A Diller, A Dollar, 12th-Grade Scholar
One of the themes the Left has repeated to itself is "Bush is going to overreach at some point." This overreaching is expected to bring about a situation in which the people finally decide to rid themselves of this tyrant who rules with no discernible logic, other than enriching his already-rich supporters.
There may be good news on this front, although this news will be very costly to the United States and its citizens - The overreach may be in progress.
There have been a lot of news articles of late concerning the fall of the dollar's value relative to the other currencies in the world.
In How the war machine is driving the US economy, published January 06, 2004 in The Independent, Andrew Gumbel writes "Military Keynsianism might get Bush re-elected, but it is starting to worry economists".
The war has been a large part of the justification for the Bush administration to run ever-widening budget deficits, and those deficits, predicated largely on military spending, have in turn pumped money into the economy and provided the stimulus that low interest rates and tax cuts, on their own, could never achieve.
The result, according to economists, is a variant on Keynesianism that has particular appeal for Republicans. Instead of growing the government in general - pumping resources into public works, health care and education, say, which would have an immediate knock-on effect on sorely needed job creation - the policy focuses on those areas that represent obvious conservative and business-friendly constituencies. Which is to say, the military and, even more specifically, the military contractors that tend to be big contributors to Republican Party funds.
Military-fuelled growth, or military Keynesianism as it is now known in academic circles, was first theorised by the Polish economist Michal Kalecki in 1943. Kalecki argued that capitalists and their political champions tended to bridle against classic Keynesianism; achieving full employment through public spending made them nervous because it risked over-empowering the working class and the unions. The military was a much more desirable investment from their point of view, although justifying such a diversion of public funds required a certain degree of political repression, best achieved through appeals to patriotism and fear-mongering about an enemy threat - and, inexorably, an actual war. At the time, Kalecki's best example of military Keynesianism was Nazi Germany. But the concept does not just operate under fascist dictatorships. Indeed, it has been taken up with enthusiasm by the neo-liberal right wing in the United States.
"It may be very inefficient and obviously not fair, but it is nevertheless causing almost 5 per cent more money to be pumped into the economy than is being taken out in tax revenues," observed Robert Pollin, professor of economics at the University of Massachusetts at Amherst. "At the same time, it fits into the broader ideological goals of the administration because they can paint it as part of a national emergency, the fight against terrorism, the fight against Saddam Hussein, and so on."
The Bush administration itself prefers to attribute the recovery to its tax cuts, targeted disproportionately towards the richest Americans. Many non-administration economists, however, say this is nonsense, and that the tax cuts are far more political than they are stimulative. A more significant role has been played by buoyant household spending, helped by low mortgage interest rates which have inspired many homeowners to borrow against the rising value of their properties. But there are signs that interest rates are now on their way back up and that the refinancing fad has ended.
"The administration is conducting a highly irresponsible fiscal policy, and there is no legitimate economist on the face of the earth who doesn't say
the tax cuts are just loony," said Kent Sims, a San Francisco economic consultant and public policy expert. "The chosen weapon for dragging the economy off the floor - now that an election is coming - is the deficit. Military expenditure is usually the least effective of short-run ways of spending money, because it doesn't build infrastructure that give you returns over time. But it does create a short-term lift."
The Bush deficit has not yet reached Reaganesque proportions (it stands at roughly 4.5 per cent of GDP). But Professor Pollin, for one, predicts that the resulting debt burden could rapidly rise to the levels seen in the 1980s, with interest repayments eating up as much as 18-19 per cent of the overall federal budget.
"The long-term effects of military Keynesianism are obviously negative on public infrastructure, health, education and so on, and there are limits on how long you can keep it up," he said. "What we borrow we will eventually have to pay back, with interest."
It isn't just academics who are feeling this way. Check out these excerpts from this article:
With its rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of such record-breaking proportions that it threatens the financial stability of the global economy, according to a report made public today by the International Monetary Fund.
In nearly 60 pages of carefully worded analysis, the report sounded a loud alarm about the shaky fiscal foundation of the United States, questioning the wisdom of the Bush administration's tax cuts and warning that large budget deficits posed "significant risks" not just for the United States but for the rest of the world. The report warned that the net financial obligations of the United States to the rest of the world could equal 40 percent of its total economy within a few years — "an unprecedented level of external debt for a large industrial country" that it said could play havoc with the value of the dollar and international exchange rates.
