The George
Soros-backed Institute for New Economic Thinking's just-concluded Bretton Woods
weekend conference of leading economists didn't actually focus on America's
future, but the sum of the discussions produced a pretty grim outlook.
The current
political and cultural polarization of the country was seen as probably worse
today than at any time since the outbreak of the Civil War exactly 150 years
ago. The geography of this polarization is also similar to that of the Civil
War period and the issue of a powerful federal government versus states' rights
remains pretty much the same.
The
polarization today is being propagated by wealthy and powerful elements on Wall
Street and elsewhere that fund bitter, attack dog politics and sharply
polarized media commentary.
The power of
big financial and corporate lobbies is such that they overwhelm reform efforts
with huge lobbying campaigns. The effort to regulate the banks and establish
accountability for them has failed to a large extent. The Dodd/Frank law that
is supposed to re-regulate the banks fails badly because the reform of the
banks to date has involved actually making them bigger and fewer. The biggest
50-odd institutions are being designated as too big too fail, but are not being
subjected to any rigorous or vigorous oversight and regulation.
By dint of
being understood to be too big to fail these banks are effectively in a
position to "short" the government, meaning that they can essentially force the
government to subsidize them by pursuing risky investment policies that the
government must then support. The cost of capital of the big boys is lower than
that of the medium and smaller fry by reason of the "too big to fail"
designation. Thus, they will eventually squeeze the other banks out of the
game. So bye bye community banking and ever getting to a real person at the end
of the endless telephone menus.
But it gets
worse. Americans are far too indebted and are trying to repair their personal
balance sheets and cutting consumption to pay down debt. But this is retarding
recovery and forcing the government to spend more in order to keep some kind of
growth going and unemployment falling. To avoid falling back into recession,
the government spending will have to continue for quite some time. But this
will exacerbate the U.S. trade and current account deficits and increase
overseas dollar holdings.
The rest of
the world is pretty strongly dedicated to export-led growth. The Germans are
forcing the rest of Europe to deflate and the only way for Europe to get any
growth is through exports. China says it wants to rebalance its trade and focus
more on domestic consumption led growth. It's nice that China wants to do this,
but it will be extremely difficult if not impossible in practice for China
actually to reverse its export led policies.
The result
is likely to be a continued shift of the production of tradable goods and the
provision of tradable services outside of the United States to off-shore
locations.
These trends
will see a continued erosion of America's ability to provide a good, middle
class standard of living at home and to extend security abroad.
The really
smart people have already put their wealth in gold bars and moved to New Zealand.
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