Great Unraveling Leads to Competitive Devaluations and Protectionism
Posted by Michael A. Kamperman on September 24, 2009
Last week President Obama sent China a stern message on fair trade when he slapped a 35% tariff on low end tire imports from China. China is basically expanding industrial capacity far beyond their own internal demand and is looking to dump excess supply onto the U.S. and other markets. In the last two years China’s share of the U.S. tire market has risen from 4% to 16%. China retaliated with a couple of trade restrictions against the U.S. But nothing is set to rattle world markets and global trade more than Britain’s attempt to grow exports ala China by driving down the value of the pound against other currencies. The Bank of England’s Head Governor Mervyn King told a regional newspaper a lower currency was desired by the British government to grow their share of the export market. The corollary of course is that a weak currency encourages local production and discourages expensive imports. The Obama administration also believes a strategy of growing exports and shrinking the U.S. trade gap is the right strategy to restore the economic health of America. Basically, Britain and the U.S. want their economies to look more like China’s. Correspondingly, this beggar they neighbor strategy is dependent upon the large net export nations in Asia such as China and Japan, plus Germany, to change their economic models and begin to produce less and import more. Fat chance! While this may look good in some wonkish white paper it is not going to happen in the real world. The export driven nations have taken a huge hit to their economies and global trade has dropped more in the last year than at any time since the early 1930’s. It is politically unrealistic to expect them to ask their citizens to endure higher rates of unemployment so that America and Britain can experience lower levels of unemployment. The imbalances in the global economy brought about by excessive debt levels are continuing to unravel. The Great Unraveling is as inevitable now as it was in the 1930’s. The leaders in the 1930’s weren’t dumb, they were desperate.
One of the widely blamed causes of America’s deep suffering during the Great Depression was the Smoot-Hawley Act which raised tariffs on thousands of imports sparking a global trade war. Back then the U.S. was a creditor nation with a positive trade gap. Today we are a debtor nation with the world’s largest trade deficits. A trade war will hurt us less and hurt China, Japan, and Germany more. While our risks from a trade war are not as great as they were in the 1930’s, that doesn’t mean we won’t feel some real pain and should avoid one at all costs.
President Obama is looking to re-orient the U.S. economy to borrow less, save more, and spend less. He wants us to become a creditor nation again and lead the world in exports. He only wants responsible people to have access to credit. He wants to see the federal budget deficits reduced. He wants to drive down the costs of healthcare in the U.S. and bring them in line with the per capita costs experienced by other industrialized nations. While these virtuous ideals sound good, in reality they are the opposite of what is needed to get the country out of our debt induced deflationary depression. We need to look to solve our own problems and not expect the rest of the world to solve them for us. With the whole world in a depression it is not possible for the world’s largest economy to export its way to prosperity. We need to re-kindle internal consumer demand. We need massive quantitative easing from the Fed. Unfortunately, the Fed is bowing to the pressures from the inflation hawks and has failed to increase its program of quantitative easing. The Fed will up this program in time. It is just a question of how much more pain the Whitehouse and the Fed are willing for us to take before they act. My guess is we will not see a concerted effort from Washington to provide further assistance to the economy until unemployment reaches 11% in a few months. Hopefully by then it will not be too late to head off at the pass a new depression worse than The Great Depression.
