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Financial Meltdown: What Happens Next For Manufacturers
By Richard McCormack richard@manufacturingnews.com
What does the U.S. financial sector's collapse mean for American manufacturers? It won't be good, at least in the short term, according to some economists who have warned for years about the economic threat posed by global trade imbalances and the plight of U.S. manufacturing.
"Unless there is a sharp policy turn that allows U.S. manufacturers to supply our own market, most of them will be out of business," says Charles McMillion, president and chief economist at MBG Information Services. "Because both consumer demand and business investment is tanking and will not reappear for a long time, the pain hasn't even started."
The rapid decline in both the stock and real estate markets means Americans' indebtedness has just increased by a giant leap. "Equity can collapse, but debt stays there," says McMillion. Equity in homes dropped to an all-time low in the second quarter of 2008 to 45 percent, but could fall to under 40 percent in the third quarter. "Think about it: the consumer is more indebted now than he was a month ago because his assets have been slashed by 20 or 20 percent and his debts have stayed the same or increased." Increasing personal indebtedness, which contributed to the financial meltdown, along with the rapid increase in federal debt, which jumped by an amazing $1 trillion in one year, will put the country in an even more precarious financial position.
Dean Baker, president of the Center for Economic Policy Research, says get ready for a serious downturn, but don't lose hope. "First and foremost, people have to be cautious and cover their bases, but the economy is not going to collapse," he says. Even in a severe recession, people still have to buy things. "We will be out of the recession at some point, and you want to be positioned to take advantage of that," he said.
The situation might get rough, but it was inevitable that Americans would be forced to rein in their profligate spending habits and start saving. "You can't have people going through their whole lives not saving because that means when they hit retirement, they're not going to have anything to live on," Baker says.
Clyde Prestowitz, president of the Economic Strategy Institute, believes that U.S. manufacturers will suffer through a steep downturn, but if they stay alive by growing exports, they will be in a good position when the economy settles down. "The only way we're going to be able to grow is by exports because the borrow-and-consume game is over," he says. If the dollar weakens against managed Asian currencies, it will open up new markets for manufacturers that commit themselves to product improvements and innovation. With costs in China rising, energy prices staying high and the dollar weakening, "there are a lot of products we make in this country that are competitive, so in the medium to long term, I'm optimistic."
Kevin Kearns, president of the United States Business and Industry Council says the U.S. manufacturing sector has been in decline for 30 years, and that the current crisis requires that the U.S. government take immediate action on prosecuting unfair trade practices and currency manipulation. "If you look at the collapse of the Bretton Woods system in 1971 and 1972, you had Richard Nixon and John Connelly as his Treasury Secretary putting on an emergency import surcharge because our trade deficit was 0.5 percent of GDP. They considered that to be unacceptable. Now we're at 5 or 6 percent of GDP and people couldn't care less." Kearns is not looking for increases in tariffs, but he does believe that when the credit crunch eases, capital needs to flow to companies that make products and provide high-end services, not into financial derivatives or phony investment vehicles.
McMillion recommends the newly elected president act quickly and decisively on a creating a government program that is on the scale of the New Deal. If the new president doesn't have a program in place similar to the CCC or WPA on the day he takes office "he may not get a second chance," says McMillion. There also needs to be a well-thought out program that places quotas on imports that encourages American manufacturers to start producing for the American market. "It has to be done in a cooperative way because we don't want to beggar and bomb thy neighbor," say McMillion. "Everyone in the world has to understand that the United States has produced $5-trillion less than what we've needed over the last eight years and we're still producing $2 billion a day less than what we need and we simply can't do that. We have created a downward spiral that has no good end without radical steps. We have to produce for our own markets, and we have to encourage others to produce for their own markets."
The financial collapse marks the end of the economic and geopolitical era that started with the end of World War II. It is a world that is "turning upside down," adds Prestowitz. "The Asians and the rest of the world are lending to us and investing in us. They're going to have to become the consumers and we're going to have to do the producing and the whole exchange rate structure is going to have to be completely redone," he says.
Without enough wealth, the United States is going to face some tough decisions involving reductions in Social Security and military spending. "I don't see how we maintain 750 military bases around the world when we owe money and are begging everyone in the world for money," says Prestowitz.
President Bush would protect what little is left of his legacy if he were to work with the new president in calling a global conference of the heads of the major central banks in the major economies and come up with a global strategy of adjusting exchange rates. "There has to be an adjustment of those countries that have been managing their currencies, including for the Saudis," says Prestowitz. "There has to be a whole new currency regime."
Baker agrees. The high-dollar policy has hurt the United States economy and has been supported by Republicans and Democrats as if it's been a point of pride. "It's a machismo thing -- like if you want a weak dollar, you want to be fat, lazy and out of shape, but it's not going to help us to have a strong currency," says Baker. "They are still talking about having a high dollar like it's a good thing."
The United States does not have to be "tough" on countries that are manipulating their currencies," says Baker. "There is no point in having an argument about it: we can set the value of the dollar against the Chinese currency just like they set the value of their yuan," he says. "What's going to happen to us? The peg is seven yuan to the dollar, so we say it should be five. Pick a date in the future, say June 1, and say we will honor an exchange rate of five yuan to the dollar: you come to the Treasury with five yuan, you get a dollar That's the deal. If China gets upset, you negotiate it and work something out."
It won't be easy politically because it will be like putting a tax on imports and there is nobody in politics who wants to raise taxes. "We're going to pay more for all the stuff we buy at Wal-Mart, but we don't have a choice," says Baker.
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