America has conquered its debt crisis with incredible speed
US Congressional Budget Office expects the budget deficit to drop to 2.8pc of GDP this year, and 2.6pc next year
By Ambrose Evans-Pritchard
12:06AM BST 24 Apr 2014
The US has added 2.5m barrels a day of crude output over the last three years, almost as much as the next three countries combined. America covered a quarter of its oil needs in 2007. It covers well over half today. It has overtaken Russia to become the world's biggest exporter of refined petroleum products, and will soon be an exporter of liquefied natural gas as well.
For more than half a century the US has been losing part of its industry with each recession. A study by the International Monetary Fund found that the pattern has been very different this time. Manufacturing has recovered quickly, led by machinery, computers and electronics. America's global share of manufacturing has stabilised at 20pc. China's share has also stabilised, at exactly the same level. The two superpowers are competing toe-to-toe for factory dominance. China is no longer gaining.
Yet the other half of the story is monetary stimulus a l'outrance - quantitative easing - to offset fiscal tightening and prevent a "pro-cyclical" downward spiral, which is what occurred when the European Central Bank jumped the gun and raised rates twice in 2011 before recovery was entrenched, setting off the catalysmic crisis that nearly destroyed EMU in mid-2012.
This policy mix is no novelty. Britain pursued the same strategy with success after leaving the Gold Standard dollar-peg in 1931 and after leaving the ERM fixed system in 1992, and arguably again over the last five years though the jury is still out this time.
America's public debt has peaked at 72.3pc of GDP (bonds held by the public). The CBO expects the ratio to fall gently for the next three years. Such is the magic of the denominator effect. Economies do not have to cut debt in absolute terms to whittle away debt. The Romanian dictator Nicolae Ceaușescu thought otherwise and assiduously paid off Romania's debts just in time for his own execution in 1989. Those shaping eurozone policy today sometimes seem to be in thrall to this same atavistic belief.
Growth does the job so much faster. US household debt has plummeted from 98pc to 81pc of GDP in four years. The ratio of debt payments to disposable income fell to 9.9pc in March, the lowest since the Federal Reserve's modern data series began in 1980. Most mortgage debt is locked at fixed interest rates so this will not change fast when the Fed tightens in earnest.
Charles Dumas from Lombard Street Research -- author of the America Phoenix in 2011, before it was fashionable -- says the mix of "soaring household wealth" and lower debt burdens leaves the US poised for a surge in consumer-led growth. He predicts a mini-boom, lasting until 2016.
The numbers of mortgages in negative equity have dropped to 19.4pc from 31.4pc two years ago, according to Zillow Real Estate Research. Over 4.8m households have been liberated. This is accelerating as US home prices claw back most of the 35pc drop from peak-to-trough.
Much of the debt has been cut by defaults, chiefly by home-owners throwing in their keys. You can do this in most US states, and rightly so. America's bankruptcy doctrines evolved with the injustices of colonial debt servitude still in the collective mind.
James Madison argued in the Federalist Papers before the American Revolution that treating debtors as criminals impeded risk-taking and commerce. A series of bankruptcy laws in the 19th Century gradually broke the lockhold of vested interests, levelling the playing field between debtors and creditors, with powerful effects on US economic dynamism.
Much of Europe still clings to late Medieval notions of debt sanctity, with laws to match, though a spate of suicides is forcing reform. In Spain the banks can sieze all your current and future assets if you cannot pay the mortgage - which tends to happens when the jobless rate jumps from 8pc to 26pc - adding the legal costs of foreclosure for good measure. Leaving aside the morality of state coercion to uphold the interests of creditors alone, this practice is inefficient. It blocks the cleansing process of boom-bust cycles, trapping economies in excess debt.
Data from the OECD show that the varied effects of Europe's debt laws, contractionary policies, and a needless double-dip slump, led to jumps in public and private debt (non-financial) by 30pc of GDP in Spain, 33pc in Holland, 34pc in Italy, 51pc in France, 71pc in Portugal and 151pc in Ireland, between 2008 and 2012. Europe's harsh methods have been self-defeating even on their own terms.
It is true that bond yields have tumbled to record lows across the EMU debtor bloc this year but that is not in itself sustainable recovery. What these yields reflect is that EMU is close to deflation and unlikely to grow vigorously for a long time. German Bunds used to be the barometer of such macro-economic judgments.
Club Med debt has become a proxy too now that German Chancellor Angela Merkel -- though not the German constitutional court -- has allowed the ECB to back-stop Italian and Spanish debt as a lender-of-last resort.
Five years after the Lehman crisis, US output is climbing to new peaks and unemployment is 6.7pc. Euroland has yet to regain its 2008 output, and the jobless rate is stuck at 12pc. Austerity is not the variable. The US fiscal squeeze has been just as draconian. The Fed kept nominal GDP on an even keel. The ECB did not.
You might say that QE is just a beggar-thy-neighbour policy by stealth, an allegation made by India's central bank governor Raghuram Rajan in a speech this month. The Fed fought back against China and the mercantilist powers by driving the dollar down to a tolerable level, and the US is now enjoying a devaluation windfall. Europe opted instead for a hard-euro policy regardless of circumstances, and has allowed the industrial core of Southern Europe to be hollowed out as a result.
America still has a lot of debt to clear. The errors of the pre-Lehman boom and the fifty year cycle of rising leverage that preceded it have left a debt burden comparable to the effects of a major war.
Yet predictions of inevitable American decline that had such resonance five years ago already look oddly dated, a misreading of underlying economic and geopolitical power. The concept of the BRICS no longer has any economic meaning. Brazil and Russia fell by the way side long ago. India is decades away from any real challenge. Only China counts.
History is full of such false declines. Informed opinion thought Britain finished after losing America, but it was actually France that was ruined by the costs of the Revolutionary War. Britain was just about to embark on its greatest days.
The Roman Empire seemed beyond saving by the start of the Second Century. It was instead the precursor of the Antonines, almost 80 years of stability and wealth. America's governing institutions still work remarkably well. There is no necessary reason why America cannot enjoy its own Antonine revival until the middle of this century.