Passing The Baton: America Self-destructs

A former Australian Ambassador, Dr James Cumes, warned today that the United States "has, through its policy errors, inadvertently passed the Superpower baton back to where, in the reasonable Chinese view, it rightly belongs."

(PRWEB) May 31, 2005 -- A former Australian Ambassador, Dr James Cumes, warned today that the United States "has, through its policy errors, inadvertently passed the Superpower baton back to where, in the reasonable Chinese view, it rightly belongs."
        
A leading-edge economist and author of several books, Dr Cumes said that "The present Bush Administration has intensified the American embrace of policies of self-destruction; but it cannot be accused of initiating them." Indeed, he says that the policies of self-destruction began long ago with ill-conceived economic policies. Those policies, which have undermined the political and strategic power of the United States, "go back to President Nixon and Fed Chairman Burns in 1969, when they hiked interest rates to 'fight inflation'. As blind Freddie should have been able to tell them - and as I did tell them at the time - inflation did not go down. Instead it went up and we entered the era of stagflation." Through their fiscal and monetary policies, Presidents Reagan and the elder Bush then proceeded to complete the conversion of a superb fixed-capital investment economy into a speculative casino economy that has "gutted" - and continues to gut - the productive American economy.
        
In the 1980s and since, the domestic inflation of the 1970s has been shifted so as to moderate inflation through external supply and so create chronic massive trade deficits. As the distinguished economic analyst, Dr Kurt Richebächer, puts it, there has been a "serial massacre of the [American] manufacturing sector." Over the last twenty years, the great productive potential of the United States has drained away. Now, despite the "shock and awe" that the United States military can deliver, the once mighty superpower is on the way to becoming, in terms of its supporting economic base, "a ninety-eight pound weakling." Already the signs are appearing that counries like Iran and North Korea are no longer afraid to "kick sand in its face."
        
Unless the self-destructive policies can be reversed quickly, Dr Cumes warns that the period ahead could be "extremely dangerous in the interstice between the reign of one superpower - the United States - and the secure inauguration of its successor."
        
The present Bush Administration did not initiate the self-destructive process, but its policies, Dr Cumes says, have quickened its pace. Consequently, "it is hard to imagine that the Bush Administration can frame and adopt policies which will reverse the rush to self-destruction."
        
The chances are that the American economy will shortly suffer a major collapse, with its inevitable flow-on to the whole world economy. Dr Cumes believes that nothing short of such a collapse would seem to be enough to compel governments to reverse current monetary and economic policies. It is then likely to take several years to return economic, political and strategic stability to the world community.
        
By that time, monumental shifts in the political and strategic power balance will have taken place. The United States will have been shattered by an economic turmoil potentially much more terrible even than that of the Great Depression in the 1930s. In the process, today's single Superpower will have, inadvertently, passed on its baton to its successor.

The full text of Dr Cumes' statement is below.

A New Paradigm
Richard Werner has recently written a distinguished book entitled "The New Paradigm in Macroeconomics." It provides answers, the publishers say, to many "puzzles" and "anomalies" in the modern economy. His work is particularly to be welcomed for his new analysis of the "puzzles" and "anomalies" in creditary, monetary and interest-rate policies. Few even of the finance professionals really understand the way the modern economy works. This failure of understanding has far-reaching implications - implications that are crucial not only to the evolving economic situation but also to political and strategic balance around the world.
        
Central banks, on whose judgement we continue to depend so heavily, share this lack of understanding. This is demonstrated by the simplistic nature of their behaviour. They lie in wait for a sign that "inflation" might be impending and then leap on it and raise interest rates. If and when they think "inflation" has been beaten or no longer threatens, they lower interest rates.
        
In carrying out this extraordinarily facile procedure, the central banks have acquired a mystique of omniscience to which most of us customarily, habitually, almost reflexively bow.
        
Despite the dangers inherent in this procedure, Governments have increasingly passed over their sovereign power in monetary policy to their central banks. In practice, governments have instructed central banks to stand guard and, at the slightest sign of "inflation", to hike interest rates - something that governments have in effect admitted that they themselves haven't the wit or the stomach to do.
        
Perhaps - though this is unwarranted speculation - governments have become more reluctant to implement these policies directly, because they know in their hearts that there's something crazy about the whole mainstream concept of how to control inflation - and growth and employment and all the rest of it - through such a single, blunt - and misunderstood - instrument of policy.
        
But they don't know - and haven't the wit to find out - what is the right way to go about macro-management of the economy. Instead, they heap praise on the diligence and judgement of the central banks when they act with "discipline" to "fight inflation" and "slow" the economy by hiking interest rates - or when they hold them, for the most part, far too high to cultivate stable growth and high and expanding employment. There is an attitude that we are right - or central banks are right - to act like a penny-pinching Scrooge by raising the cost of money for the most slender of reasons - and indeed when such action flies in the face of any reason at all to which we can accord respect.
        
