The Consumer, First Source of Dynamism, Piles on Debt to Sustain World Growth
By Eric Leser
Le Monde
Monday 20 October 2003
For three years, while companies and Wall Street recovered from the Internet bubble?s explosion and the many excesses of the nineteen nineties, the American consumer has kept his country?s economy going by main might. The consumer has allowed that economy to withstand the most violent shocks in half a century. The September 11 attacks, repeated financial scandals, the stock market collapse, and the war in Iraq provide no justification for American households? faith in the future. And it is their intact appetite today that in large part explains the recovery.
American consumption is so significant; all the world?s economies can congratulate themselves on it. It represents a little less than 70 % of United States? Gross National Product and 20% of world economic activity.
Above all, it has been the main source of economic dynamism for several years. Europe in general and France in particular count on American recovery alone to resume their growth. The great Asian exporters, Japan, South Korea, and especially China, have not stopped devaluing their currencies against the dollar for years in order to continue their massive exports to the United States. China?s trade surplus of over 100 billion dollars finances its development into ?the factory of the planet? and Japan sees US exports as the only way out of depression.
NECESSARY DROP IN THE DOLLAR
Today no one can allow the American consumer to falter. The Federal Reserve gives him the means to continue to pile on debt cheaply by bringing the cost of money back to its lowest level in forty-two years and the White House has increased his purchasing power (especially for the wealthier) with massive tax reductions. As for international investors, they allow the machine to continue to function by bringing their capital to the United States to balance the ever growing trade deficit and the great weakness in domestic savings. The successive interest rate reductions of the last three years have not provided an opportunity for Americans to reduce their debt, but to spend more. They?ve been incited to do so by, among others, car manufacturers which offer loans at zero interest. Financial establishments multiply tricks and montages to reduce debt burdens or shamelessly propose credit cards secured by a principal residence, to, as one ad emphasizes, ?secure daily expenses painlessly.?
There are now more cars registered in the United States than there are drivers? licensees.
This situation cannot last. The world economy depends on an American consumer whose debt never stops mounting. This perverse system feeds United States? deficits and outsize needs for foreign capital. American households can?t simultaneously spend more than they earn and save. On average debt represents 115 % of their disposable income, compared to 55 %, for example, in France. Debt service equals 14 % of income, a level that hasn?t taken off, thanks to low interest rates and continual mortgage renegotiation. It?s difficult to imagine that household debt could increase still more and ?yet, the only way for the consumer to continue to dope the economy consists of accumulating new debts,? underlines Merrill Lynch economist Dave Rosenberg. ?If a new bubble exists today, it has a name: debt,? he adds.
Another danger, runaway American external deficits.
The balance of payments deficit (foreign trade and capital) should greatly exceed its record 2002 level of 480 billion dollars. Some experts consider that it could approach 600 billion dollars. That means that every day the United States have to ?import? 1.6 billion dollars of foreign capital. Aware of the problem, industrial countries timidly search for a remedy. They gave tacit agreement in September during the G7 in Dubai to pursuit of dollar devaluation, the only way to begin to rebalance American external trade accounts by favoring local businesses.
"The world economy cannot succeed if everyone concentrates on exports only. There?s a growing understanding today among big economies that they need to concentrate on demand and put reforms in place that allow their domestic markets to drive growth,? specifies John Snow, US Treasury Secretary. The only weapon to compel Europe and Asia to pep up their internal demand is to let the greenback slide. However, a rapid dollar drop could interrupt investment by Japanese and Chinese- the principal buyers of US Treasury obligations. If they were to turn away from these securities, that would mean much higher long term interest rates in the United States and a serious threat to American consumption and world economic growth.
The rebalancing of the world economy must therefore be progressive, but is nonetheless an absolute necessity. Asia, and, even more, Europe must breathe some life into their consumption, i.e., above all, make their social elevators work.
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