Consumer Trade Wars
Consumer spending accounts for two thirds of U.S. economic activity, and fully half of that spending historically occurs in the last quarter of the year. Holiday spending by Americans in 1998 was forecasted to increase 6-7 percent over the 1997 holidays, with retail sales expected in the $50 billion range, mostly for bargain-basement-priced imported goods.
The fate of the global economy hinges on the American consumer because of the extreme excess and overcapacity afflicting the world today. In fact, the entire world’s economic future depends upon a massive increase in the U.S. trade deficit to help economically ailing nations sell their way out of financial devastation which is complicated by massive unsold inventories.
There are essentially two solutions to the problem of excessive inventories worldwide: either large-scale industrial downsizing and extensive layoffs, or increased consumer spending and a mountain of consumer debt. The latter plan of action has been chosen by world leaders, manipulated by the “big money” behind them, as they attempt to bring to life mankind’s latest attempt at one-world government: the global economy.
Simply stated, to stave off massive unemployment at home and abroad and to keep the financial god of the global economy from collapsing, Americans must continue to buy more foreign products than the U.S. sells to other nations. As will be seen in 1999, however, the present lofty level of American consumer spending is unsustainable, and a new way to attain a one-world economy will be sought.
Sacrificing the U.S. Consumer
Within a recent seven-week time-period in the last quarter of 1998, the U.S. Federal Reserve Bank handed Americans three successive “gifts” in the form of interest rate cuts totaling 0.75 percent. Lower rates stimulate consumer demand and enticingly reduce borrowing costs. The goal of American central bankers was to spur domestic consumer spending.
The ugly truth lurking behind those rate cuts is that the Fed knows the U.S. economy will slow dramatically in 1999 and unemployment will rise. The recent holiday season was the only opportunity available to greatly reduce bloated global inventories and to help offset declining export sales of U.S. products. The American consumer was sacrificed in this soon-to-be-failed attempt to save the world’s faltering economies.
U.S. consumer credit (installment debt, like credit cards) is presently at a record high level. As a result, the national rate of private savings has fallen to the lowest level ever seen in America.
Over the last four years, U.S. consumer spending has risen almost twice as quickly as has income. This last holiday season, American citizens were led like lambs to the slaughter into negative savings territory. In two consecutive months, for the first time in the 60 years since the Great Depression of the 1930s, Americans spent more than they earned.
Through interest rate cuts and tantalizingly inexpensive imports, U.S. consumers have been deliberately enticed deeply into debt and savings withdrawals, as they naïvely stare into the face of impending upsurges in unemployment and bankruptcies in 1999. This baited trap was sprung on the American consumer to generate enough Christmas retail sales to at least temporarily alleviate the nation’s and the world’s economic ills.
Clearly, spending cannot continue to exceed income for very long unless you are a government which can print money. Because of that simple, but realistic, law for all individuals, the mirage of a continuing U.S. economic boom may very soon turn into a bust. The U.S. economy is now vulnerable to a sharp slowdown and perhaps even a recession or worse. The questions now are only when and how.
False Market Signals
We should guard against being deceived by the recent rise in stock markets, which was also caused by the triad of U.S. interest rate cuts. Many economists called those market rises a “dead-cat bounce” and noted that even in 1930, as the Great Depression began, there was a rebound in the Dow Jones industrial average.
The schizophrenic American stock market is indeed a very risky place. We need only look as far as Japan, Russia or Brazil to see the recent examples of what happens when a market bubble deflates. The U.S. has in all likelihood reached a point of credit saturation and depleted savings in which consumers can no longer continue spending, thus beginning a contraction of that enormous portion (two-thirds) of the American economy composed of consumer spending. Further interest rate cuts will not be able to sustain consumer spending and will only serve to inflate the U.S. stock market to the bursting point.
The Economist of November 21, 1998, described the peril of last November’s interest rate cuts: “What is wrong with America’s cutting rates now just in case? Plenty. Every rate-cut pumps up an already inflated stock market. Investors pile in more money in the conviction that the Fed will bail them out [with lower interest rates again] if prices start to fall. Rising share prices, in turn, allow consumers to carry on spending, and companies to keep investing [because of the paper wealth created in the stock market]. But the more share prices become overvalued, the more they will eventually have to fall. And the more consumers have spent and companies have invested on the basis of those overvalued prices, the more painful the economy’s eventual adjustment will be. The Fed failed to prick the bubble by raising rates a few years ago before it grew too big. It may now regret that; and it may come to regret cutting rates now.”
That same Economist states in another article, “The fact that share prices are almost back to their levels of the summer [and have exceeded them] is in itself a main cause of financial fragility: what goes up too far may crash. If the market’s exuberance was irrational when [Federal Reserve Chairman] Alan Greenspan first said, it is verging on the insane at the moment.”
