The worst not over yet for US economic woes

The disintegration of the Soviet Union and drastic changes in the Eastern European countries in the 1990s helped the United States become the only superpower in the world and the leading advocate of globalization.

However, the country's subprime woes that began last summer have led to a grave credit crisis gripping Freddie Mac and Fanny Mae, the largest two mortgage lenders in the US. People are now concerned the US subprime crisis may develop into a credit calamity.

As analysts around the world warned about the prospect of a US economic recession and began worrying about a global tide of inflation surging back and causing another round of economic stagnation, the US economy managed to recover just a little bit recently.

According to official statistics released in mid-August, the 15 euro-zone economies saw their second-quarter growth drop by an average of 0.2 percent while Japan's gross domestic product (GDP) also fell.

Although the US economy was hurt by the credit crisis, it fared not as badly as the ones of the European Union (EU) and Japan. The main reason for this is that the sharp depreciation of the US dollar allowed the country's export to increase, bringing the economy along with it.

The EU member countries, meanwhile, found many of their financial institutions burdened by increased bad debt resulting from large amounts of US subprime and real estate bonds in their possession on the one hand and hurt by flagging export, thanks to a strong euro, on the other. This led to the reality that the euro-zone countries felt the subprime pain more than the US did.

The fact is the US manufacturing industry is still on top of the world. Its semiconductor-related sectors outnumber China's three times by output volume, while its aviation and automobile industries remain far ahead of the rest of the world anyway one looks at them. When the greenback took a nosedive, the country's advantage in export came into full play and brought the US economy back to life.

When these factors were reflected in the market, the US dollar rose by 7.6 percent against the euro within a week to a record $1.45 to a euro. This was after the British pound suffered an 11-day downslide against the US dollar, the longest in 37 years.

Not long ago people were worried that the US economy was going into recession and its inflation rate would climb up. As the prices of bulk commodities such as oil and grain soared, the US core inflation index also went higher.

For example, the US consumer price index (CPI) in July surged by 5.6 percent from a year earlier, the largest increase in 17 years. Despite the ominous numbers, however, a Bloomberg survey found that 79 percent of investors agreed the US inflation rate would come down in the fourth quarter. Will things really turn out this way?

When Alan Greenspan was chairman of the Federal Reserve a few years back, he generously eased monetary control in order to mitigate the damage done by the 2001 bursting of the tech-bubble to the US stock market. The measure consequently gave birth to the real estate bubble. When the latter bubble burst in 2007, Greenspan's successor Benjamin S. Bernanke followed the same prescription and created a futures bubble.

Oil is the most representative of commodities traded on the futures market and also a strategic resource. The skyrocketing oil price has caused a profound change in the international strategic configuration.

The Russian economy was set back many years with much of its national strength gone in the early days of the post-Cold War era, but the soaring price of oil on the global market propelled Russia back into the position as a major player on world stage with newly-regained strength.

Russia is one of the top energy resources exporting countries in the world and the primary natural gas supplier to EU member states as well as a major oil exporter. The explosive liftoff of oil price helped Russia clear the debts it owed the International Monetary Fund (IMF) ahead of schedule, recharge its military power and build the launch pad for a new foreign affairs strategy.

It was against this backdrop that Russia, with its energy resources as the big stick, reminded Ukraine how important Russia was when the latter moved too close to the West and sought to join NATO. When Georgia provoked it in South Ossetia, Moscow didn't hesitate a minute and conflicts ensued.

As a matter of fact, the latest round of oil price hikes was caused by the US monetary policy, but this did not do the US much good in terms of geopolitical interests. From a geopolitical point of view the higher oil price goes the more it benefits Russia, because it helps boost the country's national strength.

Still, oil price is determined by two factors. One is the supplier - Russia no doubt can control oil price through output maneuvering; and the other is the buyer, especially in the financial market, because oil futures as one financial product or another are gaining weight everyday.

The US is the No 1 oil importer and consumer in the world, while the oil futures market in New York wields considerable power when it comes to oil price. For the sake of its geopolitical interests the US government does not want to see oil price keep rising. As the global center of oil price control, America can use its fully developed financial market to sway oil price movement.

In July the US Securities and Exchange Commission "killed two birds with one stone" by ordering all naked-short trades of financials be halted immediately, a decision that directly affected the oil price.

That measure forced financial institutions and speculators of financials to withdraw all their investment from the oil market in order to bail out their money trapped in financials. Because of this a round of panic selling brought a flood of cash into plummeting financial stocks, pumping them back upward by an average of more than 30 percent, and caused the oil price to plunge at the same time.

The US government will no doubt keep its policy geared toward pressing energy resource prices further down in the near future to protect its strategic interests and eliminate the threats facing its financial system.

Even though the US economy has shown some signs it is getting back into growth and the inflationary pressure is lessening because the commodities futures market does not look headed for a big leap anytime soon, the most worrisome danger in the US economy is not gone just yet.

Toward the end of the last century the US launched an all-out financial expansion campaign, which left behind a trail of burst bubbles starting with high-tech, then housing and most recently commodities futures. While the country's financial assets grew $39.6 trillion in the 1990s to $151.9 trillion in 2006, which gave its economy a rosy look, the deceptive numbers came with a potential crisis, especially in the debt department.

A documentary, titled IOUSA and funded by Pete G. Peterson, secretary of commerce during the Nixon administration, went on a wide release across America in late August. It was intended to highlight the US government's humongous debt problem as an outstanding issue in the presidential election.

Warren Buffet, the securities market guru, after watching the movie, agreed with Peterson on the country's problem of twin deficits. They both believe it could trigger a catastrophe with consequences much worse than the current credit crunch if no immediate action is taken to quash it.

These two US billionaires have warned that several future generations of Americans could be victimized if Washington does not act right now to cut down federal debts, which have exceeded $50 trillion so far.

The author is a researcher with the State Council Development Research Center

(China Daily 09/11/2008 page9)