AS America is going to the polls on November 4 to elect a new President, the question uppermost on everybody's mind is:
Has the balance of economic and political power in the world altered?
The prolonged agony of the financial meltdown originated from America and continued into the tenth month of the current year with gloomy news last week.
The US economy contracted by 0.3 percent between July and September. This decline is against 2.8 percent growth rate in the previous quarter, when the economy was helped by tax rebate cheques and rise in exports.
Consumer spending which forms 70 percent of America's gross domestic output decreased by 3.1 percent. This is the first contraction since 1991. As of September, 760,000 jobs were lost over the last nine months. The first round of job losses was in the housing construction, followed by mortgage lending institutions and real estate business. Sales of America's three big three automakers fell by 20%. Further, job losses are forecast in retail trade, auto and travel industry.
In the third quarter, however, a rise in the value of the dollar and the slowdown of European and Asian economies following the financial contagion, dampened the demand for US exports.
That is the paradox of the crisis: when other economies go down with their currencies weakened, the American dollar becomes strong.
Harsh critics
Harsh critics do not hide their feelings: America went wild soon after the end of the Cold War. After the fall of "the evil empire" and the failure of communism, America assumed the role of world sheriff. In a unipolar world without the Soviet Union, America emerged as an unchallenged power. In recent years, US has been fighting two seemingly endless, costly wars, one of which was started with a well justified pursuit of "smoking out" Bin Laden from the Afghan caves. Then America got entangled into quagmire of sorts, created by "weapons of mass deception."
In the arena of economics, the triumphant years of Reagan in US and Thatcher in UK, witnessed growing faith in free market economy and capitalism. There were several steps of deregulation, which encouraged unbridled free enterprise. In the financial sector, these initiatives encouraged banks, investment houses, security firms and insurance companies to merge into bigger financial institutions and invest and compete with each other.
"Casino capitalism"
In 1999, the passing of Gramm, Leach, Bliley Act, repealing some of the previous regulations paved the way for total deregulation of the US financial sector. New and complex financial products emerged to be traded in the market. All financial institutions began to invest a large portion of money in mortgage backed assets. The exposure spread to other countries.
In addition, buoyant growth in China created opportunities of access to cheap money. With one trillion dollar trade surplus built up through dirt-cheap exports to US, and the consequent reverse flow of funds to US, American banks were sitting pretty on a mountain of excess liquidity.
Financial sector institutions started the game. They encouraged the American dream of owning houses and pushed money to those, who could not afford. The result was the phenomenal growth in subprime loans. Once the supply of houses rose and prices began to fall, the asset price bubble began to burst and loan defaults became the order of the day. The contagion of mortgage bank failure spread across the globe.
Living beyond Means
The American consumer appetite for goods and services is legendary: "He consumes things which he does not want, on credit card terms which he cannot afford, to impress his neighbour, whom he does not like."
The US government joined the game: living beyond means. Two costly wars and access to cheap sovereign funds led to budget deficits and trade deficits. The current account deficit rose to US$ 1.12 trillion or a close 7.5 percent of GDP; and external debt is US$ 8 trillion or 50 percent of GDP.
While America went about advising the rest of the world, preaching practices based on "Washington Consensus" for fiscal discipline, low debt and all that, its economic role has not been exemplary.
Pundits, including those with IMF, who forecast doom for any economy involved in fighting wars, with growing budget, trade and current account deficits and domestic debt are quiet now.
The reason is that none can afford to see America fail.
The Chinese and Arabs are the last persons who would like to see the giant falling.
China can unleash "financial terror" by downloading its dollars. However, it will not happen. China has a huge stake in the fate of America.
As Professor Barry Eichengreen noted, "it is like the idea of mutually assured deterrence".
Redirecting to original purpose
Both Presidential candidates have committed to tax cuts, provide stimulus to the economy, strengthen the economy, create jobs and save failing institutions.
Rhetoric apart, the new President has to re-direct America to the original purpose.
Lessons from past crises have been learnt. Mistakes including allowing banks to fail through contractionary monetary policies during the Great Depression have been avoided. More liquidity has been provided to make the financial wheels move again. Expansionary monetary policy changes have been resorted to. All are aimed at recovery.
Ending the wars would release resources for boosting public expenditures. It would encourage domestic investment.
Energy independence would be the priority in the agenda. With its far superior technological base, America which has been attracting the best brains from the world to study in its universities for doing frontier research, can end dependence on fossil fuel and find alternatives. In the process, more jobs will be generated, giving rise to technology intensive, energy saving products, exported to the rest of the world.
America's industriousness, innovations, inventions and breakthroughs in medicines and knowledge revolution, including Microsoft and Google, and in general, prosperity have always spread to other parts of the globe.
Above all, America has been the beacon of hope to the oppressed. Its founding fathers have been a source of inspiration to freedom lovers anywhere.
Even tyrants such as Idi Amin of Uganda, overthrown monarchs such as Shah of Iran and deposed dictators such as Marcos of the Philippines sought refuge in America.
The world cannot let America fall.
After John Kennedy's election in 1960, Theodore White wrote in his "Making of the President":
"America is a nation created by all hopeful wanderers, not out of geography and genetics, but out of purpose."
* Associate Professor T.K. Jayaraman teaches Economics at USP.