Growing Trade Pressures
The U.S. stock market has created an illusion of wealth which has been fueling spending. That is now about the only way the world can export its way out of trouble. An economist quoted in the Investor’s Business Daily on November 25, 1998, stated bluntly, “Never underestimate the willingness of American consumers to spend everything they have and then some. With the stock market going to new highs, you have a wealth effect on top of a higher income effect.”
As stated earlier, the entire world’s economic future depends upon a massive increase in the U.S. trade deficit. In 1999, imported products into America are predicted to exceed exports to other countries by $300 billion, and the sound of rattling trade sabers may soon become deafening as American businesses begin to complain.
The all-time record U.S. trade deficit was in 1987 when the trade balance, called the current account, ballooned out of balance to the then-incredible figure of a $153 billion deficit. The U.S. is facing a trade deficit of twice that in 1999. As a result, many American business people will likely become increasingly agitated at America’s role as the import target for the rest of a slowing world.
Rising Imports—Falling Exports
In the past year, imports into America from eight major Asian economies have risen at the same time that Japanese imports from those same countries have actually decreased by more than 13 percent. During that rise in American imports, the U.S. is experiencing a decline in exports to other countries, because the strong dollar makes American products too expensive and less competitive than products from countries whose currencies have been devalued by the economic crisis.
American businesses are being squeezed in the increasingly tighter jaws of rising imports and falling exports. Because of the resulting lower profits and upwardly climbing unemployment, more and more cries are being heard for protectionism, meaning trade barriers like higher import duties and tariffs.
The American manufacturing sector is virtually in recession, with 193,000 factory jobs lost since the beginning of 1998. October unemployment figures released on December 1 show that for the sixth month in a row manufacturing employment has declined—caused by falling sales revenue compounded by overproduction and unsold inventories. Unfortunately, about 40 percent of the rest of the world is in the same condition, and those vast foreign inventories are showing up on American wharves at fire-sale prices, while American products are being taken off the world’s shelves.
American farmers are facing the worst agricultural crisis in decades. Markets in Southeast Asia are drastically cutting back on U.S. farm products, which are piling up unsold, in spite of severely depressed prices on everything from corn to cattle. The Washington Post of September 28, 1998, stated, “The price of wheat recently, for example, was $2.15 a bushel, compared with $3.20 a bushel this time last year . Corn is getting $1.56 a bushel, compared with $2.28 a year ago, and soybeans $4.80 a bushel compared with $5.85. Moreover, hog prices were at a 24-year low, and beef cattle were selling at $50 per hundredweight, compared with $60 a year ago.” The article mentions “a staggering 98 percent plunge in net farm income in North Dakota alone, from $764 million in 1996 to $15 million last year . Nationally, net farm income is expected to be down $7.5 billion [in 1998], resulting in the failure of thousands of small farms.” The production of food and fiber in America amounts to 15 percent of the GDP—the Gross Domestic Product—meaning the total of all goods and services sold. That major portion of the GDP is being severely weakened by the global financial and trade crisis, which in turn is crumbling the very foundation of the American farming family.
An examination of the number of shipping containers leaving America empty compared to the number of full U.S.-bound containers from Asia paints a clear picture of the plight of U.S. farmers and business people. The Port of Long Beach, Calif., is the largest container port in the U.S., with the vast majority of ships that dock there plying the routes from Asia to the U.S.—the busiest ocean-trade lanes in the world. According to a November 16 “flash report” by the Port of Long Beach, the number of containers being sent back empty to Asia in 1998 rose 86.2 percent over 1997.
The empty shipping container problem is so great that ocean carriers are raising their rates on Asia’s U.S.-bound cargo by 30 percent to offset the staggering decline in shipping revenue caused by the virtual absence of U.S. products being ordered by Asia.
Steel, the world’s most basic manufacturing industry, is likewise in crisis, raising the specter, according to industry analysts, of as many as 100,000 lost American jobs. On September 30, twelve U.S. steel companies and two steelworker trade unions filed trade complaints against Russia, Japan and Brazil for illegal dumping or unfair subsidies on their hot-rolled carbon-steel exports to America.
Dumping is the practice of selling goods at unfairly low and even below-cost prices in export markets to get rid of excess inventory. Export subsidies are payments by a government to producers to enable them to sell their goods at lower prices in order to be more competitive. Both practices are currently creating havoc in the steel industry.
The culprit is the major industrial downturn being faced by countries now deeply mired in recession. Russia is the worst offender, exporting steel to the U.S. for as little as one-third its cost of production. Since 1995, U.S. imports of hot-rolled steel from Brazil, Russia and Japan have soared 500 percent, absorbing 28 percent of the U.S. market—up from 10 percent in 1997 and 4 percent in 1995.
