Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.
To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.
We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.
What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.
It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.
And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.
The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.
It's not that it is so difficult intellectually to set out a scenario for a "soft landing" and sustained growth. There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand.
But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?
The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.
Volcker has cleanly laid out the central problems we face.
First, homes are essentially giant ATM machines instead of investments. Thanks to the plethora of home equity loan and refi advertisements, people are cashing in on their homes. And they are either buying more "stuff" or paying down higher interest loans (credit cards) with lower paying loans. Either way, they are not saving. If they lose their jobs, they have no financial buffer to help them to their next job.
The 6% consumption and prodiction gap is another big issue. We consume more than we make and other countries are paying the bill for us at the rate of 1.5 - 2 billion dollars per day. I have seen an enormous amount of right-wing economists trying to justify this situation with all sorts of crazy theories. Our own President and Secretary of the Treasury call the trade deficit a "sign that the US economy is growing faster than our trading partners." Therefore it is a sign of strength.
This is pure fantasy. There is no way a cycle of consumption being greater than production to continue forever. We can justify it all we want; reality will eventually come crashing through our national wall of denial, forcing us to face reality.
Consumers will eventually run out of assets to collateralize or use to refinance so they can spend more. At some point, the US will no longer be a great place to invest, as our creditors realize we can't pay them back, or our economy is not growing at an attractive rate. Compounding this situation will be the lack of real wage growth when compared to inflation and necessary expenses. Then there could be real problems.