Feature
Who’s calling the tune?
by Nick Smith
Americans are blind to their looming economic crisis, which will send shockwaves around the world, warns former Reagan adviser, economist and now author Clyde Prestowitz.
US critics call Clyde Prestowitz many names – among the more printable is “canary in the coalmine”. The coalmine is the US – and global – economy. And the Washington based economist, who once advised Ronald Reagan, is now singing a tune that Americans, and many in the world, do not want to hear. It’s about the end of American economic hegemony and the rise of Asia – China in particular – as the new world force.
Some of the tune is familiar: US spending out of control; debt at crisis levels (US borrowing accounting for 80 percent of world savings); production capacity flight to Asia preventing the US from trading its way out. And then there are the Asian creditors who will demand repayment of $US1.5 trillion debt, causing the dollar to collapse. This will wipe out an estimated $US11 trillion in dollar assets – the biggest default in economic history.
Prestowitz: “A sudden collapse in the dollar will cause a spiking in global interest rates, a sharp recession in the US, rippling into a global recession, possibly a global depression, with concomit-ant political upheaval – and who knows what kind of hostilities could break out on the international scene [as a result]?
It’s a very dangerous scenario, Prestowitz says. The media commentator is not alone in his analysis.
Even former US Federal Reserve chairman Paul Volcker is predicting a “75 percent chance of a major financial crisis in the next five years”. Investment banking giant Morgan Stanley puts the odds of American economic Armageddon at $3.33, or $1.66 for “muddling through” to a delayed disaster.
When both legendary investor Warren Buffett and George Soros, the man who broke the British pound, are furiously selling dollar-based assets (and urging others to do so), financial markets should pay heed.
But hasn’t there been an economic turnaround in the US? Prestowitz is incredulous: “What do you mean, improved economic news? We have a property bubble, people have been selling homes and paying taxes on their capital gains, and that has increased the tax flow to the federal government. So it looks like the federal budget deficit is coming down. This is a one-time thing, and does not in any way correct the structural built-in trend toward an even larger federal budget deficit. Also, it doesn’t reflect the cost of the war on Iraq, which hasn’t been included in the budget. And that is another $US100 billion.
“If the US was generating sufficient internal savings … this wouldn’t be a problem,” he says. “But we aren’t doing that. We are borrowing abroad, and that links it in with the trade deficit [expected to hit $US800 billion]. And that is what makes the whole thing so dicey.”
So, how are Americans taking the news?
“Not terribly seriously, because the prevailing view is that we are the envy of the world,” Prestowitz says. “And people believe it. And we are heading for Niagara Falls, full steam ahead, and we are just about to go over the falls, and we are beating our chests and telling ourselves how great we are.”
This belief in American exceptionalism is blinding the US to the emergence of China as the new economic power. “The government doesn’t have a strategy,” Prestowitz says. “It holds the consideration of such a strategy to be contrary to US interests.”
US media say that China’s growth is a mirage, and claim that the Communist government cooks the books for propaganda purposes.
Prestowitz agrees that some of China’s growth is a mirage. But in his new book, Three Billion New Capitalists (Basic Books, $49.95), he convincingly sets out the reasons China and India will dominate the global economy this century.
In the book, the myth of Third World nations being chock-full of unskilled labour is deftly dispatched by a tour that takes in service industries, manufacturing centres, financial services and high-tech production in Delhi, Bangalore, Shenzen and Pudong. Of China’s 1.3 billion new capitalists about to enter the global economy, some 300-400 million – more than the entire US population – are highly skilled workers, he says.
Or, as the Economist magazine says: “No longer is it just Washington that has the power to cause shockwaves.”
Further, the weight of history is on Asia’s side. Prestowitz says: “We have been here before. We saw Japan rise from the ashes of 1945 to the miracle of 1964. We saw Korea go from being one of the poorest countries in the world to one of the richest. Taiwan, Singapore, Thailand …”
It is unnatural, he says, for China to have a disproportionate share of global production. “What is happening here is that Asia is coming back to its historic position as a large part, if not the largest part, in the global economy. You guys [in the Asia-Pacific region] see it much more clearly than we here in the US. We have ideological American firsters who rule out any possibility that the US could be anything other than number one in everything.”
It’s the greenback’s role as the global currency that creates economic distortions and ensures a world financial crisis, whether next year or in five or 10 years.
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