Rashid A Mughal
USA, the biggest and number one economy of the world and driving engine of the global economy is again heading for trouble. Top Bankers, businessmen, industrialists, investors and economists all share the same perception. With monetary deficit all time high and savings all time low, trade wars initiated by Trump, threatening to walk out of NAFTA and other trade agreements have all contributed to the general climate of dismay and caution. The roller-coaster ride of stock exchange is another worrying factor, haunting many. The spin is all 100% predictable. The bumpy ride of the stock market in late 2018 and early 2019 (still on) and Government shutdown,(longest in the US history) and record 23 trillion dollar deficit, confirm the notion that the health of US economy is definitely not well and might be heading for another burst.
Though the economic fundamentals, not just in the US but worldwide, haven’t been this good in a long, long time but are the fundamentals that sound for US economy that has a razor thin cushion of savings, nothing could be further from the truth. America’s net national saving rate the sum of saving by businesses, households, and the government sector, stood at just 2.1 per cent of national income in the last quarter of 2018. That is only one third of 6.3 percent average that prevailed in the final three decades of the 20th century. Under the guise of tax reform late last year, Trump signed legislation that will increase the federal budget deficit by $1.5 trillion over the next decade. And now the US Congress, in its infinite wisdom, has upped the ante by another $300 billion in the latest deal to event a government shut down.
As domestic saving plunges, the US has two options – a reduction in investment and the economic growth, it supports or increased borrowing of surplus saving from abroad. Over the past 35 years America has consistently opted for the later-running balance of payments deficits every year since 1982 (with a minor exception in 1991, reflecting foreign contributors for US military expenses in the Gulf War). Driven by the momentum of trends in employment, industrial production, consumer sentiment and corporate earning, the case for sound fundamentals plays like a broken record during periods of financial market volatility. But momentum and fundamentals are two very different things.
Functional policies point to a further compression of saving in the years ahead and exposes the myth of sound US fundamentals. Under this grim economic scenario,USA has initiated needless trade wars with her staunch allies, mainly Europe. Brussels retaliated by imposing levies on US goods. In announcing these measures European Commission President Jean Claude Juncker said the “EU could match stupid with stupid”. Real problems are an oversupply of steel on global markets. Trump’s assertion that the tariffs are needed to protect US national security especially when most EU countries are members of NATO, does not seem to be convincing. “Nobody can win this kind of race”. German Chancellor Angela Merkel told reporters recently. Germany would support the EU”, she added.
The US dollar could face headwinds in the wake of President Donald Trump’s decisions to impose stiff tariffs on steel and aluminium imports with the biggest risk stemming from the possible flight of capital flows, needed to finance ballooning US deficits. Currency markets in general dislike any form of trade intervention and previous protectionist efforts by the US government have resulted in dollar weakness. The US is now in a very precarious position because it’s putting a risk premium on US assets by introducing tariffs and going down this protectionist route would be negative for growth. The introduction of import tariffs threatens to increase the price of foreign products in the United States reducing demand and imports. Tariffs introduced by Presidents George W. Bush and Bill Clinton in 2002 and 1995 resulted in a 15 percent decline in the dollar overall, according to estimates from TD Securities although there were other factors that also undermined the US currency during those periods.
The biggest risk for the dollar stems from the possible exodus of capital flows, analysts say. If risk sentiment worsens significantly this would outweigh any shot term advantage, the dollar would have against emerging markets in its role as a safe heaven. On the other hand the United States while still the largest economy in the world has become a net debtor, with current account and fiscal deficits seen exceeding more than 8 per cent of gross domestic product over the next two years, analysts say. Part of expansion in the US budget shortfall is attributed to the Trump Administration’s tax overhaul and fiscal stimulus. To bridge those deficits the United States needs to borrow from overseas. Analysts say about 60 per cent of US deficits are funded by foreign countries or entities. The countries with whom US is having a trade war with China and Europe, are the countries that US will have to rely to finance it’s deficit” In addition any impact on US growth, though this is expected to be limited, could undercut the dollar, analysts said.
Like the stock market, the US economy looks really good on paper, that is until you simply dig a little deeper and look at the underlying jobs data. The US unemployment rate is under four percent, but at the same time, approximately 12% of the population remains underemployed. Wages are flat, personal debt levels remain elevated, and 15% of the population is still receiving food stamps. Approximately a third (36%) of Americans have less than $1,000 in savings and investments; 60% have less than $25,000 and 76% of Americans are living paycheck to paycheck and the income disparity along with rich-poor gap, is at record levels. This is a bleak scenario.
— The writer is former DG (Emigration) and consultant ILO, IOM.