The dangers, according to the report, are that the United States' voracious appetite for borrowing could push up global interest rates and thus slow down global investment and economic growth. "Higher borrowing costs abroad would mean that the adverse effects of U.S. fiscal deficits would spill over into global investment and output," the report said.
Though the International Monetary Fund has repeatedly criticized the United States on its budget and trade deficits in the last few years, this report was unusually lengthy and pointed. Fund officials said the new report reflected the views of the authors and not the institution as a whole, whose largest shareholder is in fact the United States. But fund officials also seemed intent on getting American attention. "It's encouraging that these are issues at play in the presidential campaign now under way," said Charles Collins, deputy director of the I.M.F.'s Western Hemisphere Department and a principle author of the report. "We're trying to contribute to persuading public opinion that this is an important issue that has to be dealt with."
The dollar has lost nearly one-fifth of its value against the euro in the past 18 months, and the dollar hit new lows against the euro this week.
This situation is causing consternation all over the world.
The slow-motion collapse of the U.S. dollar has sparked a global debate over the wisdom of letting the American currency continue setting lows. The dollar has been steadily falling since last year -- the direct result of the U.S. central bank's low interest rate, 1 percent, the BBC reported Tuesday.
Earlier this week a U.S. central bank governor said the Federal Reserve would keep holding the interest rate at 1 percent -- thus ensuring a falling dollar -- because it helped American companies sell products overseas, and there was no fear of inflation.
But America's currency-driven recovery may be the world's currency-driven illness, according to Europeans and Asians. On Tuesday Japan reportedly intervened in the currency markets by buying dollars to prevent the yen from continuing to strengthen against the dollar, pushing the dollar to 106.18 yen. And European bankers have begun to complain, as well. "The impact of the latest euro rally is likely to be felt soon, and a further rise may jeopardize all hopes of an upturn in eurozone activity," economists at France's Societe Generale bank said.
There may not be much help in the way of US exports, however. According to Martin Hutchinson, who blogs "The Bear's Lair" :
The $500 billion per annum U.S. balance of payments deficit cannot be financed indefinitely by persuading foreigners that Wall Street is moving forever upward, nor by arm-twisting Asian central banks into buying Treasury bonds and bills. To rebalance it, the dollar will have to drop and U.S. exports will have to increase to meet imports. Unfortunately, close examination of U.S. trade statistics suggests that the latter may be a problem.
[T]he deficit has been financed by Asian central banks, seeking to protect themselves against a rise in their currencies against the dollar by buying U.S. Treasury securities with their payments surpluses, and thereby suppressing the natural rise in their own currencies. This can continue, but only for so long as Asian central banks wish to devote an ever increasing share of their reserves to an asset that is depreciating in price, denominated in a currency that is depreciating modestly against their own currencies and sharply against those of Europe.
The above analysis has two implications. First, the dollar will continue to be weak for some time to come, and may well drop far below its current levels against the euro. Second, U.S. exports must increase or imports decline until the payments deficit is closed (since the decline in the dollar will have a sufficient effect on confidence that the "equilibrium" $100 billion per annum payments deficit will take some time to re-establish itself.)
However, this will be very difficult. Total exports of goods and services in 2002 were $982.8 billion, compared with imports of $1,401.4 billion, a deficit of $417.6 billion, which has widened to around $500 billion in 2003, as imports have increased by around the same percentage as exports, but from a much higher base. With exports around $1,000 billion, and the trade deficit around $500 billion, the problem is clear: the deficit needs to narrow by a figure which is fully 50 percent of current export volume.
He goes on to discuss in some detail the major categories of American exports - medical imaging equipment, passenger aircraft, parts and accessories of motor vehicles, office machinery, and telecommunications equipment. Only the medical imaging exports grew, and that only 5% over five years. As Mr. Hutchinson states in his closing:
With the possible exception of the [medical imaging equipment], there are few big sectors in which the U.S. is both competitive and likely to expand its exports rapidly.
