“Your majesty, your majesty, the peasants are revolting.”
“That’s right, they stink on ice.”
From History of the World Part I, written and directed by Mel Brooks.
From the Lindsey refinery of French giant Total in England comes news that local workers went up in arms over plans to hire foreign workers, the revolt starting an initiative to force employers to hire locally across the country. This was quickly broadened to a Buy British campaign, with retailers and farm lobbies also going on the offensive.
Elsewhere on the Old Continent, the French government doled out 6 billion euros (US$7.6 billion) to its car companies on the express condition that they will not cut back jobs on French soil, following the path set by the Nordic countries as well by neighbor Italy. Similar protests that invoke nationalism as a feeble excuse for protectionism have been heard all over the continent in places like Spain, Ireland and of course, Greece.
The Great Hope, aka US President Barack Obama, has also lurched towards populist rhetoric, be it in the demand to cap compensation to bank chiefs at US$500,000 or the “Buy American” provisions subtly introduced into various infrastructure spending programs as part of the almost $1 trillion that the US government wants to spend in boosting its own economy.
There is shrewd political logic in the president’s outbursts as he seeks to deflect attention from the recent embarrassments of key appointees not paying their tax bills; but it is quite likely that a lurch to the far right would have happened under the left-wing ideologues at some stage or the other. Nope, they still don’t get irony over in America.
The next logical step for Obama would be to start preparing a five-year plan for the United States, and if he hasn’t gotten around to it, perhaps Paul Krugman would oblige in short order. Banks that take government funding, that is to say all of them, will be required to reopen lending and declare all mortgages default-free and reduce outstanding amounts. In effect, by hook or crook, the idea would be to reintroduce Americans to the concept if not exactly the reality of positive net worth.
As I wrote in Capitalism at the crossroads, (Asia Times Online, January 16, 2009) everything associated with the prosperity of the past two decades is now under the microscope, be it free markets or globalization. In its place, the quacks would like to reintroduce the system of managed socialism with a bent towards curing the world’s other evils, namely credit cards, conspicuous consumption, climate change and whatever else you care to classify in the “cc” categories.
Within all the Keynesian spending discussions, there is an underlying discomfort for the liberal democracies in the Group of Seven leading industrialized nations, namely how to control deflationary price effects of wiping out hundreds of billions more in investment values going forward; the resulting net worth shock would need to be absorbed by the governments of the day by deficit spending.
This arrangement ignores a vital ground reality, namely the distribution of the world’s surpluses and deficits. The US runs a massive deficit already on its current account while Europe runs significant fiscal deficits. At the systemic level, through the reserve currency status of the US dollar and the alternate-reserve currency role of the euro, both the US and Europe need to secure their net funding from the savers of Asia.
Demographically, Europe is headed for continued consumption declines in perpetuity, much like the Japan of today, the key difference being the relatively high level of entitlement spending in the Old Continent that requires governments to increase their borrowings in a near-geometric progression. Pretty much no European government, with the exception of Germany, now stands in a position to organically raise revenues that can be used to pay down debt; instead they will increasingly depend on refinancing debt from willing savers in Asia.
For the US, the demographic challenge is no less, with the population peaking about 10 years ago and none but the most illiterate and unskilled of laborers willing to move to the country from the rest of the world. With even these menial jobs now being taken back by unemployed Americans, the reduction in immigration will also posit an almost certainty that the American population will continue to shrink for decades to come. This would eventually reduce consumption to the level that can be supported by domestic production; however, the spiraling spending required on healthcare and other items of entitlement would also mean that the US would face a situation not unlike what is being faced in Europe today.
Protectionist impulses only help to accentuate rather than ameliorate these trends; but since the new Keynesians don’t even comprehend the additional borrowings required for their current actions, it is quite unlikely that they could even think about longer-term issues.
The most important near-term issue from protectionism is of course inflation, as the inability to substitute higher-cost, lower-quality products (such as American cars) with cheaper, higher-quality competitors (such as Japanese cars) would inevitably lead to both lower operating efficiency and higher borrowings for American consumers. In many ways, this will be replicated with the purchases of materials and labor required for the new infrastructure projects (American steel, American concrete and American labor in place of European steel, American concrete and Mexican labor).
Other than higher costs and lower efficiency, consumers will also suffer from the inability to extract Ricardian efficiency, as the closure of free markets and free trade helps to hinder factor mobility. In effect, what we have now between Keynesian spending and protectionist impulses in the US and Europe is the organized scarcity of labor and factor inputs; the rise in prices is almost a foregone conclusion at that juncture.
Already losing hundreds of billions of dollars in the value of their supposed safe savings in triple-A rated bonds issued in the US and Europe, Asians will also soon find their factories grinding to a halt. The absence of a social security net in most parts of Asia – most glaringly in China and India – implies that government measures to boost domestic spending by multiples of what has been currently proposed will soon be forthcoming.
In the case of China for example, the export sector, which occupies almost 40% of the economy, could well shrink by half. The decline in intra-Asian trade has exposed the lie that these countries actually consume one anothers’ products; instead, all are simply parts of the global supply chain towards consumers in the US and Europe. The most likely culprit in preventing consumption across Asia was the failed IMF ideology of weak currencies, export-led growth and accumulated foreign exchange reserves.
Without balance in their economies, Asians have become the unwitting victims of the global crisis in that their savings and future sources of income are both being wiped out serially. It doesn’t appear to me that either politicians or central bankers around the region are even cognizant of these risks.
The only way forward for Asia is to engineer a dumping of US and European financial assets and adopt a regional gold standard that helps to keep inflationary impulses at bay while providing Asians with greater security on their earnings and asset values. As for the collateral damage in the form of an obliteration of government bonds issued by G-7 countries; well what can I say – get some popcorn ready.