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Article Archives (03-15-2005)
A Weapon of Mass Economic Destruction
or High Priest of Voodoo Economics
If there were a Mount Rushmore dedicated to the pantheon of Republican Gods, the conservatives of our land would surely chisel the likeness of Ronald Wilson Reagan into stone. Before Reagan even became the Republican nominee for president in 1980, he faced a stiff challenge from George H.W. Bush (aka, Bush the Elder). Bush the Elder referred to Reagan's argument that cutting taxes would actually lead to higher tax revenue with corresponding lower budget deficits as "voodoo economics". Reagan was elected and got his tax cuts. The US Federal budget deficit was equal to $40 billion in 1979 (constituting 1.7% of GDP), grew to $74 billion in 1980 (constituting 2.7% of GDP), and eventually ballooned to $221 billion in Reagan's last year of 1986 (5.2% of GDP). Bush the Elder was right.
W. Bush is apparently not much of a student of history or a high priest of voodoo economics (with all that Skull & Bones stuff in his background, one never knows). He beat the tax cut drum incessantly during his first term while, at the same time, significantly increased military spending. Result: the US government went from a $236 billion dollar surplus in 2000 (Clinton's last year) to a $412 billion deficit in 2004 (with another record deficit of $427 billion projected for 2005 by the CBO). The W apologists shall whine "9/11", "Saddam Hussein", "al-qaeda", yadda yadda. Plain talking Harry Truman said the buck stops on the president's desk or, in Bush's case, the $400+ billion missing bucks.
Reagan put our national butts into a huge deficit crack before and we got out of that mess. FN1. So what's all this hubbub about deficits? Didn't VP Dick "Super Patriot" Cheney tell then Treasury Secretary Paul O'Neill, "deficits don't matter, Reagan proved that." Link. Dick has a keen insight to all matters other than reality (witness his fantom pre-war Iraq intelligence). If you look at the deficit numbers as a percentage of Gross Domestic Product (GDP), the Bush 2004 deficit is 3.6% of GDP which is less than the high water mark Reagan set in 1983--6.0%. Can't our Government just continue hemorrhaging dollars until the end of time? Only in Oz. Unfortunately, we're all back in Kansas now and must deal with reality. Here is how it looks.
Double Trouble
Some call it the Twin Deficits--(a) the federal budget deficit and (b) the US current account deficit (imports over exports of goods and services). The US current account deficit stands at $600 billion for 2004 but was roughly balanced (i.e., no deficit) in 1991. Link. For perspective, $600 billion is the size of the entire economy of Korea, the 10th largest in the world. Link. The larger the budget deficit, the more money the federal government must borrow. The higher the current account deficit, the more dollars that flow out of the country leaving less money in the country to finance the purchase of treasury bonds that finance the budget deficit. Result: the United States is dependent like a crack addict upon foreign purchases of US treasury bonds.
The Quadruple Whammy
Can it get any worse? You bet. When the world is awash in dollars with no end to the twin deficits in sight, the natural market consequence is for the dollar to fall in value against other major world currencies. The dollar has lost a quarter of its value against the Euro since 2001 and has fared poorly against the yen during this period as well despite heavy intervention by the Japanese Ministry of Finance. Link. The falling value of the dollar makes it harder for the US Treasury to sell its bonds to foreign institutions. Why hold dollar denominated assets when the value of the dollar is falling?
Now, if you are an oil exporter and the value of the dollar is falling in a sustained and substantial manner, what is your reaction? You refuse to accept dollars as payment for your oil. That's already happening and it means less dollars will be held by oil exporting countries from this point forward, thus, more dollars dumped on the market. And this leads to more devaluation of the dollar. Now, if you are the central bank of any major country in the world, and even though it is in your country's interest to prop up the value of the dollar FN2, there is a point at which the continued decline in the value of the dollar is too much for your central bank to absorb and you have to dump dollars. That's already happening putting further downward pressure on the value of the dollar.
Where's this all leading?
Just like a crack addict will pay anything to get his or her next fix, our borrowing addicts at the US treasury are inevitably going to face higher and higher borrowing rates. As private interest rates are inextricably linked to US government bond rates, this means higher interest rates on consumer debts (yeah, those credit cards Americans have maxed out), home mortgages, local government loans for building projects, and corporate bond rates. There's no way around it, substantially higher interest rates are staring us in the face. When that happens, individuals and businesses will reign in their spending and the US economy is heading for a crash. Ben (Obi-Wan) Kenobi of Star Wars fame stated all life is interconnected, enmeshed in a symbiotic relationship. One can clearly see that the world's economies are interdependent. The old saying is that when America catches a cold the rest of the world gets pneumonia. Japan (the #2 economy) will almost certainly crash with the US. The rest of the world's economies shall not be far behind when number 1 and 2 sink into recession.
Where's our leader on this issue?
When he's not working to make his massive tax cuts permanent, asking Congress for supplemental spending bills to cover the cost of the war in Iraq, or trying to kill the social security system (and, in the process, creating two trillion dollars in transition costs), he's denying there is any pending economic crisis. The neo-cons believe reality is as they dictate it. FN3. In my humble opinion, not only these short-sighted elitists, but our entire country is in for a cruel dose of the truth before our dear President W. Bush, a weapon of mass economic destruction, departs office.
JJR
3-15-2005
Footnote 1: Interestingly, it was Bush the Elder who started the country back on the path to financial stability by raising taxes during his presidency and, thus, helping to stem the tide of ever rising budget deficits. Unfortunately for him, this outraged his conservative base and he got spit out of office after one term. IMHO, it was Bill Clinton and Robert Rubin though who did all the heavy lifting and set the table for the greatest period of economic expansion in modern US history.
Footnote 2: Large exporting countries such as China and Japan have a vested interest in propping up the value of the dollar so that the price of their exports to the US (the largest consumer market in the world) remain cheap and competitive.
Footnote 3: Ron Suskind wrote the following in the NYTimes Magazine:
In the summer of 2002, after I had written an article in Esquire that the White House didn't like about Bush's former communications director, Karen Hughes, I had a meeting with a senior adviser to Bush. He expressed the White House's displeasure, and then he told me something that at the time I didn't fully comprehend – but which I now believe gets to the very heart of the Bush presidency.
The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." I nodded and murmured something about enlightenment principles and empiricism. He cut me off. "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality – judiciously, as you will – we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do." Link.
UPDATE: "The U.S. trade deficit, exacerbated by surging imports of oil and textiles, soared to an all-time high of $61.04 billion in February." New York Times, 4-12-05.
UPDATE 2: "Despite annual deficits that are approaching $400 billion -- and that will explode as the baby boomers begin to retire over the next decade -- Washington seems unwilling to take action. There are only two solutions: raising taxes or cutting spending. Lawmakers will do neither." Business Week, 4-25-05.
UPDATE 3: "[T]he [trade] deficit through the first three months of this year is still running at an annual rate of $696 billion, 12.8 percent higher than the $617.08 billion record set for all of 2004. Critics say the widening trade gap demonstrates the failure of the Bush administration's free trade policies." NYTimes, 5-11-05.
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