Beginning to sound like we are running out of product at the World Market, doesn't it? The following gives a bit of an idea as to how big a problem, in dollar values, the problem is:
The only type of assets that have seen a pick-up in foreign inflows is the Treasuries. There is a significant shift in the regions from where this investment is coming from. This increase in purchasing of treasuries is largely on account of Asian countries. The US Treasury data indicates that Japan, China and Korea account for 70 per cent of the $113 billion rise in foreign holding of Treasuries in 2002. UK is the other large investor. US direct investment flows over the past year has held up at the levels seen in the second half of last decade. Asia is now emerging as the creditor of last resort. The US had a net capital inflow of $474 billion in 2002, out of which close to $200 billion were from Asia. Recently Japan and China made purchases worth $120 billion. This may be due to the general shift into safe-haven assets. Asian countries are facing upward pressure on the exchange rates on their currencies. To stem the appreciation, central banks in these countries are mopping up dollars and have chosen to increase their foreign exchange reserves.
Here's another look at how badly Bush's tax "relief" is. According to Democratic U.S. Rep. John Tanner's (representing Tennessee’s 8th Congressional District) web site:
The federal government will have accumulated a $374 billion deficit in the fiscal year that ended last month, not including additional spending in Iraq, according to estimates from the non-partisan Congressional Budget Office. The nation’s government owes almost $7 trillion, and roughly $1.38 trillion of that is held by other countries, according to the U.S. Treasury Department.
"We are increasingly turning to foreign investors to finance our federal budget and the war in Iraq," Tanner said. "To keep up with the unprecedented growth in federal expenditures, we have to borrow billions from other countries."
Mainland China and Hong Kong bought $177 billion of U.S. debt in the first seven months of 2003. Chinese holdings in the U.S. debt have more than doubled since 2001. Other countries holding major investments in the U.S. debt include Japan, the United Kingdom, Caribbean Banking Centers, Germany and Korea.
So who else owns our government debt, and by extension, our government? India, Thailand, and Spain, although the latter two have reduced their holdings of US Treasury notes, according to India ranks 23rd among 27 countries holding USTs. The article does not list all 27 countries, but I'll bet there is a close correspondence with The Warmonger's "Coalition of the Willing".
But this support is not without cost to the supporters.
The Australian dollar was the best performing currency against the US dollar in 2003, rising around 34 per cent on the year and has started 2004 in a similar vein. With continued US dollar weakness, the domestic currency continues to hit fresh highs, rising as high as $US0.7693, a level it has not reached since May 1997.
Dealers noted that the US dollar weakness stemmed from comments by US Federal Reserve governor Ben Bernanke that implied US interest rates would remain on hold for some time, despite an improving economy. This has led traders to unwind US dollar positions and search for higher yielding currencies – such as the Australian dollar, pushing it to the recent record highs.
With US interest rates at 45-year lows, bond markets are finding it increasingly difficult to attract enough foreign investment to finance the massive US current account deficits and keep the US dollar from falling. [A] weakening dollar serves the Bush administration's needs, acting along with monetary and fiscal stimulus to spur growth. Because of this, many analysts don't expect any change of policy ahead of the November US presidential elections. So far, the dollar's decline hasn't spilled over into US equity and bond markets and risked sparking a financial market crisis.
The biggest risk that could send the US dollar into a free fall is that Asian central banks stop buying US fixed income as part of their bid to keep their currencies from strengthening too quickly.
Australia isn't exempt from having concerns over the US dollar's value. One columnist barely mentions the US in his article extolling the future prospects of Australian trade with Asia.
The distribution of economic weight in the world economy is moving back towards Asia. This process of global re-orientation will undoubtedly involve some transition strains for the international economy, and as a result many countries will tend to feel at least some degree of apprehension as the economic balance of power tilts eastward.
But the good news is that Australia's long-term economic prospects should be given an important boost by this trend, through greater demand for Australian exports and by an increase in Australia's attractiveness as a destination for overseas investment.
