Think of it as the perfect storm of fiscal woes:
A weak dollar boosts crude oil prices, raising the cost of gasoline at the pump; high gas prices fuel inflation; rising inflation dampens consumer spending; frugal consumers hurt the profitability and survival of retailers, already reeling from the impact of a sickly housing market; faltering retailers shutter their businesses, driving up vacancy rates in major property projects; stock markets plummet in response to the malaise of economic gloom.
And through it all, the central bank's panacea seems to be a relentless slashing of the federal funds rate, flooding global markets with American currency. The deluge of cash pares down the value of the dollar, and we're back to where we started: trapped in a whirlpool of what economists call stagflation – "a period of high price inflation combined with slow output growth, high unemployment, or recession."
To put it differently, we are digging ourselves into a hole. And the federal government's uninspired efforts to revive the economy aren't helping.
To be sure, emerging from our dismal circumstances will require more than the Jedi mind tricks that appear to influence our capital markets, or conventional tactics from our planners' financial tool kit. We need a radically different approach to economic reform; a strategy that transforms – fundamentally – the way we do business.
We must, in fact, begin the difficult process of reimagining America, starting with the way we see ourselves and our role in the world.
How can we be an economic force if our domestic economy teeters on the brink of chaos? How can we exert economic influence if our major financial institutions are propped up by foreign investors? How can we address our addiction to foreign oil when we continue to remain one of the world's most automobile-dependent cultures? How can we advocate the use of alternative energy sources, such as biofuels, when food and fuel prices are so intimately entwined?
Answering these questions – and consequently, tackling the problems they represent – may help create a sustainable and promising future for our country.
An America that invests in inter-city mass transit, for example, might be an America that isn't crucially dependent on gasoline. Lower demand for petroleum would have a mitigating effect on gas prices while placing additional discretionary income in the pockets of consumers. Consumers with more cash might buy more, supporting the retail sector, and also giving a lift to manufacturing. Rising corporate profits would increase revenues from corporate taxes.
Slowly but surely, we would begin to rebuild our fiscal core and restore our economic sovereignty.
It's hardly likely to be that easy. But the need for a broad-based and concerted reform effort must not be ignored. Simply pumping more cash into the economy won't solve anything.
We need a paradigmatic shift in American financial thought.
