Down the spiral —Dr Manzur Ejaz
Wednesday, January 09, 2008
The real estate bubble has burst, currency is sinking and budget deficits are increasing. On top of that, living expenses, despite the government’s claims otherwise, are skyrocketing, and thus widening the gap between the rich and the poor.
This characterisation would fit Pakistan quite neatly; however, this is in fact a description of the contemporary condition of the world’s sole superpower, the United States. **Is the US losing its edge permanently and turning into a third world country?
The bursting of the housing bubble has not only put a large segment of the US population in dire straits, it has also started threatening the entire banking sector. The Federal Reserve Board (central bank) has been pumping more liquidity in the sector and mega-banks have been allocating billions of dollars to stave off the mammoth impending crisis. But nothing seems to be improving the situation because no one knows the size of the phoney home loans that are running into trillions of dollars.**
Alan Greenspan, the ex-Chairman of the Federal Reserve Board, known as the so-called author of the recent prosperity in the US, declared the helplessness of US institutions to deal with this financial mess. In an interview with National Public Radio, Greenspan admitted that the world financial system has assumed such global characteristics that US institutions are helpless to exert any control over it. “Even if we had raised the interest rate to 40 percent, the housing bubble would not be controlled. The bubbles have their own life and no one knows their causes,” he concluded.
If Greenspan’s defence shield of globalisation has any truth to it, then one has to infer that US institutional safeguards put in place after the depression of the1930s have outlived their utility. Therefore, anything, including a severe depression, is possible whereby US policymakers will be as helpless as they were back in the 1930s. Incidentally, the Great Depression had resulted from reckless Republican policies of the 1920s. And many critics believe that Greenspan, now hiding behind globalisation, has been part of Republican policies of the last 25 years which are now resulting in a disaster.
The housing market is not the only one that is on the skids: the dollar is slipping into its lowest uncharted territory as well. Of course, the dollar’s downward slide has been affected by the deterioration of the credit market but it has very serious consequences in the long run. All kinds of investors are dumping US denominated assets to limit their losses due to the dollar’s plunge. Many central banks have started maintaining their reserves in euros resulting in reduced investment funds flowing to the US. Oil producing countries are also following suit in preferring the euro to the dollar.
The flight from the dollar can have grave repercussions: the US heavily depends on foreign capital. The fact of the matter is that US investments in the outside world are a façade; the reality is that the rest of world invests in the US much more than the US invests outside of its borders.
The US runs a huge deficit in current account, importing much more than it exports. However, these losses are balanced out by its equally huge surplus in the capital accounts: more money comes to the US than goes out.
Therefore, it is clear that the rest of the world foots America’s high consumption bill. In simple words, the world provides the US with goods and services and then also pays for them. This is an ideal situation for a superpower.
Not only does the rest of the world pay for US consumers, the US government’s overspending is also financed by foreigners. The US trade deficit is running into trillions of dollars due to foreign wars and tax deductions given to the rich. Foreigners buy US government securities that fill the gap between US government spending and its total revenues.
In the backdrop of these serious economic problems, the US economic system is going to see rough times in the future. However, **American political leaders are acting oblivious to their emptied pockets.
The Republican Party, headed by President George W Bush, is not willing to readjust its wrong-headed policies and the Democrats are too timid to challenge them. As a result, there is no hope of a meaningful correction of the system.**
The main reason for systematic apathy is that the economic policies that have brought the US to this disastrous situation have benefited rich Americans at the same time.
Comparing the rich and poor, David Johnson has recently written that the “…poorest fifth of households had a total income of $383.4 billion in 2005, while just the increase in income (due to Republican policies) for the top 1 percent came to $524.8 billion, a figure 37 percent higher”. Along with their wealth, the rich of America have tightened their grip on the political system as well.
They no more strive to rule by traditional US egalitarian capitalism. Instead, coercive laws are being put in place to control the population. It has been revealed that the Bush Administration had started a programme to spy on its own citizens much before 9/11. It shows that the Bush Administration was clear that their policies will impoverish the lower strata and, therefore, was putting in place coercive mechanisms to control the population. In the words of Stephan Lendman: “The nation is at war and laws are in place that end constitutional protections, militarise the country, repress dissent, and our government is empowered to crush freedom and defend privilege from beneficial social change it won’t tolerate.”
In the absence of any corrective mechanism in place, the US is developing the characteristics of a bankrupt police state the likes of which we see dotted all over the globe. Pakistanis need not go very far to see what may be going on in the US.
The writer can be reached at [email protected]