China and India have been two of the world's fastest growing economies in recent years, and their share of global output has risen accordingly. Using the World Bank's purchasing power parity measure of GDP, the two countries accounted for about 18 per cent of the world economy last year and were the world's second and fourth largest economies respectively. Recent work by Goldman Sachs suggests that on current trends China's economy could be larger than the US's by 2041 in US dollar terms, while India's could be larger than all but the US and China in 30 years' time.
This should provide a long-term economic boost for Australia, since Australia's mix of geographic location, resource base, strong economic and political institutions and educated work force make it particularly well-placed to benefit from expanding Asian economies and able to ride out the associated adjustment strains.
For example, Australia is likely to be an important source of the raw materials and energy needed to feed the latest wave of Asian industrialisation. Past experience with Japan and South Korea has demonstrated Australia's ability to be a reliable supplier and key partner in industrialisation. At the same time, an expanding Asian manufacturing base should provide Australian consumers with a steady supply of competitively priced manufactured products.
Moreover, as economic development progresses and income per capita increases, Australia is also in a good position to service the demand for food and beverages of increasingly wealthy Asian consumers, as well as to provide an attractive destination for a new supply of tourists. The net result should be strong, sustained support for Australia's terms of trade and hence for living standards.
Finally, there could also be important indirect gains from global re-orientation for the Australian economy, in terms of increasing Australia's attractiveness as an investment destination.
A few more of these, and the US will be the girl not asked to the economic prom. So where does this leave the US?
A major wild card for 2004 is the weakening dollar, which continues to hit record lows against the euro. The currency's troubles provide an immediate boost to American manufacturing by making our goods cheaper overseas, but they present a series of long-term threats to the economic recovery. A plummeting dollar could help narrow our trade gap, but it also means foreigners will demand a higher interest payment to finance those deficits. That could add to pressure on the Federal Reserve later in the year to start raising the historically low short-term interest rates. (Longer-term rates have already started creeping up some.)
Jobs have been hard to come by early on in this recovery. That's not unusual, as businesses are able to meet a surge in consumer demand with their unsold inventories, or by tapping unused capacity. Moreover, despite a fall in the nation's unemployment rate to 5.9 percent from 6.4 percent in the second half of 2003, technology-driven productivity growth and the exporting of many jobs overseas have raised concerns that this time a frothy economy might not lead to a labor market in which workers feel secure about their prospects and see wages rise briskly. Indeed, the employment outlook is fundamental to keeping the recovery on track. When people fear for their jobs, they cut back on spending, which may be one reason holiday sales were far from spectacular.
The Bush administration and Congress could have greatly enhanced the economy's prospects if they had been more responsible in their spending. This Republican government seems to think that it can cut taxes and increase government programs without consequence, and that there is no limit to the willingness of China and others, mostly in Asia, to finance our society's lavish lifestyle by buying up our i.o.u.'s our Treasury notes. These buyers have not been getting such a great deal of late.
Does anyone else in America see the economic danger?
Conservatives wait warily as President Bush makes final decisions about his election-year budget, three years into an administration on whose watch spending has mushroomed by 23.7%, the fastest pace in a decade.
While Bush has emphasized repeatedly the need to rein in spending, overall federal expenditures have grown to an estimated $2.31 trillion for the budget year that started Oct. 1. That is up from $1.86 trillion in President Clinton's final year, a rate of growth not seen for any three-year period since 1989 to 1991.
Let's see now, just WHO was President those years? Hmmmmm ......
What has vexed conservatives most is the 31.5% growth since Bush took office in discretionary spending. That is the one-third of the budget lawmakers approve annually for defense, domestic security, school aid and everything else except Social Security and other benefits. Such spending grew by an annual average of 3.4% during Clinton's eight years.
Further infuriating conservatives, Bush and the Republican-run Congress have enacted a $400 billion, 10-year enlargement of Medicare; $87 billion in expanded benefits for farmers; and $40 billion for increased veterans' payments and the Air Force's leasing and buying of refueling tankers.
"Re-election has become the focus of Republicans in the White House and Congress. And those in power have determined the road to staying in power is paved with government spending," said Brian Riedl, who monitors the budget for the conservative Heritage Foundation.
Mounting spending has combined with the recession and two major tax cuts to turn a four-year string of annual surpluses into deficits that last year hit $374 billion, the worst ever in dollar terms. Administration officials and private forecasters say red ink could hit $500 billion this year, with more to follow.
