Be wary of foreign leaders who complain they are innocent victims of bad U.S. economic policies. This is a little bit like friends who blame you for their hangovers — after they’ve spent the night dancing on tables.
This is not to say the United States did not pursue extremely bad economic policies. We persistently run large federal budget deficits. We’ve let the U.S. money supply grow too fast for far too long. We have been wishfully naive about regulation of financial institutions. We sat back and patted ourselves on the back as the greatest asset bubble in a century grew and grew.
Now, we — and the rest of the world — are paying the price. When Germany’s Angela Merkel or Argentina’s Cristina Fernandez de Kirchner complain that the imploding U.S. asset bubble is hurting their respective countries’ economies, they are right.
Worthless U.S. financial instruments and a teetering U.S. financial system harm investors as well as banks and other financial institutions in myriad nations around the globe. Falling U.S. output and rising unemployment, together with shrinking household spending and business investment, hurt prosperity elsewhere.
What foreign complainers ignore, however, is that much of the prosperity they enjoyed over the past five years also stemmed from booming consumption in the United States, unsustainable as that is now proven to have been. And that U.S.-asset-bubble-driven bonanza enabled other countries to avoid facing their own nagging problems.
Germany has many fundamental strengths; a highly educated work force, a high savings rate and generally well-managed public finances. It has as stable a currency in the euro as it had with the Deutschmark.
But it also has rigidities in its labor market that waste resources and foster perennially high unemployment. The high costs of its retail sector act as a tax on consumers. And, as in our country, its retirement system is poorly prepared for an aging population.
Argentina’s fundamentals are far worse. Under Kirchner and her husband, Nestor (who preceded her in the presidency), Argentina returned to the economic follies of the 1950s and ’60s that had so retarded its development.
Germany’s relative prosperity in recent years stemmed largely from strong export sales, notably of the specialized manufacturing machinery in which it dominates. Demand for this relied on growth in East Asia and North America.
Argentina’s growth depended on world demand for its traditional exports of meat and wheat, together with burgeoning exports of soybeans and even corn.
In both cases, growth came not from internal reform or a balance of domestic consumption and investment. Instead, it came from external demand, fueled in great part from a consumption binge in the United States that hinged on unprecedented growth of household debt.
Yes, our binge is causing headaches around the world. But other nations rubbed shoulders with us at the keg when the party was going strong.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.