The Treasury has forsaken the third tool of monetary policy—exchange rates—by letting Beijing enforce an undervalued yuan.
The trade deficit is a huge drag on the U.S. economy—creating a growing hole in aggregated demand. It is a primary reason, along with the Administration’s lack of comprehensive action to address the woes of the 8000 regional banks, the economy cannot accomplish growth of 4 or 5 percent, as it should when emerging from a recession.
The deficits on imported oil and with China account for nearly the entire imbalance. The president’s energy policies do not fully exploit, by some long and considerable measure, the potential to substitute domestic energy for foreign oil. The President’s failure to accomplish genuine exchange rate reform in China means that the U.S. will face a long period of mediocre growth that will only further increase the national debt, with too much held in China. Unemployment will stay alarming high.
The preponderance of risk in my forecasts and those of my colleagues—the consensus of which are fairly similar to mine—are to the downside.
China keeps saying it will do something about its currency but as long as the Obama Administration begs instead of acting, the trade deficit will worsen. Now China is aiming to force U.S. and Japanese auto companies to transfer their hybrid and electric car technology to China, just as China has seized solar and wind technology.
The chances of a double dip recession are at about 50 percent. If the EU patch for Greece and others holds and the U.S. trade deficit does not jump too much, then the economic expansion will continue in the United States, affected but not derailed by troubles in Europe. If troubles in Ireland or Spain escalate into financial bedlam, grab a helmet and head for the trenches. The same applies if President Obama’s ill-conceived drilling bans and excessive emphasis on low-yield alternative energy sources and conservation options, and its continued tolerance of Chinese mercantilism, result in a huge leap in the U.S. trade deficit.
It simply would not take much to knock the U.S. and European economies off track.
The only thing that is certain is that President Obama and his new economic team will reference the mess left by President Bush and assume no responsibility for making things worse by a combination of all too political economic and energy policies and ill-advised actions on energy and China.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.