John Rapley
A MIGHTY American illusion, born in the 1990s, is now coming to an end. Dreams may get shattered as it does so.
It has long been held that the great boom which started in the 1990s, and which tapered off but still continued into this century, benefited everyone equally. But the data always told a different story.
The United States did well in the '90s because productivity rose and inflation sank. And that happened because globalisation policies put U.S. labour on the defensive, forcing it to compete with China and India.
Wages remained flat. Accordingly, profits soared. The stock market rocketed into orbit.
But what allowed ordinary Americans to feel they were gaining from this wealth redistribution was that interest rates were at historic lows. Stock ownership was also expanding.
Able thus to spend on credit at low cost, and feeling flush with their paper wealth, Americans cut their saving. If their incomes were flat, what they spent rose. The good times were rolling.
END NOW IN SIGHT
Then, in 2000, the stock market crashed. But rather than let things end there, the Federal Reserve Board dropped interest rates lower yet. The credit binge continued. Meanwhile, absurdly low interest rates drove a housing boom, transferring the bubble from the stock to the housing market.
It could not last forever, and the end now appears in sight.
Interest rates, kept low by the continued confidence of foreign capital in the U.S. (by buying U.S. treasury paper, foreign investors and central banks kept the cost of credit low) have been rising for over a year. Mortgage rates are moving upwards.
Assuming this trend continues - and there is little reason to doubt it will - the housing boom will end. A stock market correction is not out of the question.
Rising interest rates will depress spending and increase saving. A recession could result.
Nevertheless, American prosperity is not about to end. Barring an unforeseen crisis, any recession would likely prove short-lived.
The problem, rather, is that the illusion will be exposed for what it is. Already, we are seeing signs of this. Rich Americans are doing better than ever. Luxury stores report brisk business. The top end of the housing market is bubbling.
It is at the bottom that the pinch is being felt. Real wages are declining. House prices for ordinary Americans are flattening, even declining. The wealth effect is disappearing. Foreclosures are up.
ECONOMIC PROBLEM
In short, America faces less an economic problem than a political one. For as long as they could feel they were benefiting from their hard work - and they were working harder, despite flat wages - American workers bought the dream.
Now, it will start to look increasingly like their sacrifices were made for the benefits of a wealthy few.
Not surprisingly, populism is returning to U.S politics. Immigrants are being. blamed for stealing American jobs. So, too, are Chinese labourers, prompting calls in Congress for greater protectionism.
Such a defensive nationalism could turn a recession into something more severe. That is what worries financial markets right now.
It does appear that foreigners are growing jittery over this. Though nothing like a stampede has begun, the dollar has been sinking. And a declining dollar is likely to put yet further upward pressure on interest rates, creating a vicious spiral.
Contrary to neoliberal dogma, free markets may create wealth. There is little evidence they distribute it fairly.
That has always been a political task. And the betrayal of ordinary Americans by their leaders, who have been steadily withdrawing many of the measures used to distribute America's gains widely since the Depression years, will now become evident.
John Rapley is a senior lecturer in the Department of Government, UWI, Mona.
