‘The lost decade’ was the phrase used by the President of the United States to describe the Bush years for the average American. But he hasn’t seen nothin’ yet. That decade may be yet to come if he does not change his operating ideology. The United States of America at the turn of the new century is in an identity crisis and the president it elected is a reflection of it.
The Federal Reserve has finally settled into worrying less about inflation and for good reason. It wants to keep interest rates low for an extended period, noting that, if the economic gods are favorable, the rates may have to rise at some point to normalcy from the new normalcy the country had become used to since the 2000 recession after being chastised by the Europeans publicly over Iraq for fraying from the pre-fabricated vision of global economic integration by Clintonomics. Bush could have done better with Iraq but that does not mean Clintonomics is correct: America is not Europe and the American identity is not the same as the European identity. Its purpose is transcendental and it is transcendental.
The G7 group of countries ― after the expansion of the group to the G20 in Pittsburgh last year ― have all converged on cheap money. The world’s strongest currencies are available for investors to borrow at the lowest possible interest rates. The exchange rates among the G7 currencies have also stabilized, not unduly favoring one country or the other but for the idiosyncrasies of the domestic fiscal and regulatory policies of the countries. They have stabilized as such because of deliberate deficit increases in the G7 instead of relying on effective monetary policy to revive their economies. There is no distinct advantage for any one G7 country to take its money to another in the group. The game is elsewhere, in the emerging markets, whose currencies are not independent enough yet.
The exodus of G7 cash to increase aggregate demand in the domestic economies of the emerging markets will also reallocate the flow of the world’s energy and food supplies in favor of the emerging markets. Perhaps the world’s food supplies can keep up with the expanding demand to maintain steady prices. Food is a win-win to both sides. And it could even help gradually eliminate trade barriers in global agricultural production. But this is not true for energy.
In the immediate term, as the global economy aspires to change its production processes to be less reliant on the increasingly scarce fossil fuels, the growth of the major emerging markets will exert upward pressure on global energy prices. Given the finiteness of supplies and reserves, one part of the world has to demand less. And it appears that that part of the world is the G7 to keep its inflation and growth low for an extended period of time, doing the same for the interest rates, to integrate the major emerging markets over the next decade through private capital flows denominated in G7 currencies.
The interest rate outlook therefore seems to be fairly even for all the G7 countries, because should they increase rates they will be artificially depressing their domestic economies, and should they not do anything, the rising global energy prices will still produce the same effect as if the interest rates have gone up, depressing domestic investment. The sweet spot, given the current self-imposed policy constraints of the G7 countries which determine the potential growth rates of the G7 economies, is to lie low between lukewarm inflation and potential disinflation in an environment of mildly fluctuating growth for an extended period of time. The current policy choice appears to be to tolerate a lower speed limit for the G7 economies.
This camaraderie between the rich countries, humbled by their recent excesses, is a good thing but not for trying to get the once overzealous Clintonomics back onto a more moderate track. What that camaraderie means for each of them may vary as much because of their domestic economies as it is also because of their dependence entirely on private capital flows to the emerging markets with little or no G7 strings attached through multilateral institutions for supervision, if not for lending as was the case during the era of the Washington Consensus.
From the perspective of the G7 as a whole, whose very history of economic integration after World War II demonstrates a commitment to some common political and economic values, the absence of similar multilateral government engagement through the UN framework makes little or no sense in the post-Cold War world. It could create runaway economic prosperity in the emerging markets funded by the wealthy countries, with the expectation that Milton Friedman would prove to be correct in the end: that transition economies will also eventually become free societies because of economic growth. At least, that hope goes, they could become more like France or Germany, if not the United States. This expectation may not be well-founded, because money cannot buy good government. In fact, too much of it could destroy good government where it already exists as is becoming increasingly evident in the United States. The determinants of good government must be instituted within to be able to manage the economy effectively.
From the view point of the United States, the deterioration of good governance by yielding to the economic forces of capitalism, as if Wall Street and Washington are the same, is plainly irrational. It is understandable for every other G7 country, except the United States and Canada, to want to focus on foreign markets because their domestic markets are the size of U.S states and saturated from prior decades of domestic investment. This applies to all the European countries in the G7 including the United Kingdom, and to Japan, which are all export-driven. These governments are acting in the best interest of their peoples.
The US economy is not export-driven nor is there a need for Canada to be if it so chooses. In particular, the United States is large enough to both invest abroad purely on foreign policy considerations and invest at home where most of its economic activity resides. There is no dearth of domestic investment opportunities in the United States. The cheap dollar can, in fact, bring in euros and yens into US investment to create American jobs for doing many of the same things the Europeans and Japanese have already done, even as the dollar goes to the emerging markets also at the same time.
Just as the United States was a magnet for consumption in the ‘90s, it can be so for investment over the next 20 years. It need not make the choice of growing slowly as the Japanese and Europeans are. The United States can afford to be what it is even as the rest of the world perhaps converges to the political-economic structure of Europe and Japan if global political and economic institutions are reformed to make that happen through better supervision of private global capital flows.
The United States must stick to its roots and the other countries will have to gradually liberalize to emulate a reformed American model: the democratization of the enlightenment of antiquity to achieve transcendence in society.
Global convergence began in 1776 and it must also consummate across the Atlantic to the west of Europe.