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President Barack Obama walks across the South Lawn of the White House before departing for Camp David, Aug. 05, 2011.
Dr Peter Morici: The US economy and equity
markets are being rocked by a crisis of confidence. Businesses, investors and
ordinary Americans simply lack confidence in the ability of the Obama
Administration to get the country growing and create jobs.
Apprehension about the future stems not merely from the constant bickering
between Republicans and Democrats on spending and taxes, but more fundamentally
on the growing realization that monetary policy is spent - - the
Federal Reserve has some ammunition left but is not likely to be very potent.
And fiscal policy - - huge stimulus spending and deficits championed by
President Obama - - has failed to jump start growth and jobs creation.
The Federal Reserve cannot lower further short-term interest rates. The
overnight bank borrowing rate (federal funds rate) has been keep near zero since
December 2008, and additional Fed purchases of US securities to lower longer
term Treasury and mortgage rates wouldn’t have much impact.
Fed purchases put additional funds at the disposal of banks but ordinary
Americans can’t borrow because they lack collateral - - their homes are simply
not worth enough to warrant refinancing at lower rates. Too many older families
are locked into properties valued at less than their mortgages and can’t sell to
younger couples and get more capital in circulation.
Banks make loans to businesses on the basis of cash flow not collateral—after
all the equipment and structures of businesses lose half their value if those
fail and can’t pay their debts. Simply, most small and medium sized businesses
lack the additional demand and cash flow necessary to justify expansion and
qualify for credit.
Economists can quarrel about how many jobs the stimulus saved, but a $1.6trn
dollar deficit can’t be increased any further. The bond market won’t tolerate
it, and now the whole political dynamic is to push to deficit down.
Congress quarrelling with the S&P about the calculations supporting its
downgrade of US debt reminds of a class that went partying the night before an
exam—it drank too much, got bad grades and now says the test is unfair.
Few rational observers would argue against the notion that the Congress is
spending beyond the country’s means. Hence, little additional money can be found
for additional stimulus from the public trough.
The third instrument of macroeconomic policy is exchange rates—the values the
dollar trades at against other currencies. A cheaper dollar would boost
exports; reduce imports in favor of domestic products; and increase demand,
growth and jobs creation. Europe and North American countries have forsaken
exchange rates as a policy tool and growth strategy, but not so China, Japan,
India, and others, who use exchange rates aggressively to their benefit and the
peril of western economies.
Asian superpowers intervene in currency markets—regulate transactions and sell
their currencies for US dollars—to keep their currencies cheap, boost their
exports and growth, and deprive US and EU businesses and workers of customers
With monetary policy and fiscal policy spent, exchange rates are only tool the
United States has left, and that is the province of Treasury Secretary Timothy
Geithner and the President.
Mr. Geithner argues that China’s intransigence on yuan pegging is not a problem,
because China’s inflation is making its products more expensive. That is a sad
apology for the failure of his diplomacy with Beijing to win changes in Chinese
The yuan is undervalued by at least 40%, and its intrinsic value increases at
least 6% each year because of Chinese productivity growth. With Chinese
inflation exceeding US inflation by only 3 percentage points, it is hard to see
how Chinese inflation will provide any relief.
Decisive action is needed now to counter currency manipulation by China, Japan
and others - - these could include US counter intervention in currency markets,
currency conversion taxes and licensing currency transactions to offset similar
practices by those mercantilists.
All this requires major shifts in US policy, and for the President to articulate
a clear path for Congress to support and for his Administration to implement.
Failing to make these changes would greatly imperil prospects for economic
recovery and his reelection.
Jamie Dimon on Financials & Europe: Despite all the uncertainty, JPMorgan is setting out to rally employees and defend the economy. Insight with James Dimon, JPMorgan Chase CEO:
Dow Closes Down 4.64%:
Professor, Robert H. Smith School of Business, University of Maryland,