Another look at the economy - part 2

The US Department of Labor reported in March that 373,000 discouraged college graduates dropped out of the labor force in February, a far higher number than the number of new jobs created.
  Counter Punch article

And from that bastion of liberal hyperbole, Morgan-Stanley...

Tipping points are a great concept, but virtually impossible to identify ahead of time -- let alone when they are occurring. It is only with the great luxury of hindsight that we can look back and know that the proverbial bell has rung. In my view, March 16, 2005 could end up in the running as a possible tipping point for America. Suddenly, the US has taken on a very different aura in an increasingly unbalanced world: The confluence of a record current account deficit, a disaster from General Motors, and yet another new high for oil prices all speak of an increasingly precarious role for the global hegemon. World financial markets have barely begun to sniff that out.

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America’s broadest measure of its external shortfall was just reported to have hit an all-time record of 6.3% of GDP in 4Q04 -- an astonishing 1.8 percentage point deterioration from the 4.5% deficit a year-earlier in 4Q03. Not only is this a record current-account deficit for the US, but it is also a record financing burden for the rest of the world.

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It may well be that the accelerated erosion of America’s manufacturing base in recent years is the most painful outgrowth of a record US saving shortfall. Washington, of course, wants to pin the blame on unfair foreign competition. Instead, it ought to take a look in the mirror: It is the budget deficit, of course, that has been crucial in pushing national saving to record lows in recent years.

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The US Treasury data do not accurately reflect the obvious -- an extraordinary build-up of dollar-denominated official foreign exchange reserves held by the world’s monetary authorities.

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But the message from overseas is that this game is just about over.

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The standard American response borders on arrogance: “What choice do they have?” The presumption is that the US has externally driven Asian economies over a barrel -- unwilling to accept a deterioration in export competitiveness that currency appreciation might bring. This misses a key cost-benefit tradeoff -- weighing the hit to exports against the fiscal cost of a portfolio loss on holdings of dollar-denominated assets.

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In the end, of course, there’s far more to this story than economics. As I noted recently, history is replete with examples of leadership tests that pit a nation’s military prowess against its economic base.

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In Paul Kennedy’s historical framework, America is extending its reach at precisely the moment when its economic power base is weakening -- a classic warning sign of the fall of a Great Power.

Was March 16, 2005 America’s tipping point? Only time will tell. The optimist can hope that it was a wake-up call for a saving-short US economy to put its house back in order. For once, call me an optimist. It’s time for America to smell the coffee.
  Morgan Stanley article

Call me a pessimist, a proud Eeyore, because I don't think America will smell the fine aroma of Gevalia anytime soon, if ever. This country is wearing a blindfold, staggering backwards, and slitting its own throat in slow motion. Watch the cable news, listen to our elected leaders: there's no more urgency about the economic decline in living standards dead ahead than there is about addressing global warming or loosening the chokehold of military spending. A country where "evolution" is becoming a bad word is not a country interested in facing reality. Instead, as the passage of the bankruptcy bill shows, corporate-political power is going to grind every last dollar out of the desperate and destitute rather than confront the difficult macro decisions.
  James Wolcott post