None of this is new. As I've said so many times before, the basic "policy" goes back to President Nixon and Fed Chairman Burns in 1969, when they hiked interest rates to "fight inflation". As blind Freddie should have been able to tell them - and as I did tell them at the time - inflation did not go down. Instead it went up and we entered the era of stagflation.
        
That didn't deter governments or central banks in the United States and around the world. Interest rates - and their raising or lowering - became a persistent obsession with everyone and almost the only significant instrument of economic management for the world's greatest economies and, if they wanted to be acknowledged as wise and worthy, by the world's middling and smallest economies too.
        
Of course, "evidence" did emerge that these wise and worthy policies were working. The record of the 'seventies wasn't good; but the 'eighties brought more comfort to those mainstream economists, analysts, central banks and governments who believed that a simple yo-yo manipulation of interest rates was all that was needed to give us stability - and "sustainable" growth, high rates of employment, "free" trade and all the other good things we might be chasing. (Of course, we've had few of those good things in reality but we've gone on believing that, with "discipline" by the central banks and our sturdy concurrence in that discipline, we've been doing rather, fairly or very well, depending on where your particular economy stands at any particular moment.)
            
However, most of our calculation of economic achievement has been a myth.
        
What has really happened is that inflation in the United States and several other countries has not been "beaten" but only shifted from domestic consumer price rises to deficits in the balance of trade and payments - with the consequent gutting of industry in the United States and in those countries that have adopted the United States "model". Based largely on asset-price inflation, there has been, especially in the United States but also in other highly-developed economies, an explosion of credit that dwarfs anything that has gone before.
        
Awareness of this shift in the impact of inflation is crucial to our understanding of the present national and world economic situation. It is also crucial to our assessment of shifts in the political and strategic power balance.
        
Over the last few years and even more in the last few months, the United States Administration has become increasingly preoccupied with the massive trade deficit with China. As always, the tendency has been to blame the other party: it is for China to take remedial action and, as one particular example, to loosen the peg between the Chinese currency and the US dollar.
        
However, the situation vis a vis China is not new, except in its magnitude and implications. It goes back more than thirty years to the fiscal and monetary policies of Nixon and Burns in 1969 and the collapse of the US dollar - and the IMF - in 1971. Those policies, persisted in over the years, created the Asian Tigers and, gradually, awoke the giant China. The China miracle began around 1979, after more opportunistic policies were adopted by Beijing. At first, progress was relatively slow but momentum built up steadily and then dramatically.
        
Recent economic growth in China has been unprecedented in speed and scale. The policies of the Beijing Government have been conducive but, above all, United States policies - policies that, in their essence, go back to 1969 but which have been intensified in the years since - were essential to the creation of the Tigers and, more recently, have been essential to the rousing of the slumbering giant, China, as well as indeed the other slumbering giant, India.
        
Fixed-capital investment in the United States - and with it, real productivity and production - have suffered. As Kurt Richebächer recently put it, there has been a "serial massacre of the [American] manufacturing sector through the growing trade deficit." This massacre has not been confined to the United States but has afflicted a number of countries, including Australia, whose policies have taken the United States as a "model."
        
These developments are of the most awesome significance. They go far beyond any mere economic calculation. They go deep into the area of the world political and strategic balance. Whatever the "shock and awe" that the American military can deliver, the political and strategic balance has shifted against the United States. It has shifted because of the policies that a succession of United States governments has adopted. The present Bush Administration has intensified the American embrace of policies of self-destruction; but it cannot be accused of initiating them.
        
At the same time, it is hard to imagine that the Bush Administration can frame and adopt policies to reverse the rush to self-destruction. Much the same can be said of other governments, although there are some stirrings of unease within, for example, the European Union. Britain still seems more complacently assured that it is on the right track than, for example, France and Germany.
Even though there might be these "stirrings", the chances must now be that there will be a major collapse of the United States and other leading economies before the imperative for wiser, more balanced macroeconomic, central-bank, monetary and interest-rate polices can be brought into effect.
        
Such a collapse will, of course, be extremely dangerous in the interstice between the reign of one superpower - the United States - and the secure inauguration of its successor.
        
It is sobering to reflect that the cause of these monumental changes can be traced to such an apparently simple and, apparently, almost trivial error as failure to understand the role of interest rates and, of course, to persistence in that error. At the same time, we have to acknowledge that, over the millenia, great societies and economies have flourished and then, sometimes quite suddenly, have died - or at least faded in economic, social, political and strategic significance - for reasons that, at the time, may have seemed no more significant than our monetary and creditary policies do today. China slipped from being a "global" power some centuries ago because of the erroneous policies of its administration then. It is now being re-born, partly because its administration now has had the wit to see an opportunity and grasp it; and crucially because another powerful administration in another country has, through its policy errors, inadvertently passed the baton back to where, in the reasonable Chinese view, it rightly belongs.

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