A case in point: Japanese construction and automobile industries have experienced a sharp slowdown which has caused a glut, or oversupply, of steel in Japan where demand has fallen in the second half of 1998 to its lowest level in 27 years. The recent fall in the value of the U.S. dollar has caused the Japanese currency, the yen, to rise and therefore makes Japanese steel less competitive in price. To offset the price-driven fall in domestic demand, Japanese steelmakers are exporting at cut-throat prices. That cheap steel is coming into America so fast that it is piling up unsold in parking lots in the port of New Orleans.
Two U.S. steel companies filed for bankruptcy-court protection in 1998: Acme Metals, Inc. of Riverdale, Ill., and Laclede Steel Co. of St. Louis, Mo. Employing 1300 workers, Laclede has been in business for 75 years, but suffered a 1998 second-quarter loss of over $65 million.
Nucor Corp., based in Charlotte, N. C., in an attempt to remain competitive with imported steel, has recently announced severe price cuts to the lowest level in company history. Simultaneously announced by Nucor were significant cuts in its output, dropping production to 65 percent of capacity at one mill and 80 percent at two others due to import sales absorbing domestic demand.
According to Eurofer, the European Confederation of Iron and Steel Industries, EU steelmakers are prepared to mirror their American counterparts in filing formal trade charges against up to eight Asian, African and eastern European countries to stem flows of cheap steel imports. The U.S. has warned, however, that such a move by the EU will create friction with the U.S., resulting in a protectionist backlash unless they open their markets wider and shoulder more of the avalanche of cheaply priced Asian products presently flooding the world.
The result of all this saber-rattling is that trade tensions between the U.S. and EU are quickly mounting. The Far Eastern Economic Review of December 3, 1998, stated, “In early November, talks between the U.S. and EU about starting a new trans-Atlantic economic partnership ended up in a fierce quarrel over who’s doing more to help Asia’s embattled export-oriented economies.” The Financial Times subtitled an article on October 23, 1998, “Oversupply in the world steel industry threatens to ignite a trade war with serious consequences for relations between the U.S. and Europe.”
Banana Wars Too
The European Union and America are increasingly at each others throats over other trade matters as well. Both sides are acting irresponsibly at a time when stability is greatly needed for global economic recovery. No doubt the world trade system is heading into a difficult period, as Fortress Europe comes into being and vies for credibility and position.
In the so-called banana wars, the U.S. threatened to impose 100 percent tariffs (import taxes or duties) beginning January 1, 1999, on a wide range of European exports—ranging from French cheese and wine to German coffee-makers—if Europe didn’t amend its discriminatory banana import rules.
The U.S. contends that the EU is maintaining an import quota on Latin American bananas (mainly sold by American company Chiquita Brands International, Inc.) while giving a duty-free access quota to Caribbean countries and other former European colonies, thus violating world trade rules. This threat of action by the U.S. has appalled leaders on the Caribbean islands of Dominica, Grenada, St. Lucia and St. Vincent, which depend on bananas for about 60 percent of their export earnings.
Even though the World Trade Organization (WTO) has ruled for years that the EU must change its banana importation practices, very little has happened. If America carries out its threat of imposing trade sanctions against the EU, it will breach world trade rules and further undermine the effectiveness of the WTO, which is already viewed as less than effective in its dispute-settlement techniques after it replaced GATT, the General Agreement on Tariffs and Trade.
The great fear in all of the posturing and threats about tariffs and trade barriers is that U.S. and international legislation will be enacted similar to America’s short-sighted and isolationist Smoot-Hawley Tariff Act of 1930, which established a protectionist tariff regime. It is widely believed that this act and similar measures in other major trading countries, including Germany and the United Kingdom, strangled world trade and helped produce the Great Depression and the resultant global economic conditions which eventually led to World War II.
As world leaders grope for answers to the present deepening economic crisis, we must ask, regarding the rising trade friction, is this the “New World Order”? Has worldwide over-production aimed at capturing the immense U.S. market led mankind once again into a deadly trap? Will the mistakes of the past be repeated? Sadly, it appears so. As we begin 1999, the world appears once again to be entering stage two in the unholy trinity of economic crisis, leading to trade war, followed by hot war.
Enter the Euro
By attempting to build a Global Economy as a form of one-world government, mankind is only building another “Tower of Babel.” As 1999 dawns and the new European money, the euro, becomes a legitimate currency, we see it metaphorically aspiring to be on top of that symbolic tower by driving down the U.S. dollar.
On January 1, the euro became a major international currency, second only to the dollar. The euro is backed by an economy strikingly similar to that found in the U.S. Europe’s combined GDP was $6.5 trillion in 1997, compared with America’s $8.1 trillion. Europe’s share of international trade outside of Europe itself is about 19 percent, compared to America’s slightly smaller 17 percent. The primary financial difference between the two is in the financial markets themselves, with the EU having a slightly smaller bond market and a much smaller stock market than found on Wall Street.