Things look bleak in the long run, too. Director Douglas Holtz-Eakin of the nonpartisan Congressional Budget Office has said the Medicare bill could cost from $1.7 trillion to $2 trillion during its second 10 years, as the huge baby boom generation retires and foists added costs on taxpayers.
"The U.S. budget is out of control," the investment bank Goldman, Sachs & Co. wrote its clients, projecting large deficits for the next decade. "Any thoughts of relief thereafter are a pipe dream until political priorities adjust."
"It's an administration that in principle is committed to controlling spending but is unwilling to make hard choices," said Maya MacGuineas, executive director of the Committee for a Responsible Federal Budget, a bipartisan anti-deficit group.
"There clearly is a need for the Republican majority to sharpen its pencils and return to its foundation of discipline" in spending, said conservative Rep. Mike Pence, R-Ind.
The Democrats have a major opportunity here if they can demonstrate a much more prudent fiscal policy and practice than the Bush (mis)Administration has demonstrated to date. By doing so, the fiscal conservative of the GOP who care nothing for the balance of the Bush agenda just might be coaxed into voting Democrat this fall. Every little bit helps against the huge campaign fund George Warmonger Bush will have at this disposal!
This may not help him much if the following scenario comes about:
The dollar plunged against most of the world's currencies in 2003, its third-worst performance since it began trading freely in the 1970's. It was the dollar's second consecutive annual decline, and many forecasters see a further weakening this year. Any further, paced decline in 2004 would generally be good for American investors and for American business.
[A] modestly falling dollar is what most economists prescribe as the long-term antidote to the growing U.S. deficit in its current account, which measures the balance of trade in goods and services with the rest of the world. That deficit is currently running at a record annual rate of more than $500 billion. But a much weaker dollar would also make imports - from commodities to automobiles - more expensive, adding to inflationary pressures.
[A] sudden plunge of many percentage points, which some analysts say is a possibility, could undermine financial markets around the world. David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut, predicts that the dollar could fall as much as 15 percent this year, leaving the euro around $1.45. That would put its value right around where it was in 1995, when it hit its post-1971 low against the Deutsche mark, one of the 12 currencies since merged into the euro. "The dollar is one beaten-down beast," Gilmore said. And he warned that there was a chance the decline could be fast enough "for things to get ugly, for disorderly markets and for interest rates to go up and stocks to go down."
"The risk is greater than 5 percent," he added, "and that is statistically significant."
A precipitous fall in the dollar is possible because the worsening current-account deficit requires a increasing flow of money from abroad to cover the widening gap. Through the first three quarters of last year, the foreign flow into stocks and bonds actually picked up over the 2002 pace, possibly curbing the dollar's fall.
But that flow could slow if foreign investors decide to go to other markets because of low U.S. interest rates or if they are just worried that the dollar might tumble. If the flow slowed too much, the dollar would have to fall in value, and U.S. interest rates would need to rise to draw the foreign investment needed to cover the current-account deficit, economists say.
Here'a another view:
If you're hoping the price of imported goods will decline soon or that the cost of a European vacation will become reasonable in 2004, think again. Traders and investors in currency markets are betting the value of the U.S. dollar will remain bed-ridden throughout much of 2004 because:**The U.S. Federal Reserve Board is unlikely to raise interest from their rock-bottom lows in an election year.
* Officials in the United States, the European Union and Asia show signs of anxiety about the depressed greenback.
Result: The dollar will remain where it closed 2003, about 20 percent below its purchasing power of a year ago. "Until there's a perception in the marketplace that the Fed is about ready to start bringing rates back up, I don't see the market thinking the dollar is going to be stronger," said Mark Gargano, managing director of foreign exchange at Wachovia Corp. in Charlotte.
