Retrenchment ahead for all Americans

Posted: Sunday, September 30, 2007

By the time you read this, I will be aboard a ship somewhere beyond the Aleutians, on my way to Asia. I'll be seeking a first-hand look at the countries that have lately powered the world to unprecedented growth in income and wealth.

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Alaska officials love to tout international trade statistics, and thanks to the growth in the Asian and world economies, upbeat data haven't been hard to find: "Our exports grew more than 12 percent last year, and, for the first time, our annual exports topped $4 billion in 2006," crowed Gov. Sarah Palin in July.

True enough, but the growth in dollar terms disguises a less upbeat truth: The weight of exports in Alaska's economy has been stagnant for over a decade, hovering between 9 and 11 percent of the state's gross product. The geo-economic reality is that North America is the natural market for Alaska's resources; given Alaska's limited resource base and the growing competition from other resource exporting regions, that is likely to remain the case for the foreseeable future.

World markets for timber, energy, and minerals are currently booming, but the relative weight of those products in the world economy continues a long-term decline. Only in tourism, the export of recreational services to people who make their homes elsewhere, does Alaska appear to have a long-term comparative advantage. When the world economy cools, as at some point it must, Alaska should prepare for its world trade to shrink faster than the economy as a whole. In Asia, I'll be looking for clues to the when and how of that slowdown. My first stop is in Japan.

"Growth has collapsed, deflation has taken hold, and the financial system is in shambles," write Takeo Hoshi and Anil Kashyap in a recent issue of the Journal of Economic Perspectives.

The Japanese government has been running huge and chronic deficits, but extraordinary high rates of household savings have allowed the deficits to be financed from domestic savings, with more than enough left over for Japan to accumulate $612 billion in U.S. government debt. If the Japanese decide to cash in even a piece of that hoard, the result would be a cascade of economic repercussions, beginning with a disastrous fall in the value of the dollar.

My second stop is Vladivostok, in the Russian Far East. Like Alaska, Russia has benefited from skyrocketing prices of oil and mineral commodities, and like Alaska, Russia faces many potential dislocations if the boom takes even a small stumble. Oil exports have allowed Russia to increase its foreign reserves from virtually zero in 1999, to more than $300 billion now. Unlike the other countries on my itinerary, Russia has put almost none of its reserves in dollar-denominated investments.

Following Russia, it's off to Korea. Forty years ago, per capita income in Korea was on a par with the poorest nations of Africa and Asia. Today Korea is richer than several countries in Europe, and growing far faster. The Koreans have been great savers, and $50 billion of those savings are in U.S. treasury debt.

After another stop in Japan, I move to China, where families are saving in excess of 20 percent of their household income. The contrast with U.S. households couldn't be more stark: American families are now borrowing more than they save, producing what economists call "negative" savings. American corporations, fat with profits, are net savers, but those corporate accumulations are canceled out by the chronic deficits being chalked up by the U.S. government.

The three sectors - households, corporations and the government - constitute the whole of every economy. In America, that economy is deeply in the red.

The significance of this is no secret. Chinese and other Asian savings finance American debts and deficits, which have allowed American households and government to consume goods and services far in excess of what Americans can produce and pay for from current income.

"Negative saving would seem to point to growing indebtedness and, ultimately, a decline in living standards, as Americans tighten their belts to pay off debts," was the lifeless way economists at the Federal Reserve Bank of New York recently put it. A day of reckoning must come when Alaskans and all Americans will be in for some serious retrenchment.

During my trip to Asia, I'll be looking for clues as to when and how that will happen.

• Juneau economic consultant Gregg Erickson is editor-at-large of the Alaska Budget Report, a newsletter covering the state budget and economy. He can be contacted at gerickso@alaska.com.



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