Obviously, the dollar’s role in international finance is considerably larger than the newly born euro. The dollar is the main currency used in world trade and investment, with roughly half of world trade invoiced in dollars. Commodity prices (oil, wheat, gold, etc.) are almost always priced in dollars. The dollar is used in at least one side of 87 percent of all foreign-exchange transactions, while Germany’s D-mark is used in 30 percent and other euro-member currencies in only 24 percent. About 57 percent of world reserves are held in dollars, with almost half of the world’s foreign-held bank deposits likewise in dollars.
The strength of the infant euro depends upon how quickly and to what extent financial institutions, private investors and world governments diversify their investment portfolios into euros. One camp thinks the euro will need to develop a track record before much of a change becomes apparent. Others see a very quick challenge to the dollar, especially if Britain, which has better-established capital markets than the continent, joins the euro.
According to The Economist of November 14, 1998, the director of the Institute for International Economics expects “a portfolio shift of between $500 billion and $1 trillion into euros” very soon. Two economists from the London Business School and London School of Economics are then portrayed as suggesting “that a portfolio shift of $700 billion into the euro might drive down the dollar by 40 percent. Such a change would, to put it mildly, have a big impact on the global economy.”
The Economist article then states that “a lesson of the 1930s is that the existence of two semi-dominant currencies (in that case, the pound and the dollar) can be destabilizing.” This was put another way by the September 1998 Economic Intelligence Review, which described the “builders of Europe—the constructors of this new ‘Tower of Babel’ [as being] a recipe for economic, social and political disaster.”
Tremendous Change Is Coming
Time will prove that this latest and final attempt by mankind at one-world government through a global economy will lead to the collapse of civilization as we presently know it.
For over 50 years, the late Herbert W. Armstrong taught a strong prophecy message which included God’s prophecies about a “beast” power comprised of ten nations or groups of nations (Dan. 2:28-43; Rev. 13). That multi-national, religion-led superpower is now rising to the forefront of world economic news before our very eyes, and will soon dominate the world and all of its inhabitants (Rev. 13:16-17).
A European economic and military powerhouse led by Germany and a “universal” church will soon take mankind down its final and most deadly pathway of destruction! (Read Rev. 13:11-15; Ezek. 5; Jer. 9:12-16; the entire book of Lamentations, and many other prophetic scriptures dealing with the “latter days.”)
Truly, the only answer to the repetitive and destructive cycle of economic crisis leading to trade war followed by hot war is world government. But how will it come? Mr. Armstrong wrote in The Wonderful World Tomorrow—What It Will Be Like (pp. 99-102): “Statesmen, scientists, educators know the only hope for survival and for peace is one-world government. We could quote many scores of world leaders affirming this.
“We could quote other scores of world leaders saying it is impossible.
“So it’s ‘world government—or annihilation’ on the one hand, and it’s ‘world government is impossible’ on the other hand.
“That is the stark paradox of terror facing all mankind today. No wonder God Almighty says ‘the way of peace have they not known’ (Rom. 3:17).
“But what man cannot do for himself, the great living God will do for him. World government—perfect government—is coming in our time, in the hands of the great ruling Christ, and unnumbered thousands of co-rulers given immortality with and under Him.
“And that good news is the true Gospel of Jesus Christ. Christ is to inherit the world throne (Luke 1:32-33), which God had promised to David would never cease on this earth (II Sam. 7:13). Jesus said, before Pilate, it was for this express purpose that He was born (John 18:36-37)….
“Christ, the King of kings. Perfect in character, absolute in honesty, integrity, faithfulness, loyalty and trust; filled with outgoing concern for the governed—their welfare and salvation; total knowledge, understanding, wisdom. Complete love, mercy, patience, kindness, compassion, forgiveness. Yet, possessing total power, and never compromising one millionth of an inch with His perfect law—which is the way of love. He will enforce God’s law—God’s government on earth. He will compel haughty, carnal, rebellious humans to yield in complete submission to God’s government.
“No one will be deceived, as the vast majority of mankind is today. All will know the truth. No more religious confusion. Eyes will be opened to the truth. Humans will become teachable. People will start living God’s way—the way of outgoing concern for others—the way of the true values—the way of peace, of happiness, of well-being, of joy.”
Yet today, as the ominous clouds of trade war gather, following the year-and-a-half long Asian financial meltdown, mankind faces even stormier seas in the future, with no safe port in sight. Luke 21:36 gives each of us hope if we will “watch therefore and pray always that you may be accounted worthy to escape all these things which shall come to pass.” Be warned—an unparalleled time of darkness and trouble in mankind’s immediate future first must be navigated before the dawn of the wonderful World Tomorrow.