Misson Impossible

[This is a slightly revised version of an article originally published in The Telegraph, Calcutta on November 23, 2010.]

Barack Obama’s desperate bid to rescue the recession-plagued American economy stands in sharp contrast to events that occurred in the early 1970s when Richard Nixon was in charge of the country. His bête noire at the time was the then president of France, Charles De Gaulle, who demanded that the United States of America pay for its mounting trade deficits by gold shipments from Fort Knox valued, according to the Bretton Woods agreement, at $35 an ounce. The US refused to honour the agreement and forced upon the world the tour de force of an oil-backed dollar. Oil imports, in other words, had to be paid for by US dollars and this made it imperative for everyone to hold eagerly on to the dollars printed by the US government to support its trade deficits. The US trade deficit turned, therefore, into an advantage for its creditors, especially the ones, such as Japan, who were in dire need of oil imports to keep their economies running.

When Obama came to power, the trade deficit was still very large, but the US economy was in the doldrums. And things had not improved significantly by the time the midterm polls were due. This is clearly borne out by his press conference of September 10, 2010, published by the Wall Street Journal. As he admitted, “We lost 8 million jobs total during the course of this recession. That is a huge hole to dig ourselves out of.” The US economy has been sucked into a maelstrom of recession for over three years now and this makes Obama’s job far more difficult than that of Nixon. In contrast to the latter, who decided that Americans should continue to spend beyond their means, Obama needs to assure his people that they can spend at all.

With US industries thirstily awaiting a resurgence of growth in the demand for their produce and domestic demand continuing to be weak, Obama does not enjoy Nixon’s luxury to allow American trade deficit to keep inflating. Indeed, he needs to travel in a direction exactly opposite to the one that Nixon was headed for. He has no choice, in other words, but to reduce the deficit and, if feasible, convert it into a surplus. His recent whirlwind tour of the world has little purpose other than convincing foreigners to purchase American goods, for that can at least open up the closed factory gates in his country separating a sitting work force from the elusive work they seek.

His tragedy lies unfortunately in the magnitude of the problem he inherited. Worse, he has now less than two years to address the issue. “The huge hole” of eight million job losses that he needs to “dig” the US economy out of translates into providing a net addition of 330 thousand jobs a month on the average during the rest of his term, a task that might appear to be far more daunting than the cleaning of the Augean stables.

How has he set about to achieve this miracle? Despite all the hype surrounding his India trip, policymakers in this country ought to be aware that the $15 billion in deals promising 72 thousand jobs for the US economy is no more than a whiff of a consolation in an ocean of despair. The US Census Bureau quotes the figure of $7 billion as the US’s trade deficit with India for the current year till August end. If the $15 billion Indian expenditure is undertaken by year end, then there is a possibility of turning the deficit to a surplus.

Once the US turns India’s creditor in the trade account, it will be in a somewhat comfortable position to acquire assets in this country and it is no wonder, therefore, that Obama has left behind him material promises of investment in infrastructure and agriculture, cooperation in civil nuclear energy and, much to the chagrin of his Indian detractors, the suggestion of retail trade. He has made non-material promises too, such as a permanent seat in the United Nations security council, which has been viewed by the American media as “largely meaningless”. He did not forget to chide Pakistan. He has removed Bharat Dynamics, the Defence Research and Development Organization and the Indian Space Research Organization from the entities list. However, G. Balachandran, a non-proliferation expert has pointed out that the list itself consists of 24 countries. He has been quoted to have observed that “all that will happen now is, when Indian knocks at the gate, the US will ask the gatekeepers who it is and listen to what India wants. But a licensing regime will continue to be in place”.

Of course, all is not over yet. The Federal Reserve Bank has already flooded the market with dollars, thereby cheapening US money against most other currencies in the world and especially the Chinese yuan. It has been a long standing contention of the US that China has kept the yuan artificially low to hold the rest of the world captive to its manufacturing sector. This hurts the US deeply, needless to say, especially on account of its unwavering affair with a recession economy. The jobs that Obama is inviting for Americans will create incomes and these incomes will be spent. If they are spent on American products, then more jobs will spring forth and more incomes generated in a sequence that will make the final employment figure much larger than the initial dose of, say, 72,000 jobs created through Indian expenditure. Lord Keynes, the author of the General Theory of Employment, Interest and Money, had famously called this the “multiplier” effect of any expenditure.

However, if the incomes generated are spent on Chinese goods, then the multiplier impact will fall on Chinese products. This makes it vital for Obama to insist on an appreciation of the Chinese currency. Even if he succeeds in this mission though, it is doubtful if the US will gain a competitive edge over China, given that Chinese wages and other production costs are low compared to those in the US. Consequently, the US, the most important force behind the jostle surrounding globalization, will have little alternative but to raise tariff and non-tariff barriers to protect its own economy.

This in turn could unleash a tariff war, which is the last thing Obama desires. Nor will such actions find favour with the US’s own business community, for which foreign markets are a vital part of its life support system. Hence, Obama has little option but to support the Federal Reserve Bank’s recent decision to come out with a massive rise in dollar supply. The price of the dollar needs to be kept low, quite independent of what is happening to the yuan.

In the meantime though, the world will be watching crude prices. The Organization of the Petroleum Exporting Countries will not be elated to see itself caught in a depreciated dollar trap, the currency in which it earns its income. Either it will be forced to raise the dollar price of oil at breakneck speed, or the oil economy is poised for fundamental structural changes. And there is always the possibility that the dollars earned by oil importers will be spent in the US to purchase Chinese goods!

Every cloud has a silver lining. Despite India’s abysmal performance in terms of the human development index, we have succeeded in applying a veneer of sugar as it were to sweeten the US’s bitter pills. This has earned us a modicum of economic prestige in our role as a country that brought succour to the mighty United States economy. Similarly, although Obama is unlikely to get a second term, he has at least pocketed the Nobel Peace Prize, even if serendipitously. And finally, if history remembers him for failing to rid his economy of recession, he will at least stand delisted from the group of people responsible for its arrival in the first place.

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