Barack Obama's fiscal stimulus could dig a hole for the US and lead its economy towards hyperinflation.
Barack Obama's election has sent the hopes of so many soaring. No modern leader has inspired people from so many countries and all walks of life - even before he takes up the post of US president.
After eight "don't worry, be happy" Bill Clinton years and eight "we kill them" George W. Bush years, the world is elated to see someone with honesty and integrity in the White House. Unfortunately, hope usually begets disappointment. Mr Obama has put together a team of big names, like John F. Kennedy's best and brightest, as his advisers.
Their bright idea is to stimulate, stimulate, stimulate. Mr Obama is warning that there will be years of trillion-dollar budget deficits ahead. Does he want to get re-elected in four years by pumping up the economy with government largesse? That would be a catastrophe. The excessive monetary stimulus after the technology bubble burst in 2000, which is behind much of today's pain, was probably designed to get Mr Bush re-elected in 2004. If Mr Obama tries the same with a fiscal stimulus, instead of reviving America, he would lead the US towards hyperinflation.
The US economy is experiencing the hangover of the two-decade-long Alan Greenspan party. Most of the hardship is unavoidable and deserved. How could one avoid pain after a bubble? Economic stimulus can be justified to minimise excess economic adjustment. But such overshooting cannot be totally avoided. For example, when workers are laid off in response to declining profits, unnecessary losses occur to the overall economy while workers are idle. A rising unemployment rate, however, is a driving force for economic adjustment away from bubble activities. If government stimulus could totally replace lost private-sector demand, adjustment wouldn't be necessary. The Obama team is putting out a US$800-billion-plus stimulus package. The magnitude seems intended to totally offset the negative wealth effect from declining stock and property prices, and keep the US economy operating at capacity. This would be wrong. It would slow, and may prevent, structural adjustment. If the economy is hooked to the fiscal stimulus to sustain inefficient economic activities, the US would become Japan - with inflation. The negative wealth effect on the US economy could be US$800 billion. The knock-on effect could add considerably to it. It would obviously take a big bite out of the US$14 trillion American economy. But, much of the contraction is unavoidable and necessary. It would grow back, but with different economic activities. Overstimulus would only prevent such economic activities from emerging and hook the economy to government money. Instead, the right stimulus package would be half the size, and most of the money should go to help unemployed workers. Overspending got the US into trouble; spending more won't solve the problem. The US has to either cut spending or increase production. On the surface, what got the US into trouble was borrowing against overvalued properties to finance consumption. The driving force is actually skyrocketing health care costs, which means there is less money available for other expenditure. During his campaign, Mr Obama promised government help to increase health insurance coverage. Unfortunately, cost, not coverage, is the key issue. People don't have health care insurance because they can't afford it. To rein in the cost, some form of service rationing, which is still a taboo subject in the US, is unavoidable. If the US doesn't want to cut expenditure to balance its books, it can increase production. America has lost competitiveness in most manufacturing industries. Oil, pharmaceuticals, IT and aerospace are the few where it still leads. Protectionism to revive manufacturing will not work, I believe. Expanding primary industries has potential. The US is underpopulated and underexplored. If it replaces imported oil with domestic energy resources, it can solve half its problems. Improving efficiency was Mr Obama's great idea during his campaign. There are endless possibilities. Improving energy efficiency alone could wipe out most of the US trade deficit. But improving efficiency is a long and arduous process. It is unlikely someone will come up with a magic idea soon to solve America's economic woes. America's course of action seems to be for the government to borrow and spend. This debt approach carries risks for all creditor nations. All other entities in the US have lost credibility with creditors; households, businesses and banks have used up their goodwill. The US government still has it, and intends to use it to support the domestic economy. But, unless the US economy restructures to balance its books, how would the government pay back its debt? Mr Obama can sell the message of sacrifice, instead of government largesse, as the way forward for the country. If his message remains about government help, we can envision a disastrous future for the US economy and its creditors. In the next five years, the US government could double its debt, to more than US$20 trillion, from recapitalising its financial system and financing its budget deficits. At that point, the interest payments on the debt could surpass half its fiscal revenue. The world would suddenly stop buying treasuries.
The Federal Reserve would step in to buy, causing the US dollar to plummet. Hyperinflation follows. Sound familiar? It was Russia in 1998. Many analysts in the US view foreign debt casually: if needed, America could just print more dollars, but the subsequent financial chaos could ruin the US for years to come. There is no free lunch, not even in terms of robbing foreigners. As Mr Obama glides into the White House, he must rely on common sense, not clever free-lunch ideas, to manage
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