Wednesday 21 May 2003

Pic of the day: The American middle class must prepare for a slow decline in luxury, but it is not likely that they will go back to 1960 level any time soon ... (Screenshot from The Sims)

World economy update

I suppose some of you are eagerly waiting for my next analysis and predictions for the economy in Norway, the USA and the world. Read the news before they happen! Well, actually I won't pretend powers of prediction. I simply notice trends and match them with known laws of economics.

What's up? Not the dollar, that's for sure. I am happy to see it sliding steadily. Happy not just because this makes American e-books cheaper for me; it is also a welcome sign of common sense. For too long, the administration has tried to talk up the dollar. I guess there is a certain prestige in having a strong currency. But a weak dollar will help America deal with its serious imbalance in trade: It will make American exports cheaper abroad, so making it more likely that people will buy American. It will also make imports more expensive. Not only will this make it easier for national companies to compete, and sometimes deter people from buying at all, but it will also put an upward pressure on inflation.

Normally inflation is a bad thing, as it distorts prices, making it hard to compare. Also it discourages saving and encourages borrowing and spending. But there is something that is worse than inflation: Deflation. When prices fall, people refrain from buying as they wait for prices to go down further. And those who have borrowed money, have to pay back more than they borrowed, before interests are even factored in. The net effect is to squeeze common people and freeze the economy. And unlike inflation, the central bank cannot just respond by changing interest rates, because you cannot go below zero interest. (Well, you can, but it looks really weird and would probably crash a lot of computer programs.)

A weakening dollar means that the USA is exporting its deflation and avoiding it back home. This is good for the American economy. Now admittedly this has a price for the rest of the world; the European Union and Japan in particular. But the USA has really painted itself into a corner with its reckless borrowing, and any help here is good news. We really don't want to see a spectacular crash in the American economy. Well, some people would probably be very happy to see that; but the last time it happened we got the Great Depression all over the world, followed by the rise of nazism and fascism.

What we seem to see now is a world that is slowly forced to rely less on exports to America, as that nation is no longer able to borrow and spend freely. The respect for the dollar is falling, and with it the respect for American economy as a whole. This is good. America needs to slide down to its proper place in the economic society of the world.

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The second thing to point out right now is SARS. It has already hit East Asia hard, and also made some impact in Canada. Australia is hit by proximity, although it has so far avoided the fate of Hong Kong, Singapore and Taiwan. These trade centers, and Beijing in China, have been largely closed down. Tourists and merchants both stay away, and the economy is visibly reeling. Airlines stop flying to certain destinations, or fly only every other day. Expos and trade masses are canceled, cultural exchange halted, festivals not celebrated.

SARS has not yet peaked in China, and may be out of control despite the power Chinese government has over its people, and despite the draconian measures they are willing to use. Taiwan is not much better off than mainland China, at least yet. If – no, when – SARS hits the Chinese countryside, a plague of biblical proportions is let loose.

Research continues unabated. One drug made to treat common cold (another corona virus) may be modified to deal with SARS. This will however take many months at best, possibly a couple years. Much depends on whether SARS can be contained for another year. The longer it can be contained, the better our hope of treating it. And even if not, we will get psychologically used to what lies ahead, not struck down by shock and awe.

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Notice that I don't find the Iraq war worth many words in this entry. It is already factored into the current economic situation. Trade relations between the USA and its traditional allies have worsened further. Oil prices are falling somewhat and poised to fall further as Iraq actually gets its export going. A counter-revolution is unlikely in the short run, so we can expect cheaper oil and preferential treatment for American companies for a while. But all this is already known. The underlying problem was not the uncertainty of war (and besides, with Bush and his friends The Crusaders in power, there will be new wars soon enough).

The fundamental problem for the USA, and in the longer run the world, is the imbalance in trade. The borrowing and spending spree. This is not exactly helped by the government combining a gigantic military budget with massive tax cuts. But the weakening dollar will help, because it will get steadily more expensive to party for other people's money. Americans, prepare to pay your bills. World, prepare to look for other places to sell your luxury goods... or make something useful instead. There are still billions who don't have basic necessities. If these can somehow be enabled to pay for them, there is no shortage of market.