Lower rates in the U.S. might discourage some international investors from buying the debt sold to finance a record fiscal deficit. The gap was $374 billion in the year ended Sept. 30. Investors have "little reason to step in and buy dollars," said Robert Sinche, head of global currency strategy in New York at Citi-group Inc. "The trend is there for a weaker dollar," he said, which means that the decline could resume in 2005. [from NYT - ed]
Against the euro last year, the dollar lost about 17 percent, and weakened to a record low of $1.2649 on Friday. The dollar also had its largest yearly decline in five against the yen. It traded at 107.29 yen from 106.97. Against a basket of major currencies measured by the Fed's Trade Weighted Dollar Index, the dollar dropped about 15 percent, the most since two years after Group of Seven finance ministers met at the Plaza Hotel in New York and agreed to let the dollar weaken.
If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered. - attributed to Thomas Jefferson
So what will this mean for the Average American, smart or stupid?
The list of have-nots continues to grow as Congress spends massive sums rebuilding war-torn Iraq and supporting a vast troop deployment in Iraq and Afghanistan.
Increasingly, needy U.S. interests are getting shortchanged because President Bush and Congress are spending all our tax revenues and are borrowing about $400 billion a year to make ends meet.
Bush and many in Congress now are pretending they can approve a $400-billion prescription drug program for senior citizens without making harmful cuts in the Medicare program or by borrowing more money.
Cancer patients have been protesting in Washington, Knoxville and other cities in recent weeks that Congress will deeply cut federal payments to their physicians providing cancer care under the Medicare program. Deep cuts in federal payments will force many cancer clinics to close, physicians warned.
Of course, Bush and many in Congress face re-election next year and sure would like to give senior citizens a new drug benefit and make them happy before election day.
For decades, the Appalachian Regional Commission has helped boost development in the poorest rural areas of 13 eastern states in the Appalachian region, including Tennessee. U.S. Rep. Bill Jenkins, R-Tenn., warned recently that plans to cut ARC's federal budget in half - from about $70 million to $33 million in 2004 - would bring great harm to the region. Crucial transportation, water, telecommunications, business and economic projects could be cancelled, Jenkins said.
National parks' maintenance backlogs remain long because they cannot count on the federal government for adequate funding. Increasingly they are reaching out to individuals and foundations for extra money to preserve natural resources, repair trails and protect wildlife.
For the last couple of years, national parks' federal budgets haven't even been enough to pay all staff their full salaries. So, they hired fewer seasonal workers to help with the crunch during peak visitation months and left multiple staff positions vacant. The Great Smoky Mountains National Park in East Tennessee was among parks having to do this.
If this keeps up, national parks may have to survive as many football stadiums and basketball arenas do - naming themselves after their most generous sponsor.
It was oddly humorous last week when World Bank officials were trying to get the United States and other countries owed about $120 billion by Iraq to forgive at least two-thirds of that to make it easier for Iraq to move onward and upward.
Yet the United States' debt is $6,840 billion ($6.8 trillion). No one is asking countries to forgive part of that. So, the Chinese and other foreign countries holding much U.S. debt increasingly will be able to influence the U.S. economy.
U.S. Rep. John Tanner, D-Tenn., is one of the few in Congress pointing out the danger of the United States heavily selling debt to foreign countries, such as China.
China has financed so much U.S. borrowing that it already is able to greatly undervalue and manipulate its own currency, Tanner said. The end result: The Chinese economy grows and takes more jobs from U.S. manufacturers because Chinese products are selling for about 40 percent less than U.S.-made products, he said.
But Tanner, like Duncan early this year, cannot get enough thoughtful people to pay attention to the big financial problems ahead and to take firm remedial action.
"cannot get enough thoughtful people to pay attention"
Are there enough thoughtful people to pay attention? Based on the blogging of the last couple of days, the general consensus seems to be "Maybe not". But some, Mary in particular, offer Hope Springing Eternal.
OK, hopeful types. Here's an important issue, one that every American deals with on a daily basis. I've tried to cut out the expertese and obfuscation and hopefully made this an issue of relative understanding by non-economists, and I certainly am not an economist myself. Those of you who feel you can talk to GOP supporters, some of whom we've maybe unfairly castigated as "stupid" on this blog in the last couple of days, should now have a way to test your hypothesis.
Money is certainly an issue which especially appeals to Republicans. Point out the statements from conservatives and Republicans, like the ones I've included, and see if you can get anywhere with them. Then come back and let us know how well you succeeded.
I sincerely wish you luck.