Tuesday, 12 January 2010

US economy: Why it is not working–2

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/home/opinion/20772-us-economy-why-it-is-not-working2.html

IT is amazing that as close as the Philippines is tied to the USA through history and affinity, there is not much effort by the local media to inform the public about the situation there.

Considering that the US is the largest investor in the Philippines, the country’s largest trading partner and that the largest number of overseas Filipinos live there, we should know and follow what is happening there.

The best that the local media can do is read the news reports without any analysis on what it all means for this country. It is as if the Philippines is consciously ignoring the US economy, and that is dangerous and foolish.

Last month 500,000 Americans dropped out of the labor force. These were people who were working and for a variety of reasons are no longer seeking jobs. Nearly 7.2 million jobs have disappeared since the recession started in December 2007. More people are employed by the government than in manufacturing businesses.

Last month personal consumer credit dropped by nearly $18 billion. This was unprecedented. Every month, home foreclosures hit new highs. Apartment vacancy rates are at a 30-year high. US office-vacancy rate hit a 15-year high at 17 percent. One of the largest commercial property developers, Tishman Real Estate, just defaulted on a $5-billion loan, the second-highest in history.

It is impossible to consider that these events will not have an impact on the Philippines. That is not to say the old nonsense about the US sneezing and the Philippines catching a cold. But there will be effects and, more important, the Philippines should be making policies to take advantage of the critical wounded elephant of the US economy.

Local politicians and policymakers too often show the creative thinking of a rock. The only way Philippine economic policy can be formed is by considering the US reality. The alternative is basing the policy on the idea that the Obama administration’s policies are working. They are not and will not. Not even the Obama people think it is working.

A trillion dollars of extra money has been placed in the US economy with no results. As I wrote last week, that money has, for all intents and purposes, disappeared.

Most of the funds were coursed through the banks which went to automobile bailouts and infrastructure projects that might as well have been thrown in a deep hole. All the funds for the auto sector have generated nothing in terms of economic growth. The money for infrastructure provided nothing in terms of long-term and sustainable growth.

The money that went to the banks was supposed to be loaned to businesses and consumers to make the economy grow. But because the major banks are insolvent, the banks know that they cannot take any risk with their lending or they will go out of business. No lending; no economic stimulus.

The trillion dollars did not come from US government reserves. It came from increased borrowing and budget deficits. Unfortunately, the rest of the world is not interested in loaning the US money to bail out its economy.

In 2007 foreigners purchased 100 percent of all new US government debt. In 2009 that percentage dropped to 30 percent. While the US government is desperate for creditors, foreigners are not interested. It is clearly an example of being between a rock and a hard place.

The banks have billions in cash that they will not loan. The government is frantic to borrow money. What the banks have done, therefore, was to take money from the US government and then loan it back to the government. I know that makes absolutely no sense, but that is exactly what has happened.

Further, the banks are depositing a large portion of their excess funds with the US treasury, getting just enough return on investment to be able to show a profit and pay huge executive bonuses, and doing it without the risk of lending to people and businesses. Meanwhile, the economy is sinking faster than before.

Instead of wasting time and resources on the silly global-warming- conference nonsense, we ought to be sending delegations to speak to US-based Filipinos and others, about the advantages and safe havens in the Philippines. We should be once again taking advantage of the global conditions instead of waiting for a return—which will never come—to business as usual.

There is no indication that the US economy is recovering through job creation, economic activity, growth or investment. The US has spent over $1 trillion of money that they do not have, and those funds have accomplished nothing except to push the government closer to a financial meltdown which will reflect in a collapsing dollar, higher nominal commodity prices and high domestic inflation. The government has taken money from one hand and moved it to the other with no benefit.

Meanwhile, the Philippines waits and watches and does little of value.

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