Spreading the woe
Everything is relative, even crises. So after a year of being the epicenter of both the housing and financial crises and feeling their impact on its economy more than any other country, America is now facing the prospect of seeing its position improve. Ideally, that would happen by ‘things’ – various measures of economic activity – actually getting better. Unfortunately, that is not likely to be the case, at least for the next six-twelve months. The American economy is still locked into an IKGW (it keeps getting worse) syndrome, and it is the various life support systems put into operation by the Fed, the Treasury and Congress that are responsible for the flickering signs of improvement showing up on economic radar screens.
In this unhappy state of affairs, the genuine good news relating to the American economy is not that this or that looks to be a bit better or a bit worse, but that the process as a whole is moving forward and – critically – that households, corporations and even the government are getting to grips with the very serious problems they face. This is a painfully slow process and, at least as far as the governmental level is concerned, cannot generate the kind of major reforms needed until the current Administration is removed in January (when the new guy brings in new people and, hopefully, new ideas). But the point is that the American economic machine has got past the denial stage. It realises that something – maybe many things – are seriously wrong, and it is now focusing on how to fix it or them. That is what the Americans are good at and that’s why there are strong grounds for hope that they will clean up the mess and that they will do so relatively quickly — which realistically means a 3-5 year time-span, given the scale of the disaster in the financial sector. (NB the IMF, in a report this week, said as much, thereby helping disperse the illusion that there are any quick-fix solutions available).
The overall picture regarding the US, therefore, is that the crisis is still intensifying, but it is now far advanced: housing prices have been falling for over two years (!) and the overt financial crisis is past its first birthday. Every crisis winds down eventually, but the fact that the whole country has now “gotten real” about it means that the process of identifying and implementing solutions – not band-aids, but real surgery — is now underway and, to the degree that this process will be pursued intelligently and systematically, the impact and aftermath of the crisis can be reduced in terms of both time and intensity.
Compare all that with other developed countries. Most of these are still in the pretence-and-denial stage, making believe that the financial crisis is mainly an American problem that has had and will continue to have limited impact on their economies. Key players in maintaining this façade are the central banks — led by the European Central Bank but also including those of Britain, Scandinavian countries and Australia and New Zealand – whose focus remains firmly on inflation rather than on the gathering storm in their economies. Yet how bad things are set to become can be seen from the survey data showing that European commercial banks have tightened lending standards at least as much – if not more – than their American peers. On the other side of the world, National Australia Bank ‘surprised’ the markets this week by announcing hefty losses and write-downs. With analysts talking (in a Bloomberg feature article this week) of a “once-in-a-century” housing slump Down Under, you have to wonder why people are surprised – until you remember that most Aussies, Brits, Germans and the rest who work outside of the financial sector are still living in la-la-land and actually think that their happy times will continue more or less undisturbed.
Unfortunately for them, the balance of woe is changing. The Americans will see further deterioration, but at the very least, the pace of decline in the US will slow. On the other hand, everywhere else, rapid deterioration is the primary prospect for at least the next year. This development will not merely make the Americans feel somewhat better – as in ‘everything is relative’. It is also likely to make their currency look and act better than all the others.