The dollar is trading at all-time lows
against the euro and gold for good reasons. The
George W Bush administration has flooded the world
with greenbacks, and global investors have little
confidence in the management of the US economy.
During the Bush years, the US trade
deficit has doubled. Thanks to dysfunctional
energy policies and tolerance for Chinese
mercantilism, the deficit has exceeded US$700
billion each of the past three years and is more
than 5% of gross domestic product.
The
Bush energy policy emphasizes incentives for
domestic oil production and letting rising prices
instigate conservation, but those have failed.
Domestic crude oil production is falling, the
price of gas has risen from $1.51 to $3.21,
automakers have populated US roads with
fuel-guzzling sports utility vehicles, and
petroleum now accounts for
about $380 billion of the trade deficit.
Cheap imports from China have chased
millions of Americans from manufacturing jobs, as
the US purchases from the Middle Kingdom exceed
sales there by nearly five to one. The trade
deficit with China is about $250 billion.
China has engineered this competitive
triumph by keeping its yuan even cheaper than the
dollar, euro and gold. Annually, it sells at deep
discount about $460 billion worth of yuan for
dollars, euros and other currencies in foreign
exchange markets. That provides a 33% subsidy on
Chinese exports and keeps Chinese goods cheap on
the shelves at Wal-Mart.
The Bush
administration has sought changes in China's
currency policies through diplomacy and has
failed. Paradoxically, Treasury Secretary Henry
Paulson has managed to tar as protectionist any
proposal for US government action to offset
Chinese subsidies.
The remainder of the
trade deficit is largely autos and parts from
Japan and South Korea, which through various means
have kept the yen and won cheap too.
The
huge trade deficit must be financed either by
attracting foreign investment in new productive
assets in the United States or by printing IOUs.
Investment has only provided about 10% of
necessary cash, so each year the United States
sells currency, bank deposits, Treasury
securities, bonds and the like to foreigners.
Those claims on the US economy now total about
$6.5 trillion.
That floods world financial
markets with US dollars and paper assets that
function much like US dollars - what economists
call liquidity. And, it evokes an iron law of the
universe. If you print too much money, it won't
have any value.
Until recently, most of
that borrowed purchasing power was put into the
hands of US consumers by large Wall Street banks.
Essentially, through mortgage brokers and regional
banks, those Wall Street banks loaned Americans
money to buy homes and refinance their mortgages.
In turn, the banks got the cash needed by bundling
mortgages, as well as auto loans and credit card
debt, into collateralized-debt-obligations - bonds
backed by consumer promises to pay - for sale to
fixed-income investors, hedge funds and others.
The bankers could get reasonably rich on
this scheme, but they got greedy. Last summer, we
learned that the banks were not creating
legitimate bonds. Instead they sliced, diced and
pureed loans into incomprehensibly arcane
securities, and then sold, bought, resold and
insured those contraptions to generate fat fees,
big profits and generous bonuses for bank
executives.
Now investors ranging from US
insurance companies to Saudi royals are not much
interested in buying bonds created by large US
banks, and the banks can no longer make loans to
many creditworthy consumers and businesses.
Without credit, the US economy cannot grow and
prosper.
The Federal Reserve has direct
regulatory responsibility for the large US banks,
and it is chairman Ben Bernanke's job to require
them to fix their business practices and resurrect
the market for bonds backed by bank loans.
Yet, Bernanke has offered no plan to
address these problems, or even acknowledged the
urgency of the situation. And, without a
well-functioning banking system, the US economy
heads into recession of uncertain depth and
duration.
International investors,
recognizing the US economy lacks competent
helmsmen at the Treasury and the Federal Reserve,
are fleeing the dollar for the best available
substitute - the euro and gold.
When Bush
was inaugurated in January 2001, the euro was
trading at 94 cents and gold cost $266 an ounce.
Now they are trading at $1.52 and $985 an ounce.
That is a plain vote of no confidence in the
Bush-Bernanke economic model.
Peter Morici is a
professor at the University of Maryland School of
Business and former chief economist at the US
International Trade Commission.
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