The black day – with the red ink – arrived this week: America reached the limits of what it can borrow. But the world didn’t end, the economy didn’t grind to a halt, and the dollar didn’t collapse. This non-event is being handled by accounting sleight of hand: some $4 trillion of the $14.3 trillion of debt is owed by the government to itself, so by temporarily suspending such payments as contributions to federal employee pension funds Treasury Secretary Timothy Geithner has enough cash to pay Americans and foreigners to whom interest payments are due. And keep the government functioning.
This has emboldened those who are unenthusiastic about raising the debt ceiling to believe that such temporary measures are available without end, which they aren’t. Other, wiser opponents suggest that because payments on the debt come to only 7.6 percent of total government outlays, by keeping the ceiling in place they can force the government to cut back other outlays, and not necessarily military paychecks, as the president’s men are suggesting he will have to do. Still others wonder why the government cannot get cash by selling off assets such as buildings, roads, bridges, and shares in bailed-out companies rather than raise the debt ceiling. These views, along with disputes over whether the cure is higher taxes or less spending (“revenue enhancements” or lower “investment” is Democrats’ preferred formulation), the president’s absence from the bargaining table, and the lack of civility following his attack on Republican plans to reform entitlement programs as an effort to leave autistic and Down syndrome babies on their own, are not conducive to easy compromise. That will have to wait until the last minute before Congress adjourns for the summer.
All of this comes against a background of an economy not growing as rapidly as most experts expected only a few months ago. The tepid 1.8 percent GDP growth in the fourth quarter of last year prompted the Economist Intelligence Unit to lower its 2011 U.S. GDP growth forecast from 2.9 percent to 2.7 percent, a testimonial to the precision forecasters ascribe to their guesses. The housing market weakened further. Construction of single-family homes declined by 5 percent in April, and is now over 30 percent below last year’s depressed levels. Both home sales and price continue to decline. The outlook remains grim. And not helped by the near-record level of borrowers in foreclosure. One glimmer of hope: the number of borrowers who have missed three or more mortgage payments – “seriously delinquent” in the jargon of the trade – has declined for five successive quarters.
Retail sales, except at the high end, are being hit by $4 gasoline, which is curtailing trips to the mall. Walmart reports that its customers buy little other than food, stock their carts with supplies on the last night of the month, and wait at the checkout counter until the clock strikes midnight, when government checks electronically hit their accounts. The depressing effect of gasoline prices is partially offset by a 19 percent jump in online sales in April over last year.
As is often the case, the picture is confusing because of contrary indicators. U.S. manufacturers are expecting their revenues to be up by 7.5 percent this year – that’s an increase from their December forecast of a 5.6 percent rise – and are expecting to increase hiring by almost 3 percent for the rest of the year. Service sector executives have more modest and decreasingly optimistic expectations: they now expect revenues to increase over last year by only 2.1 percent, lower than the 3.4 percent rise they predicted at the end of 2010.
All of this seems to obscure underlying trends that are more important than bits of monthly data, but less profound than a shift of the tectonic plates. In short, very important, but not the sort of thing that prompts learned tomes about the end of the world or a new beginning for the universe.
The first of these is a shift in the nature of political debate in America. After decades of figuring how much to spend, politicians are forced to discuss how much spending to cut – to confront the fact that Americans cannot afford all of the goodies to which they have grown accustomed, and expect to remain accustomed. It is not that the nation’s credit card is maxed out, as some choose to put it. It is that the political acceptability of borrowing to pay off the balance has declined, and scrooge has replaced the drunken sailors who have been in charge of the ship. The effect of this won’t be felt immediately, as some of the profligate sailors refuse to give up control. But their time has come and passed, and their vessel is about to be boarded not only by Tea Partiers, but by like-minded citizens. They will either have to give up spending or walk the plank back into private life.
Along with a winding down of uncontrolled government spending we are about to witness the beaching of QE2, to continue the now overly extended naval analogy if I may. Federal Reserve Board chairman Ben Bernanke will most likely not sacrifice his remaining credibility by listening to the crew members who want to set sail on a new QE3, never mind that such a launch might sink the dollar, which the World Bank is already predicting will lose its dominance as the euro (you know, the currency used by Greece, Portugal and Ireland) and renminbi (you know, the one subject to manipulation by the Chinese regime) achieve equal footing in a new “multi-currency” world. Bernanke is under pressure from presidential wannabe Congressman Ron Paul and a perfervid group of followers who are calling for the abolition of the Fed. They won’t prevail, but they will make congressmen calling for major reforms of the central bank seem less extreme by comparison.
The combination of less expansive fiscal policy, the end of QE2 and the overtime operation of the currency printing presses, and the eventual if gradual implementation of the Fed’s plan to tighten the money supply by selling off its swollen portfolio of mortgages, promises a new era in American economics. The government and the Fed will now be providing headwinds rather than tailwinds as the private sector struggles to accelerate its growth rate.
Then there is what appears to be a shift in the balance of commercial advantage between the U.S. and China. Not yet visible, but very real. China is running into what environmentalists would call the limits of growth – inadequate water and other resources to support a continuation of its growth. Its decreasingly cowed workers are driving labor costs up, reducing China’s cost advantage over America’s more productive work force. To control inflation the regime is being forced to let its currency creep up in value, further eroding its trading advantage.
This is not to say that daily, weekly, and monthly data releases and the negotiations over the debt ceiling are irrelevant to such things as consumer and business confidence. They matter. But not as much, in the longer run, as the less obvious policy and competitive shifts that will dictate the future health of the American economy.