A Program for the United States
The situation in the U.S. is different from that of the euro zone and, in a way, would be less complicated to resolve. The U.S. has all the levers with which to address the crisis and would not need to coordinate 17 countries with divergent interest. But some facts would need to be acknowledged before decisive action could be taken:
- In spite of massive intervention by the Fed and the US government, growth remains anemic
- The deleveraging of private households will have to go on for many years
- The real estate market has not yet stabilized. About 11 million US households suffer from negative equity (their mortgage outstanding is higher than the value of their home). And the supply of homes is still in excess by 1.2 to 3.5 million (depending on the data used to estimate this number).
- The US government deficit is not sustainable and will need to be brought to acceptable levels, which will slow growth and amplify the problems of the private sector.
- In spite of a significant weakening in the dollar, the U.S. is still running a trade deficit that cannot be blamed on China alone. It reflects a lack of competitiveness in some key markets and the low proportion of manufacturing in the U.S. economy compared with countries such as Germany and Japan.
- There is a striking similarity between the US and Japan in the development of stock and real estate prices (See chart below). A correlation does not mean causality, but it is a sobering picture should Ben Bernanke and his team fail to reflate the economy.
- The interventions of the Fed, notably the programs designed to buy financial assets, have created a monetary overhang that could be the basis for sizable inflation in the future.
Addressing the debt overhang.
The US would also need to reduce the debt overhang of the government, of consumer loans besides mortgages, and of non-financial corporate sector in the same way as in Europe. As exhibit 2 shows, the total debt overhang in the US equals $11.5 trillion or 77% of GDP. In the somewhat unlikely event of the US following the same path that Europe might pursue, a one-time wealth tax of 25% of financial assets would be required. As in Europe, this would also require the following initiatives.
- Cleaning up the banking sector by calculating the losses and recapitalizing as needed – even if it means wiping out existing shareholders.
- Additional taxes on real estate, including an increased capital-gains tax to offset the support for the real-estate market.
- Creating an incentive for corporations to invest in R&D and new machinery by taxing profits not reinvested.
- A commitment by the government to restrict its debt level and to prepare for the increasing costs of an aging population by either limiting benefits or raising the retirement age.
Addressing the fundamental issues of the US Economy.
We have argued for a long time that the US economy needs to address some fundamental issues in order to become globally competitive again. In putting an end to muddling through, the government might also embark on a major restructuring of the economy:
- Reindustrialize and grow the share of the manufacturing sector from the current low of 12% of GDP to 20% of GDP . This might then allow a rebalancing of trade flows.
- Revisit income distribution. Most U.S. families cannot make up for their income shortfall with increased credit – and 41 million Americans are officially considered to be below the poverty line.
- Take action to reduce dependency on imported oil by investing in new technologies and modernizing existing infrastructure.
- As in Europe, an administration that truly bit the bullet would take a long-term view and invest more in education.
All this is still speculation. But history shows that the US economy, like no other, is capable of adjusting and implementing quite radical changes. And in our view, some of the actions described above might be pursued by the US government if things do not improve soon.
BCG_Back_to_Mesopotamia_Sep_11[2]
http://www.zerohedge.com/news/muddle-through-has-failed-bcg-says-there-may-be-only-painful-ways-out-crisis
