The Jackson Hole conclave of central bank chiefs came and went, leaving hardly a ruffle behind. The remarkable fact is that it had so little effect, despite the much expected speech on the U.S. economy by Mr. Bernanke of the Federal Reserve Bank.
Mr. Bernanke’s main field of study as an academic economist has been the Great Depression. As the current “Great Recession” developed the Fed’s primary concern therefore was to avoid the policy mistakes that turned the 1929 stock market crash into a disastrous ten-year downturn. Chief among these errors was the failure to provide abundant liquidity to the financial system.
Accordingly super-abundant liquidity was provided this time around, under the form of an intensive bank bailout, huge deficit spending, the creation of money, zero interest rates and a raft of financial facilities. As a result there was, initially, an economic bounce. But as this “recovery” now appears to be rapidly fading, the question bears asking: “Everything that should have been done has been done, but the effects are not up to expectations. Was something missed?”
Yes, it was. While study of the Great Depression can certainly teach us a lot, it was over 70 years ago.
Today we would not make a study of transportation on the basis of 1930 technology. At that time air transport was a minor factor. Today it is a major one.
In a similar vein, in 1930 our economy was almost entirely national, and all its components were within the reach, if not the control, of federal authorities. Today’s economy is globalized.
Global finance means that the sums moved daily around the world by private interests (many of them speculative) dwarf anything the U.S. government can muster. Foreign exchange transactions alone involve $4 trillion per day. In other words, the value of our currency is out of the government or anyone else’s control.
Global “free trade” translates into entire industries being transferred, within a few years, to whatever locations multi-national company executives may choose. With the industries go the jobs, services, investments and taxes.
In other words, whatever the government does might have a bigger impact in another country than it does in the United States, and much of the money spent will end up in China rather than Virginia or California. The same happens to jobs, whether they are existing ones that disappear abroad, or “newly created ones”, which materialize directly in foreign, low-cost locations.
The U.S. government and the Fed are pumping air into a leaky tire. Unless the leak is fixed, they can pump for years, but the tire – our economy – will stay flat.
U.S. authorities are treating the economy as if it was a constant entity, to which government spending can add, thereby creating growth. But the economy, and the wealth that goes with it, are no longer tied to the national territory and its population. Because U.S. political and economic leaders have chosen to practice an “open border” economic policy, wealth and activity have been flowing out for the past two decades. As a result, many “American” corporations have more interests abroad than they have here. They will invest, and create jobs, where their interests are.
If it is more profitable, short-term, to manufacture in China, that is where investments will be made. Profits will rise (and they have) but so will U.S. unemployment (and it has). The Fed will keep the money printing press running, and the administration will increase the deficit, and the “jobless recovery” will go on, until something gives.
If we want a real return to prosperity, we need to deal with this issue. Otherwise we will slide into another depression, with all the consequences this entails, political as well as economic.
Globalization has been presented to us as progress, the “next economic thing”, the way to world prosperity, and so on. Given the situation that the world economy is in, as well as our own, we need to reconsider.
Jacek Popiel was born in Poland and educated in Africa, Canada, a