The American Economy is in “Pretty Good Shape”
 This column's title is a quote from one of the many pronouncements by Alan Greenspan who was, until recently, Chairman of the U.S. Federal Reserve Bank. In my view, Mr. Greenspan was one of the most overrated persons in America. For a while, when it became known that he had a cold, key stock markets lost several points. When the G.W. Bush Administration lowered income taxes while greatly expanding Federal spending, he said nothing. He should have yelled bloody murder when the Federal Estate Tax was being gutted, but was silent again. As a dual citizen with close relatives on both sides of the border, it is my sad duty to disagree with Mr. Greenspan. It is true that the New York Stock Exchange has more than recovered from its “dot com” doldrums in the 90s and that U.S. unemployment is at historically low levels. By these standards the quote above makes perfectly good sense. But when one looks to the future a completely different picture emerges. In fact, the economy could depict a couple on a Caribbean island beach writing enthusiastic post cards to friends and relations in the United States while their Visa, MasterCard and Amex have “maxed out.” In January of 2006 the Economist had an editorial entitled “Danger time for America” in which one can read: 'Part of America’s current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future. The words of Ludwig von Mises nicely sum up the illusion: ‘It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.’ The danger for the future has three aspects. The first is the rate of family savings, which has tumbled from a low of 1% to - 3%. This situation has not occurred since 1933 at the bottom of the Depression. It means that the average family spends 3% more than it takes in. In many cases, the growing deficit will be wiped out by the sale of the family home which keeps on growing in value. However, should millions of debtors sell roughly at the same time, or the houses on the market become too expensive for too many buyers, a major “meltdown” could occur. The second danger is a 2005 Federal deficit of 274 billion dollars brought about by the cut in income taxes and an increase in spending mentioned above. The American economy was so strong that it only took eight years to wipe out the deficit incurred as a result of the Cold War and earlier tax cuts. However, the current expenses of the occupation of Iraq are enormous compared to the spending when the Soviet Union was our adversary.
 The third danger is a 2005 negative balance of trade which came to nearly 800 billion, of which slightly above 200 billion is attributed to the People’s Republic of China alone. One of the results of the surplus of dollars in the hands of the Chinese government is its desire to invest in American companies. A “far-seeing” Congress considers this a threat to U.S. security, yet it cannot suggest practical alternatives. Much has been made of the Chinese currency being kept artificially low to make imports to China more expensive and the goods that country ships out, cheaper. While the complaint has merit, even if the manipulation of the renminbi were to cease, it would help but not fundamentally change the situation. While everyone is conscious of the lopsided trade with China, there are the other trading partners who are slightly less than 600 billion ahead after the year 2005. In spite of the billions of U.S. dollars sloshing around the globe, our currency is still quite strong. However, I do not know any serious commentators who believe that this strength is permanent. A really low dollar would result in higher interest rates being paid to foreigners buying our government bonds. Similarly, it would cost the -3% families more to borrow money and they would stop buying many goods because they could no longer afford them, thus interfering with the cyclical pattern of the economy. All of the above is well known and you do not need ripostejournal.com to make you aware of it. What I can do for readers, however, is to put the situation into the context where it belongs. The problems are not as serious as the failure to recognize them and to do something about them. 2006 will be similar to 2005 and only the end of the occupation in Iraq will make a noticeable difference. But a sudden pullout will make the situation there even worse. In the immediate future, income taxes should be raised and the Estate Tax speedily restored. The concept of the Two Ocean Navy should be abandoned – something Secretary of Defense Rumsfeld tried to do several years ago – and defense spending should be limited to actual military needs rather than being a hodgepodge of these needs and job creation. It is a painful prescription, but the medicine can be taken more gradually while a crash would be worse. With regard to the ever-growing negative balance of trade, I have no immediate recommendations. Producing less than one buys as a lifestyle, would require a change in that lifestyle and a questioning as to whether one can really have free trade between a country whose hourly wages are from ten to fifteen times more than those of its trading partners. To get back to Mr. Greenspan’s comment, I am very grateful that my health is not like the economy, “in pretty good shape.” | 
