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Winter 2003 cover

National Observer Home > No. 57 - Winter 2003 > Editorial Comment

World Economic Uncertainty: Indefinite Risks for Australia

Will the United States’ economy recover soon? Or will it suffer a long, slow, decline as has Japan’s? Will Australia's economy be gravely affected by any U.S. decline, or will its dealings with Asia protect it sufficiently?

These and related questions are widely debated, and the purpose of this Editorial is to draw attention to uncertainty and to indefinite risks. Unfortunately no-one is able to predict with reasonable confidence what the pattern of the next decade will be. So it is recalled that two years ago it was confidently predicted in many quarters that America’s recession would soon be over. That prediction was wrong. And it is seen to be still too early, when account is taken of opposing viewpoints, to know how bad the fundamental state of the United States’ economy may be.

In particular, there are now disquieting factors that have not existed to the same degree in recent times. The U.S. Federal Reserve Board has estimated that M2 (money growth) has increased from approximately one per cent in the course of 1995 to approximately ten per cent in the course of 2002 and is now 7.2 per cent. The same source has estimated that the U.S. ratio of total debt to G.D.P. has increased from 140 per cent during 1980 to 195 per cent today. The U.S. current account deficit has increased from approximately $100 billion per annum to approximately $503 billion at the present time (Bureau of Economic Analysis). And the same source indicates that the net international investment position of the United States has fallen from approximately nil in 1990 (when foreign investment in the United States was approximately equal to U.S. investment abroad) to a negative today of $2,309 billion: that is, an investment deficit of $2.3 trillion.

These figures show that savings in the United States have fallen markedly, that money growth has been exceptionally high and that imports and negative items have exceeded exports and positive items to an alarming degree.

Many conventional economists may say that these matters will rectify themselves under market forces, and in one sense they are doubtless correct, if a result is called a rectification. The difficulty is, what form will any "rectification" take? Will it, for example, lead to drastic falls in the value of the U.S. dollar, large reductions in living standards in the United States and possibly also the imposition of further trade barriers?

Historically the United States as a dominant manufacturing nation has supported free trade. Its equation was that this brought a net advantage to American manufacturing industry. But now the phenomenon of China has interceded. The wage structure in China is, comparatively speaking, almost unprecedently low. The monthly wage of a Chinese worker may be less than the daily wages of an American worker. This extraordinary differential makes many industries in the United States, Australia and elsewhere entirely uncompetitive. American or Australian industry cannot compete with Chinese industry where comparable products are involved.

Economic orthodoxy has attempted to minimise the consequent detriment to the United States economy. In theory, American industry will withdraw from uncompetitive areas and will instead concentrate upon special value-added or specialist products which are not the subject of effective Chinese competition, and which can be exported to pay for Chinese goods. But the difficulty with this theory, as with so many economic theories, is that in practice it is found to be defective. American industry has not generated sufficient exports to counter the very large range of imports that are acquired by American consumers. Nor is there any indication that in the short or medium term this position will change.

A consequence of these various matters is that it is not clear whether the U.S. economy will suffer continued low growth or a recession or even a depression during future years. Further, as has been noted here, experts appear to be unable to foretell which of these various possibilities will arise and in what form.

For Australia there are hence very considerable risks. On the one hand, the U.S. economy may recover and lead other countries including Australia into a period of growth and prosperity. On the other hand, there may at the other extreme be a disastrous long-term economic downturn which may affect Australia severely. In this context one notes that pessimistic observers refer to the possibility of deflation as in Japan and to a period of substantial falls in living standards and in employment.

It is by no means clear that the Commonwealth government, with its unfortunately inept Treasurer Mr. Peter Costello, is giving sufficient attention to the possibility of a severe economic downturn, and Australians generally, and especially investors and businessmen, are in the same position. One may hope that in these respects the pessimists’ fears will not eventuate, but the very poor economic fundamentals referred to above should be borne in mind by everyone, and a definite measure of caution and self-protection is now appropriate for Australia and for individual Australians.

National Observer No. 57 - Winter 2003