A new world order: Playing poker on the Titanic

Edward Seaga, Contributor

The year 2011 may be called a make-or-break year for those countries still reeling under the lingering impact of the global economic recession which started in 2008. This recession has been rightly dubbed the worst since the Great Depression which commenced in 1929.

I emphasise 'commence' because, on separate occasions in previous articles, I have reminded that the impact of the Great Depression lasted for 10 years and was only broken by the massive upturn of production required to meet the challenges of World War II. In fact, President Franklin Roosevelt of the United States surreptitiously guided the entry of America into the war to create the production surge to deal with the feeble economic growth and joblessness which were still lingering throughout the terrible 1930s.

There are sufficient similarities between the American economy of the two periods, the Great Depres-sion and what can be called the Great Recession of today, although separated by some 70 years, to draw the conclusion that, globally, the same impact would prevail now as it did then. The essential links between both periods were the conditions of weak economic growth and chronic joblessness.

It was pointed out in a clearly stated position in the New York Times Digest of January 3, in a column by Paul Krugman, aptly titled 'Deep Hole Economics', that the American "economy would have to grow in the next few years, by around 2.5 per cent a year just to keep up with rising productivity and population and hence, keep unemployment from rising. That is why the past year and a half was technically a recovery, but felt like a recession: gross domestic product was growing, but not fast enough to curb unemployment."

Hgh jobless rate

Krugman went on to say, "For many reasons, it has taken about two percentage points of growth over a year to shave one point off the unemployment rate." He continues: "Suppose the US economy grows at four per cent a year starting now for several years. Even with that kind of growth, the jobless rate would be still above eight per cent at the end of 2012."

The conclusion is that the United States (US) would not get to anything resembling full employment for some five or six years, taking the toll of the recession to nearly a decade.

"The projected unemployment rate of eight per cent, even at a rapid growth rate, not long ago would be considered catastrophic." This, he concludes, "would still put us at the bottom of a deep hole."

The second conclusion to be drawn is what could happen to the rest of the industrial world, notably countries of the European Union (EU), if the US economy continued to lag in a feeble mode. Signs of this are already written on the walls of several countries. First, Greece experienced a severe financial crisis last year that could only be saved by an injection of billions of dollars. Then came Ireland a few weeks ago - same problem, same solution. Portugal and Spain are experiencing serious financial difficulties which are threatening to pull down their economies if their own attempted self-help measures fail. These are the European counterpart of the deep hole in the economy.

But the scenario is darker, as the stronger European countries, notably Germany, are only reluctantly going along with a proposed rescue fund to be put together by EU countries, just as the US is facing, with trepidation, an increase in its US$1.3 trillion-debt ceiling to help dig itself out of the hole.

These countries have interlocked economic dependencies, thanks to globalisation, which have interdigitated their international trade, leaving each to lean on the prosperity of the other, or go down like a pack of dominoes. In this scenario, the weakened US economy is the lead card, which says enough about early recovery.

Righting the sinking ship

At the same time that this dismal picture is unfolding, there is an unwitting, involuntary adjustment taking place that is slowly, and at this stage, imperceptibly, righting the sinking ship. The US dollar is experiencing a slow, but measurable currency depreciation which will lower the cost of exportable American goods to make them more competitive with the trading strength of the exports of China, Brazil, Russia and India in the main. If this continues, the US economy, together with their European counterparts, could gain strength and rebalance themselves, positioning the ailing industrial countries for real recovery.

But there is a serious obstacle facing any meaningful action in this direction. The recent meeting of the Group of 20 powerful countries called a halt to depreciation being used as a tool of rebalancing, lest it provoke a currency war which could threaten international stability, economically and politically. Some of this thinking is already evident as, more and more, the American media is casting China in the role of villain, to say nothing of Hollywood and TV, which are abandoning the Arab world as the enemy and re-positioning China in that role. Perhaps 'enemy' is too strong a word. Unfair competition which leads to a build-up of hostile feelings is the better description for this shift of focus. And this is because the Chinese government will not allow the currency to appreciate (revalue) so that their goods will be more expensive; so that American goods can better compete; so that the American standard of living can be maintained. In such circumstances, the Chinese standard of living will not grow as fast as it is now experiencing, because Chinese goods would become more expensive.

What is lacking in this short-sighted focus is that we are dealing with something bigger than the policies of political states. We are dealing with ill-defined cultures which are polar opposites. At one pole is the American society, which thrives on spending, not saving, in order to encourage production of food, jobs and growth. At the other pole is China's population, which is culturally devoted to produce and save, and which does so better than practically any other country.

So how do Americans, and for that matter the British people, live if their savings rate is near the bottom of the table? In good part, they live off the savings of the population of China, India and other countries whose people work hard so that they can create a financial surplus to save, which savings are then invested in the US or Britain as the biggest and most secure financial markets. It is these foreign investments which play a vital role in keeping expenditure or American consumption of goods buoyant and its economy prosperous. So at the top of the American list of vital policies is 'don't save; spend!' China, on the other hand, needs no encouragement to save.

So, which makes more sense, or is more humane: lowering the standard of living of the industrial world, 'the haves' which have already exceeded in establishing a far more tolerable level of living, or pressuring the Chinese and other poorer productive nations of the world of 'have-nots' to take a cut in their already low, intolerable standards? Equity cannot support the latter alternative, because it is solidly grounded in faithfully following the mantra laid out for poor nations of the south, by rich nations of the north: work hard and grow prosperous so that the rich does not have to subsidise the poor. It seems that a growing list of once poor nations are now following this dictum too well, opening themselves to the charge that they are eating more cake to benefiting them more than the rich can allow, although the poor worked hard and baked its own cake!

No one puts it better that Robert Peston in an article titled, 'The new capitalism'. "To put it in crude terms, for much of the past decade, millions of Chinese slaved away at near subsistence wages and still managed to save, both as a nation and as individuals (China has £1,400 billion in foreign-exchange reserves). And to a large extent they were working to improve our living standards, because they made more and more of the stuff we want at cheaper and cheaper prices - and clever bankers took their savings and lent the cash to us, so that we could buy the houses we cherished, the cars we desired, and the flat-screen TVs.

Ibalance

This imbalance - between the savings of China, India, Japan and Saudi and our indebtedness - between their massive trade surpluses and our deficits - was never sustainable. At some point, the Chinese were bound to say, 'We'd like some of the cake now, please, which means you'll have to have a bit less.'

Tragically, they toiled for our prosperity - we lived high on the hog while they fattened the pigs for us - for too long. Which is partly why the return to equilibrium, to a more balanced global economy, is happening in a horribly painful way that's impoverishing millions of people."

So, to return to the original thesis that the rich industrial countries are, by and large, near the bottom of a very deep hole which they dug for themselves, through their own mismanagement and greed, with only a short, fragile, makeshift ladder to climb out. Escaping from this hole will ultimately require a rebalancing of world economies to achieve equilibrium, which can best be done by what we always knew was true, the capitalist dictum: use initiative, work hard, earn more, save more, invest more and create more jobs.

But this model has left the door open in some rich and powerful societies for bandits to crave more of what they did not earn, while insisting that poor strugglers pay for their greed. These are complexities which shatter the confidence needed for early recovery, reliving problems rather than discovering solutions.

A new wave of thinking out of the box is needed to urgently fashion the rebalancing of the world order, lest it degenerate by itself, engaging us all eventually in a game of poker on the Titanic!

Edward Seaga is a former prime minister. He is now chancellor of the University of Technology and distinguished fellow at the University of the West Indies. Email feedback to columns@gleanerjm.com and odf@uwimona.com.