The coming train wreck

Sol W. Sanders   [See Archive]

Resembling a huge 74-wheeler packed with unassembled goodies, the U.S. is stranded on the world economy grade-crossing with the Euro express gathering speed as it tears down the Trans-Atlantic financial tracks for a seemingly inevitable collision.

A police report written by patronizing Harvard economists some time in the dim future, will ask: why wasn’t something done?. Why was it the truck driver didn’t get off his “handle” [radio], stop talking about the “bears” [police], and move the goods on their normal route toward assembly and profit.

That’s as good a simile as I have for this moment in economic history when world leadership has gathered for two U.S. summits to wring their hands and attempt to manage a growing crisis.

G8 Nations heads of state (from left) Canada's Prime Minister Stephen Harper, French President Francois Hollande, U.S. President Barack Obama, Britain's Prime Minister David Cameron and Russia's Prime Minister Dmitri Medvedev gather at Camp David, Maryland on May 19. /Larry Downing/Reuters

The Europeans, arguing about who is at the train throttle, all seem clueless about stopping the train. President Barack Obama, the truck diver, is so preoccupied with “bird dog” [radar], to permit American business to free the economy by simply taking his foot off the brake.

Mr. Obama, trying to talk his European colleagues into loosening the purse strings [in this case, alas!, rolling the printing presses] will get some help from new French President Francois Hollande. It’s the first affirmative response Sec. of Treasury Geithner’s minions have had after accumulating thousands of frequent traveler miles jetting back and forth across the Atlantic and rolling up big tabs in those fabulous Brussels restaurants all the while evangelizing for “stimulus”.

President Hollande represents growing European populism, rebelling against austerity as primary remedy for earlier nanny governments profligacy. Chancellor Angela Merkel, with her back to a wall of German voters who do not want to ante up for more bailouts, will have to fudge her role as chief governess with her governing coalition falling apart.

Ironically, the dirty little secret no one wants to talk about is that whatever liquidity the Europeans have pumped into their system — e.g., the European Central Bank’s $1.15 billion prop for the Continent’s banks — has flown to the dollar on the eve of a threatened Greek breakout and the rebirth of a neo-drachma. That’s facilitated the Obama-Bernanke largely unsuccessful attempt to reflate the American economy with “stimulus” and “quantitative easing”, helping enable funding of the runaway U.S deficit at record-breaking low interest rates with [so far] low inflation.

Fears of collapse of the Euro boosted the dollar even at a time of growing U.S. domestic economic crisis — stubborn high unemployment and a slackening puny growth. The dollar still reigns supreme as international reserve currency, despite Beijing’s public carping. Realistically if hypocritically, China continues to gobble up low-paying [but relatively “safe”] U.S. Treasuries and hoards its obscenely huge currency reserves in dollars.

But with every indication that the whole of Euroland and Britain are going into extended recession, the distress in Europe, collectively the biggest economy in the world, will be felt in the U.S.

Mr. Obama’s vaunted promise to double U.S. exports in five years is a will o’ the wisp if the EU, America’s No. 2 customer after Canada, sinks into stagnation or worse.

Even the portentous goods trade figures pale in comparison with the $166 billion in U.S. services sold to the EU in 2010, along with the $168.1 billion in annual direct investment. Even a modest medium-term European economic disruption would spell disaster for U.S. trade and the American economy.

There isn’t all that much Mr. Obama — or presidential hopeful Mitt Romney — could do directly about Europe’s problems. Mr. Obama never tires of saying so as part of his “leading from behind” motif for American foreign policy.

But as has been the case since World War II, the now somnambulant if vast U.S. consumer economy has been the sparkplug for world growth and European prosperity. Note that Germany’s unique position as strongman in this dismal European economic arena is based on its aggressive export-led strategy. And it has booked the U.S. as No. 1 market for a whopping 6.5 percent of its $100 billion-plus exports, eclipsed probably only briefly last year as it attempted to shift emphasis to China but which now, too, begins to feel domestic and international shrinkage.

It doesn’t take much argument to see how Europe’s disaster is America’s as well as vice versa. The only question is just how hard will that locomotive hit the truck — and who will pick up the pieces.

Sol W. Sanders, (solsanders@cox.net), writes the ‘Follow the Money’ column for The Washington Times on the convergence of international politics, business and economics. He is also a contributing editor for WorldTribune.com and East-Asia-Intel.com.

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