How Long Can the Good Times Last?

by Patrick J. Buchanan – January 26, 1999

“Carpe diem,” wrote the poet Horace; seize the pleasure of the passing day. Eat, drink, and be merry, for tomorrow we die.

Gazing on the shambles of the Global Economy, the questions come: Is America sacrificing her future to perpetuate a fraud? Are we squandering our patrimony to put off the inevitable?

America may be relishing the longest peacetime expansion in history, but the gathering global disaster is now visible to all.

Japan, two-thirds of the Asian economy, is awash in debt and headed, say economists, for a “hard landing.” From China come reports of urban riots and investment bank defaults.

Brazil, two-thirds of South America’s economy, has seen its currency fall 30 percent in 10 days, putting pressure on Argentina to devalue its own currency or raise tariffs to protect itself from a flood of cheap Brazilian imports. South America is plunging into recession. Mexico seems destined for yet another election-year crisis.

Russia and Indonesia are on life support. China and Hong Kong are under pressure from Brazil to devalue or lose their U.S. markets. Free Asia is in recession, and there is disquieting news from the European Union of growth far less robust than predicted.

What maintains our prosperity in this world in crisis?

First, the bailouts. Since the summer of 1997, the International Monetary Fund and the United States have pumped $180 billion into Thailand, Indonesia, Korea, Russia and Brazil. Without these bailouts, all five, not just Russia, would have defaulted, and the Dow would have crashed.

Second, President Clinton’s decision to throw open U.S. markets and allow the destruction of our industrial base, if necessary, to enable debtor nations to export to the United States to earn the dollars to repay the IMF. The U.S. merchandise trade deficit in 1998 will hit $250 billion.

In 1998, China ran a trade surplus with the United States of $60 billion; Japan, $75 billion. But rather than use these dollars to buy American goods, nations are using them to buy up the U.S.A. — corporations, stocks, bonds, T-bills. Economist Steve Hanke writes that America could run a current account deficit — the net outflow in dividends, interest, plus our trade deficit — of $300 billion in 1999.

The third pillar propping up this rickety structure is the Fed. After a mighty hedge fund appeared on the brink of collapse, Alan Greenspan cut interest rates three times. Liquidity in the U.S. economy increased in the fourth quarter, by one estimate, at an annual 20 percent rate. That money poured into the stock market to rescue a diving Dow.

All these machinations could not succeed, however, were it not for the individual at whom they are aimed: the indispensable American consumer.

The higher-quality imports pouring in, at devaluation prices, have kept consumers coming back to the mall, and the soaring Dow has convinced those consumers the money will be there to pay off their ballooning debts when they cash in their capital gains.

Americans believe that they are richer than they have ever been, that they are getting richer by the minute and that the good times are here to stay. They are being encouraged by a host of economists, politicians and journalists whose careers depend on the great spending spree continuing until the world gets out of intensive care. Such is consumer confidence that, in September and October, for the first time ever recorded, Americans drew down savings — to spend.

Let me concede it: Mine is a sense of deep foreboding.

Our world is sunk in debt. The vast foreign debts of Africa, Russia, Indonesia, Mexico, Brazil, etc., will never be repaid. Dollar-denominated debts owed by companies in these countries will never be repaid. Their income and savings have been decimated by these devaluations. To prevent formal defaults, dollars will have to pour out of America in endless streams of foreign aid, IMF loans, private bank loans and U.S. trade deficits all the way to the horizon. Eventually, the dollar will begin to lose its value and sink. We have postponed the day of reckoning; we shall not evade it.

A falling stock market or falling dollar could trigger a crisis. A collapsing bubble market would bring a clamor for tax cuts and easy money, but a falling dollar would argue for raising interest rates and tightening money. Foreign abandonment of the dollar could lead to disinvestment in the United States, sending the Dow and Nasdaq tumbling and striping away the security blanket of the American consumer.

Even as those who predicted the Asian crisis would spread were right, those who predicted the United States could avoid the storm have also been right — so far. I sense our luck is running out.