World War I. His thesis was that civilizations had an underlying trajectory, an organic rise and fall; his metaphor was to compare the stages of this process to the stages of our seasons�but seasons of many centuries. In the 19th century we were, he suggested, in the winter of the West, witnessing the triumph of materialism, socialism, and money and that the era of individualism, liberty, and humanitarianism was nearing its end. (When the Nazis rose to power he seemed vindicated�he was a vehement critic.)

Read today, Spengler�s forebodings have an uncanny and chilling association with our present predicaments. He was not saying Western civilization would vanish overnight in a puff of smoke. It would erode more slowly, as did some ancient civilizations�not to vanish forever but with symbols of their power and influence surviving (the Pyramids, the Aztec temples, the Parthenon), with the potential to re-emerge as civilizations many centuries later.

Myopic self-indulgence. Are our current plagues�the riots first in Athens and then in Paris, our global economic crisis manifest in the riots and rampant sovereign debt�merely a symptom of a deeper decay of a civilization in the autumn of its existence? A civilization unable to recognize its own vulnerability? The riots were certainly as much an example of myopic lethal self-indulgence as the sovereign debts in all the leading countries of the West. In France, students took to the streets protesting against a rise of just two years in the age of subsidized retirement�a system destined to bankrupt the state long before they, too, want the comforts that will be impossible to sustain.

Among Spengler�s convictions was that money, instead of serving mankind, would betray the Western civilization as it had others�and money in politics and media especially. If he could have seen this election season, he would have been even more downcast! Money is surely the great corrupter of American democracy. Congressmen have to spend more of their time raising money for misleading and defamatory television commercials�and resisting briberies of one kind or another�than they spend studying our predicaments.

The global prosperity of much of the 20th century would seem to belie the pessimists, but I don�t think there is much doubt the moral authority of the West has dramatically declined in the face of the financial crisis. It has revealed deep fault lines within Western economies that have spread to the global economy.

The majority of Western governments are running fiscal deficits of 10 percent or more relative to GDP, but it is increasingly clear that there will be no quick fixes, that big government and fiscal deficits will not bring us back to the status quo ante. Indeed, the tidal wave of red ink has meant that the leverage-led or debt-led growth model is dead.

Developed countries will be forced to deal with their debt on every level, from the personal to the corporate to the sovereign. Being able to borrow may have made people feel richer, but having to repay the debt is certainly making them feel poorer, particularly since the unfunded liabilities that many governments face from aging populations will have to be paid for by a shrinking band of workers. (Ecoutez, mes amis!)

Demography is destiny. As a result, there is a burgeoning consensus that we are witnessing an inevitable rise of the East and a decline of the West.

The prognosis for America is especially discouraging. We have relied too heavily on surplus savings from abroad on top of running massive current account deficits. Until recent times, we ran deficits of this order only when we were engaged in a titanic war; otherwise we sought to achieve budget balances over a complete business cycle. But now we are running annual deficits of $1.4 trillion, about 10 percent of the total economy. We have compounded the deficits we accumulated over the last decade, so they now reach 61 percent of GDP. Only once before has the ratio of federal debt to GDP come in above 60 percent. That was after World War II. And our federal debt ratio today doesn�t even take into account Social Security and Medicare. Total liabilities and unfunded promises for Medicare and Social Security were about $62 trillion at the end of the last fiscal year, tripling from the year 2000, according to the calculations of former Comptroller General David Walker. Sixty-two trillion dollars is $200,000 per person and $500,000-plus for the average household. As Walker put it, the problem with these trust funds is �you can�t trust them [and] they�re not funded.� Therefore, he asserts, we ought to count them as a liability, which would bring the debt-to-GDP ratio to 91 percent.

The present model of global growth had served excess Western consumption with inexpensive products from the East. The result is plain to see: The West has excessive debt, while China has excessive capacity and inadequate consumption, as well as high levels of savings and our debt.

The deficits we face are a dagger pointing at the heart of the American economy. They threaten that the United States will evolve into another aging welfare state, where fiscal expenditures shift from defense to social welfare, and America�s power in the world will shrink. It has clearly happened in Western Europe, which can no longer defend itself but relies on the United States.

Foreign lenders. We clearly need to reduce our dependency on foreign lenders. Quite simply, we are mortgaging the future of our young people at record rates while we fail to improve education, healthcare, and a decaying infrastructure. How is it that we manage this while spending double per person what the average industrialized nation spends on such programs? Who could be surprised that so many Americans now fear that their children and grandchildren will not have as good a life as they had? Whose American dream?

For the last half century, the United States gave priority to defending against serious security threats because no other nation could step up to that responsibility, just as today no other country can lead coalitions against terrorists and the planetary menace of nuclear proliferation. But economics has become the center of geopolitics. As the former president of the Council on Foreign Relations, Les Gelb, points out, �There is no arena in which the vital interests of great powers seriously clash. Indeed, the most worrisome security threats today�rogue states with nuclear weapons and terrorists with weapons of mass destruction�actually tend to unite the great powers more than divide them.�

It�s the defense readiness of the United States that makes it possible for the world to focus on economic priorities, including trade, investment, access to markets, and a better life for the people.

China makes the best case for the primacy of economics. It is daily demonstrating that a country can become a global economic giant without becoming a global military power. Its strategic response to what�s been happening is to shift the sources of GDP growth from external to internal markets.

In the United States, gloom has spread to our policymakers on how to deal with our economic dilemmas. Monetary policy is relatively ineffective because we are in, or near, liquidity trap conditions. Our economy is so weak that lower interest rates and other monetary tools are not working. In the liquidity trap, no matter how much money is thrown into the system, people have so little confidence that they tend to hoard it. Similarly, fiscal policy is beginning to reach its limits. High debt levels can raise concerns about the creditworthiness of our government. This in turn could lead to higher long-term interest rates that would aggravate the economic contraction.

There is a real danger of a global double dip. We face a general slide in confidence, the unwinding of the temporary fiscal boost to growth, and the negative reaction to the fiscal profligacy. Government budgets have been tightened around the world since Europe�s crisis in May, providing additional headwinds to an economic recovery. Every country is facing ballooning government debt. In the countries of the Organisation for Economic Co-operation and Development, which are mostly in Europe but include the United States, government debt will go from 73 percent of GDP when the recession started in 2007 to over 100 percent next year.

What we clearly need is leadership with the will and the moral authority to govern on the basis of the long-term interest of the country. It will not be easy given the fact that any attempt to cut future entitlements will be opposed by those in or approaching retirement. They form a powerful voting constituency, in contrast to their children who somehow will have to pay the bill.

Fiscal responsibility and discipline are going to be critical issues in the formulation of public policy. The debates in this election season, sidetracked on emotional but marginal issues, have been depressing. We cannot continue to mortgage our future by reducing investments in our future, whether it be for education, infrastructure, or basic research. We still possess the most appealing popular culture and public values, as well as the most innovative and competent business culture. American exceptionalism endures. But we must confront our dysfunctional and profligate government. America was founded on the principle of creating a better life for our children and grandchildren. We can do it. We aren�t doing it. �

America ~ Economic Crisis ~ Europe ~ Kings of the East