One of the few economists who have kept a consistent eye on trade, Professor Peter Morici, properly observes that if the U.S. relies only on a stimulus package and banking reform, then
the economy will fall back into recession once the spending has run its course. A pattern of false recoveries, much as occurred during the Great Depression, will likely emerge.
As the present crisis was picking up steam in April, 2008, a number of commentators ventured their predictions as to the course of the “recession.” Disagreeing with Nouriel Roubini prediction of a prolonged “U” recession, Calculated Risk suggested a double dip recession:
And a double dip is very possible.
But to say this will be the “most severe recession” in decades suggests job losses – and a corresponding increase in the unemployment rate – that I don’t see on the horizon. The good news is that manufacturing employment is holding up better than usual in a recession due to a combination of a weak dollar (strong exports) and relatively strong global growth.
My view at the time was something a bit worse than either a W, a U, or an L.
I suggest we may be in for something worse. No letter in the alphabet quite captures it. The only image that comes to mind is that of a slinky sliding down stairs, each deeper fall accompanied by a short rise.
At the time, I asked: “What will be the engine of our recovery?” Or to put the horse before the cart, I asked:
What is it that we can trade? In order to compete globally, we must have something to offer the rest of the world, something to trade.
The latest surge in the trade deficit was a result of computers, pharmaceuticals, and foreign cars. Slowly but surely we have less and less to trade in terms of finished goods. Agriculture is not enough.
As the crisis deepened, all eyes turned to stimulating aggregate demand. Then it turned to rescuing the financial system.
But, as I said, at some time a horse must draw this cart. To date, there is no horse, no engine of recovery. Like sheep, we follow the latest tinkling bell as we struggle to fix and restore an old order.
Peter Morici is one of the few world-class economists that has repeatedly kept an eye closely on trade.
In 2008, the United States had a $144.1 billion surplus on trade in services. This was hardly enough to offset the massive $821.2 billion deficit on trade in goods.
The deficit on petroleum products was $386.3 billion, up from $293.2 billion in 2007. The average price for imported crude oil rose to $95.23 from $64.28 percent from 2007, while the volume of petroleum imports fell 4.0 percent.
Also, the American appetite for inexpensive imported consumer goods and cars is a huge factor driving up the trade deficit. The trade deficit with China was $266.3 billion, a new record and up from $256.2 billion in 2007.
The deficit on motor vehicle products was $107.1 billion. Ford and GM continue to push their procurement offshore and cede market share to Japanese and Korean companies. However, the automotive trade deficit was down from $120.9, as Asian automakers continued to expand production in North America and demand for autos fell with the recession.
The trade deficit should ease in 2009 with lower oil prices and as the recession bears down on consumer spending. However, China is not permitting its currency to rise in value, despite its trade surplus and has beefed up subsidies on its exports in an effort to export its unemployment to the United States and other industrialized countries. China’s beggar-thy-neighbor protectionism threatens to ignite a global trade war of devastating proportions.
When everyone’s back is to the wall, expect trade to rise to the top of the agenda. The global pie is shrinking; everyone will fight for keeping or improving his share. That Hillary went first to Japan and China is no accident. That she asked the China to continue to purchase U.S. bonds confirms that fact that the U.S. is now China’s impoverished Siamese twin.
Even if China continues that game, a consequence of its burgeoning trade surplus, China and much of Asia is protecting its share of the global pie:
The dollar remains at least 40 to 50 percent overvalued against the Chinese yuan and other Asian currencies. Although China adjusted the yuan from 8.28 per dollar to 8.11 in July 2005 and permitted it to rise gradually to 6.84 by July 2008, the value of the yuan has not changed since.
To sustain an undervalued currency in 2008, China purchased approximately $600 billion in U.S. and other foreign securities, creating a 40 percent subsidy on its exports of goods and services. Other Asian governments align their currency policies with China to avoid losing competitiveness to Chinese products in lucrative U.S. and EU markets.
Another aspect of this disturbing game is the quiet, resigned acceptance that he who has the cash can now find fire sale prices everywhere. Sovereign wealth funds, flush with the wealth only lucrative trade can bring, now prowl among distressed companies. While I have noted many of these sales–especially in resources–, you should take note of how they are being greeted. I watch CTV commentators wrestle with the sale of NOVA chemicals to Abu Dhabi for $499 million (U.S. dollars).
The price is reasonable, analyst Hassan Ahmed of HSBC Holdings PLC told Bloomberg News.
“It’s a bit on the lower side, but keeping in mind the current economic environment and their debt situation, I think this was the right thing to do,” he said.
A profound malaise now blankets many companies. They are ripe for the taking. Take the cash and let the credit go. Do not heed the rumble of a distant hope.
Unfortunately, in the final analysis, we are all in this boat together. For the past ten years, I have watched various players wrestle to see who could put a bigger hole in the global boat. Most economists have merely sat back and admired the handiwork.
I think we need a new boat.