Ron Struther notes gold price manipulation; and a correction

Section:

Rethinking Globalization:
How Much Longer Can the U.S. Keep Borrowing?

By Clyde Prestowicz
Chicago Tribune
Tuesday, July 19, 2005

http://www.chicagotribune.com/news/opinion/chi-
0506190012jun19,0,1185180.story

With the U.S. economy needing $2 billion daily in loans from the
central banks of China and Japan and the White House demanding that
Beijing revalue its yuan while proving unable to get the proposed
Central American Free Trade Agreement passed by Congress, it's time
for American economists, CEOs and political leaders to fess up.

In its current mode, globalization is undermining long-term U.S.
economic strength and is ultimately unsustainable.

As usually presented in the press and quantified in economic models,
globalization presumes a world of private enterprises engaging in
free trade through open markets under conditions of transparency and
rule of law.

Nothing could be further from reality.

In fact, the global economy is bipolar. One bloc of countries--the
United States, the EU, Canada, Mexico and a few others--run
according to a kind of "dirty" free-trade model. The others pursue a
variety of forms of strategic trade. This reality is obfuscated by
the fact that everyone involved pretends not only to be playing free
trade themselves but also that all the others are too.

The result is a world in which there is one net consumer: the United
States.

All others (even the "dirty" free-trade EU) are net sellers,
depending on exports directly or indirectly to the U.S. market for
all or most of their growth.

U.S. annual consumption is now $700 billion more than production.
World growth depends entirely on growth in this consumption, which
can be maintained only by borrowing from abroad, especially from the
above-noted banks. Thus the global economic role of the United
States is to borrow ever more in order to consume ever more so that
the rest of the world can export ever more.

In contrast, the strategic traders suppress consumption (by, for
example, limiting consumer credit), compel high savings rates (in
some cases by simply deducting from paychecks), subsidize investment
and exports, protect key markets, and manage the dollar exchange
rate to keep their goods and services underpriced while those of
America remain overpriced on world markets.

Although this tends to transfer U.S. production, technology and
investment abroad, American leaders have long acquiesced to such
practices because they keep prices and interest rates down while
stimulating short-term growth through, among other things,
consumption financed by home equity.

One result of all this is that the U.S. is now absorbing about 80
percent of all available global savings, a figure that suggests the
ultimate denouement. When it hits 100 percent, the music will stop.
And because U.S. and world growth depend on ever rising U.S.
consumption and borrowing, the number is mathematically almost
guaranteed to hit 100 percent. Thus the sustainability of the system
has been in question for some time.

Recent developments have dramatically sharpened that question. Three
billion new participants from China, India and the former Soviet
bloc have entered the global economy in the past 10 years. Standard
international economic doctrine holds that people in developing
countries typically have low skills and that their low wages are
offset by low productivity because of lack of technology and capital
investment. It is further assumed that they can't easily move abroad
and that capital and technology can't easily move to them. Hence,
their low-wage production poses no threat to high-wage workers in
developed countries.

With the Internet and FedEx, a new wave of globalization has made
most of these assumptions obsolete. Capital moves instantly around
the world at the click of a mouse.

Technology goes where it finds smart people and financial
incentives. And people move quite easily and almost instantly in the
virtual world of call centers and business processing offshore.

On top of this is a unique aspect of these 3 billion new
participants. Most are poor and unskilled as expected. But 10
percent of that 3 billion, which results in a number larger than the
population of the United States, have the unexpected combination of
the highest skill levels with the lowest wages.

The new globalization puts this population effectively in the next
cubicle, and its ticket to the good life is to combine these low-
cost skills with the mobile technology, capital and virtual
workplace to produce more U.S.-bound exports financed by more U.S.
borrowing from China and Japan.

In theory, of course, as these new participants sell more, their
wages will rise and they will consume more, including more U.S.-made
goods and services. So everyone will win. But that's where the
problem is. It hasn't yet happened that way.

Japan and the Asian tigers have not become net consumers as they
have gotten rich. Just as the U.S. structure of consumption is hard-
wired, so is the strategic trade structure of export-led growth.

In the face of this, dollar devaluation and other conventional
nostrums such as more free-trade agreements will not prevent the
global economy from eventually collapsing under a huge burden of
American debt.

Before it does so, we need to redesign globalization by enforcing
World Trade Organization rules to end the practices of strategic
trade, reducing U.S. consumption below U.S. income, and making an
Apollo Project-like commitment to U.S. energy independence.

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