America, the Odd Man Out
John Browne
Posted Jul 28, 2010
At long last, a good portion of mainstream economists now concede
that a 'double dip' recession is in the cards for the United
States. To head off the pain, sixteen top economists addressed
an open letter to the President urging him to "stimulate"
the economy with a massive new round of government spending.
We feel this is a recipe for driving a recession into a depression.
However, there can be few doubts that such a move is being considered
in the highest policy circles. Flush from victories in financial
regulation and healthcare, the Administration may feel the conditions
are ripe to push through another bold initiative.
If so, the United States may find itself in a very diminishing
bloc of nations who fail to appreciate the magnitude of the global
debt crisis. Its policies will become increasingly at odds with
the drift of other world powers. Given American dependence on
economic support from abroad, the risks of such isolation are
significant.
On July 20th, UK Prime Minister David Cameron made his first
official visit to the US. At a joint press conference that followed
the private meeting, President Obama and Mr. Cameron papered
over the fundamental economic disagreements that separate both
governments.
At his core, Mr. Obama is in favor of spending his way out of
the current recession. Most of the post-World War II occupants
of the White House have followed the same course. Although the
policy is short-sighted, it serves nevertheless to protect the
competitive advantage of keeping the US dollar at the heart of
the international monetary system. Spending expands global credit
and creates the illusion of an invincible dollar, increasing
the system's popularity at home and abroad. In a self-perpetuating
feedback mechanism, the dollar's unique international position
allows it to get away with even more spending.
Many international economists, bankers, and politicians now believe
the US has overplayed its hand. At the recent G-20 meetings,
America was at odds with the other major powers, who favored
major cuts in government spending even if the result was a deeper
short-term recession.
Part of this can be explained by currency movements. The Greek
debt crisis threw doubt on even financially sound nations like
Germany and ravaged the European common currency. Wishing to
save the euro from the dustbin of history, the Germans and their
allies within the EU have dug in. The sentiment even had an effect
on the UK elections, which put the Conservatives into power with
a mandate to strengthen the government's balance sheet and buck
up the pound sterling.
On the other hand, Washington's profligacy has yet done little
to dent confidence in the greenback. As a result, the Obama Administration
senses no need for caution. This hubris will prove costly.
On paper, the United States appears to be the world's richest
economy. However, she is also the largest debtor. If unfunded
obligations are added to the $14.1 trillion official Treasury
debt, the total would exceed $60 trillion, or 430% of 2009 GDP.
If deficits and the disguised costs of Obamacare are included,
the bill gets even larger. Despite this, the US government retains
its treasured 'AAA' credit rating, at least in the eyes of disgraced
Western ratings agencies. Meanwhile, according to the seemingly
less-biased Dagong International Credit Rating (DICR) agency
of China, the US has been downgraded to 'AA-'. Given its debt
levels, even that rating may be overly generous.
According to the DICR, only Australia, Denmark, Luxembourg, Norway,
New Zealand, and Switzerland retain their prized 'AAA' rating.
Canada, China, Germany, and the Netherlands have been downgraded
to 'AA+'. France, Japan, South Korea, and the UK join the US
at the disturbing 'AA-' level. However, if Prime Minister Cameron
delivers on his promised 25 per cent cut in government spending
by 2015, the UK may regain a higher rating.
On the other hand, President Obama has bragged that Americans
should "make no mistake, we are headed in the right direction."
More disturbingly, his Administration has put forward the absurd
notion that government spending achieves a 3:1 multiplier versus
private spending (meaning every dollar of government spending
will "pay for itself" by generating three dollars of
private economic activity). Sensible economists suspect that
the reverse is true: every dollar of government spending sucks
between one and three dollars from the wealth-creating private
sector.
It appears that America is now set on the sanguine 'progressive'
path of stimulus and inflation. Our rejection of the other great
powers' newfound maturity will push our recession into a depression,
reduce our credit rating, and raise our already vast borrowing
costs. Meanwhile, the rest of the world may not even notice we've
fallen. Cool heads should plan accordingly.
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Jul 27, 2010
John Browne
Senior
Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website:
www.europac.net
 John
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Browne is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as Chairman
of the Conservative Small Business Committee, and as a close associate
of then-Prime Minister Margaret Thatcher. Among his many notable
assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Browne's advocacy,
Thatcher famously pronounced that Gorbachev was a man the West
"could do business with." A graduate of the Royal Military
Academy Sandhurst, Britain's version of West Point and retired
British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military, John
has a significant background, spanning some 37 years, in finance
and business. After graduating from the Harvard Business School,
John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays
Bank and Citigroup. During his career he has served on the boards
of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's
Kudlow & Co. and the former editor of NewsMax Media's Financial
Intelligence Report and Moneynews.com. He holds FINRA series 7
& 63 licenses.
321gold Ltd
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