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5 Oct, 2009 12:52

US economy: “living on borrowed time”

US economist and author Max Wolf says the American economy is a ticking time bomb, and there is no telling when it will go off. RT caught up with him in New York to talk about the subject in more detail.

While some are cheering that the American economy is in recovery, others believe it is too premature to say.

“We are all waiting to see the private sector – that is 80% of the US economy – pick up and start growing again. It has not done that yet,” Max Wolf explains.

He also indicates that there is a common belief in America’s powerful circles and media that if the top 20% of the population is doing better, then the whole of America is doing better.

“The problem with that story is that we don’t know if it’ll last, and it’s left 80% of the public behind, and this is a big problem,” he said.

“And so, we don’t know how long the bottom 80% will be okay with this, we don’t know how long the government can keep spending, and we don’t know how long we have to wait until our private sector basically kicks back into high gear, starts hiring, starts growing and starts being more profitable,” the economist clarified.

Where the cash comes from

Speaking of the US government’s injections into the economy and their effectiveness, Max Wolf noted that this money comes from several sources, some of which represent long-term threats to the economy:

“The money comes from future tax receipts – we borrow it, present tax receipts – then the government uses its income to do this and from all clients of special programs, some of which involve activities that are not too dissimilar to printing money.”

“There’s been a lot of assistance coming from all different kinds of angles, mostly borrowing against the future. And thus far, that has kept us from going down further, and it’s leveled things off, but it hasn’t really created actual growth,” he added.

Another economic crash around the corner?

As a result of the cumulative mistakes in the government policies, another serious letdown in the US and global economy will definitely happen soon, Max Wolf says:

“The question is when. We’ve done a lot of things that are dangerous, so we could have it quite soon.”

“We have done absolutely nothing to basically change the root causes of those problems in the economy, which means we’re living on borrowed time,” he added.

Root causes

So what are the roots of the problem? The economist names the wage of an average American, which has stayed flat for too long:

“For 35 years the average American’s wages has gone nowhere. They’ve been flat… And the problem we have now is that they cannot borrow that much again. And if Americans do not borrow, and their wages don’t go up… this becomes a problem, because 70% of the US GDP is private consumption.”

Moreover, 15% of the economic activity in the world, Wolf says, is American private consumption:

“If that turns down, which it has, and if it stays down, which it likely will, this means we basically push down economic activity for all 6.2 billion people on Earth.”

“Exaggerate and simplify”

Despite all the obvious problems of the credit crunch and alarming prognoses, American politicians have announced a recovery. Max Wolf is sure they will continue doing this unless it becomes “unbelievably obvious” that there is not any.

On top of that, he says there is hardly any difference between the policy of the Obama administration and that of his predecessor, George W. Bush:

“You have to try really hard to see the difference… and in many areas – a shocking lack of difference.”

“What we’ve been celebrating for the last four months is that life is getting worse for the average American more slowly than it was getting for the average American last year. The bottom 80% of people in this country are continuing to struggle,” he added.

The coverage of the crisis in the United States represents another problem. The country’s media seem to be trying to distract common Americans from reality by following the two-part rule, the economist says: “exaggerate and simplify.”

Dollar diplomacy

With all that, should we still trust the US dollar as a reserve currency?

“The long-term trajectory of the US government is bad for the US macro-economy and is bad for the dollar,” Wolf says.

Apart from the path the US economy has taken, the problem is also in the nature of modern fiat currencies, or paper currencies, like the US dollar. They are backed by nothing but the will of the world to hold them, and have no intrinsic value.

Other countries

However, despite the current crisis having acquired a global status, some countries are coping with it better than the others.

“The Chinese are [doing] fairly well. Western Europe has done better than some had forecast. And to some extent the large commodity and energy exporters – Russia, Brazil, Middle Eastern countries – have done better, because oil prices have stayed up and commodity prices have stayed up,” Wolf says.

However, Max Wolf says it is still “very early in the game” to make conclusions.

Read also: Gazprom says hello to America