Apr 19, 2009 1:58 pm


Well, in the NYT article carrying the unpromising title, Capitalism After the Fall, I discovered that Obama shares my conclusion that the US cannot continue to recklessly borrow in order to continue to consume a large portion of what the world produces. America may be a consumer nation but the recent geometric increase in global economic production has far outstripped its ability to consume especially in an era of high energy costs. Indeed, that conclusion is supposed to undergird Obama's"new foundation" program. If so, I could not be more delighted. Obama said:

We must lay a new foundation for growth and prosperity — a foundation that will move us from an era of borrow and spend to one where we save and invest, where we consume less at home and send more exports abroad.

Richard Stevenson interprets his meaning thus:

Embedded in that approach is a far-reaching implication: that the rest of the world should no longer count on the United States to snap up imported goods or run up large trade deficits.

So far so good. We can agree on that talk and cheer his efforts to increase personal savings. Indeed, though rarely discussed, the increase of the American personal saving from 0.8% to 4.2% in the past 6 month is the brightest of all the economic green shoots out there.

The problem, Stevenson points out and I agree, is that his strategy to bring about the needed change is questionable. Governments, as the Japanese have demonstrated, are lousy at picking winners and that is precisely what Obama is trying to do:

It is by no means clear that Mr. Obama has the policy tools needed to bring about that kind of change . . . .

To drive economic growth in the place of debt-fueled consumption, Mr. Obama is banking on the emergence of alternative fuels, pollution-limiting technology, health care technology and other new industries linked to broader policy goals.

Indeed, the administration's failure to become a strong advocate of domestic drilling refinery building and new nuclear power plants demonstrates it's lack of seriousness when it comes to tackling energy policy. For when all said and done, it was high energy prices which caused the 70s stagflation and was the immediate cause of the current economic collapse. All we see, is stimulous money trickling out for unpromising solar and wind projects while venture capital not only hit an eleven year low but it also stalled for"green" technologies:

Even clean technology, one of the few areas where VCs were bullish, stalled. In the first quarter, renewable energy, the sector covering most venture companies working on so-called green technology, registered $117 million invested into nine deals, a 73% decline for the $427 million invested in 16 deals in the first period of 2008. The sector had been strong through the fourth quarter when 26 renewable energy companies raised $790 million.

Certainly, the efforts to revive the housing market by easy credit is not only as the Economist argues amounts to Building castles of sand, but it is certainly not the way to change the old American debt based consumer culture.

Most troubling, as Stevenson points out, are the consequences of the Obama administration's failure to designate China as the currency manipulator that it surely is:

And some of the administration’s own policies suggest that there are limits to Mr. Obama’s willingness to bolster investment in new production capacity at home. His unwillingness so far to confront China aggressively over its currency and trade practices, for examples, leaves many American manufacturers at a disadvantage.

Indeed, they do. Just note the larger than expected -

decline of American manufacturing:

US industrial production fell in March for the fifth consecutive month, by 1.5 percent, to the lowest level in a decade amid a prolonged recession, government data showed Wednesday.

The seasonally adjusted monthly decline matched the 1.5 percent drop in February, revised up from a prior estimate of 1.4 percent, the Federal Reserve said.

The March slide was much steeper than the 0.9 percent decline expected by most analysts.

Output in March dropped to its lowest level since December 1998 and was nearly 13 percent below its year-earlier level.

On a 12-month basis, output was down a hefty 12.8 percent.

For the first quarter of the year, industrial output dropped at a punishing annual rate of 20.0 percent, the largest quarterly decline"of the current contraction," the Fed said.

To sum up, if the Obama administration is serious about building a New Foundation for the American economy in order to renew it's ability to enlarge the economic pie and not merely using the slogan as an excuse to redistribute an ever decreasing one, it better start walking the walk rather than just talking the talk. For only then will private equity investors become as optimistic about the future of America as they currently are about the future of China.

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