LONDON UNDERGROUND SEAT
After a very long period when inflation seemed to be very much under control in the United States and the UK, we had better than average bursts of trading-up in the stock and property markets. The US dollar lost ground to the Euro, the Canadian dollar and the Pound. United States, the UK and Canada were economies to watch despite their seeming success at restraining inflation. All three were involved in fighting foreign wars which still are costly, and which seem to have no end.
Background as I see it
You would think that the financial districts of these countries would be thinking longer term than they were. We had the experience of money financed wars in the past. The weaknesses of the currencies used to finance them resulted in more US dollars in the international system than people wished to hold.
Ross Perot and his campaign in the United States got the people there aware of the dangers of money supply growth spillovers into debt financing of Government spending for the purpose of arma ment building or war waging. In his period, it was the effort by Reagan to dominate the surge in military protectionism that would bring Russia and the Solviet Union to the bargaining table on their military ambitions. The end to the cold war resulted. One wonders whether the existing administration has the common sense to see Russia as one of the key players for peace in our time.
The problem as I see it
The story is very different now. The United States is very much in hock to Asian economies, which have adjusted to previous excesses using US dollars for growth. Now they have a better mix of borrowings to finance development at a pace that Europe and America cannot match. What the Fed did was monitor inflation rates in the US and try to jump start the US economy through lower interst rates and cheaper money. This worked as long as the American consumer was willing to pile on additional debt to keep the economy and GDP bouyant. The problem has been that it worked so well that many had their wardrobe and housing needs met only to find that the economy has soured in the short term and does not look to good in the long term either.
When modern day economists want 'cheap high' growth numbers they tend to push the housing market and keep the price of houses outside of the inflation index. What they are doing is pushing consumption forward in time and creating the subsequent economic downswing. Their saving grace is that people do not adjust to a slowdown in consumption but persist by getting further and further into debt. The banks take risks and feed the persistence of consumption habit extending the period over which excessive consumption occurs without adjustment. The economy figures in this period look good because real consumption the figure that banks and businesses watch is reasonably high. The economists realize that the economy is growing too fast, but the political cycle just happens to sway them to take a political line and not an economic one. They pray for what's called a soft landing.
What we have in America is a very long term problem because we have a country that has burned its real economy out. Consumers are hocked up to the nine jars. Things may be partially saved by financial innovation as it adjusts to the present cycle of boom and bust. It will not have long term recovery until a huge group of innovations come down the pipe line. These are likely to be associated with energy production and distribution as well as cut backs by consumers of products that are energy inefficient.
Gratuitously, the American economy is telling its people that the way to end the present severe recession is by falling behind efforts to make the economy far more energy efficient that it has in the past self-identified with. To sum up, what is needed now is a brilliant effort on the part of the Fed to reexamine its approach to inflation by including inflationary pressures in energy and housing into its mathematics more forcefully than in the past.
This does not mean higher interest rates once people have had a chance to lock into fixed interest rate loans, but higher rates may want to happen if only to give the dollar some credibility.
Economics is now about adjusting the balances of energy use.
What is going to bring about the long term balance in America needs to be an innovation push. The resulting domestic growth arising in the real US economy productive sectors would save matters rather than money growth and imports. It's neither one thing nor the other, it is both. This means that both the forces underlying supply and demand have to be understood as part of the energy resource equation. The supply thing is that America needs to get alternatives to oil. It cannot go on importing the Texan way and letting oil run the economy. If it does not find the alternatives, then everyone will see and inflationary economy, no economic growth to speak of, and much higher interest rates.
Moreover, the alternatives can come from many sources: a tougher stance with the automobile companies to bring the efficiency of new cars over 50 miles to the gallon. The best thing would be for consumers not to by anything less, even if it meant that a severe adjustment resulted. The second is for a wave of investments into making all homes and appliances far more energy efficient. Widely published standards of efficiency are needed and every appliance should be graded by the standards. In effect, the economy needs to trade up its products to ones that are about ten times more efficient than existing products.
We can get really excited about the US economy on the basis of its innovative capacity, but not under present leadership and administration. I am thinking that the only one that really would know how to bring about the changes needed is someone like Al Gore, but he is too unpopular. On the basis of experience and knowledge about which economists would do the best management job, Hilary Clinton would be my next choice, and she really wants to slow down the deficit spending on the external war efforts. Good for her! There are so many opportunities out there for Americans to enjoy, but they need to take a leadership role in innovation. I like Barack and maybe he would have the necessary insights, as well, but he needs to prove he understands energy economics and would take Americans into a more efficient energy future.
