Dollar Trouble

by zigzig, Sat Nov 27, 2004 at 10:28:19 AM EST

Don't look now, but the biggest issue for 2008 will be economical, not social. The US fiscal situation, which has been perpetually bad year-after-year, has accumulated to the point that it is so massive, something is going to break.

The point is that foreign (mostly asian) ownership of our debt has been growing year-after-year, and at a certain point they will decide that owning a certain percentage of US government debt is either too much and/or has reached a threshold where they can use their economic muscle aggressively in US policy. In either case, we're not in control, and the situation has the potential to snowball.

I'm not talking about who'll eventually pay for the debt. We all know that we pay the interest now, and our kids owe the principal. But the issue is who lends us the money now, at what rates, and how much power do they exert over us?

Metaphorically speaking, we're close to reaching our credit limit and now our bankers can walk away or set onerous terms. If we want to spend more, it's not business as usual where we just draw up the bonds and people compete to buy them. The shoe is on the other foot now. We have to jump through hoops in order to get a buyer to purchase our debt.

The Total US Net International Investment Position (NIIP) is a deficit of $2.5Trillion.  The NIIP is essentially the accumulation of the annual Current Account positions. Greenspan reacted Nov 19th in a thinly veiled message that "It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point."

Most of the Current Account deficit is due to the Trade Deficit and the Federal Budget Deficit. With the Trade Deficit, foreign companies send the dollar revenues back to US via several paths (either they invest directly or they exchange the dollars into their local currency and their central bank intervenes to pick up extra dollars as reserves.. the central bank then invests the reserves into the US). The Federal Budget Deficit is more direct, where the debt (of the government, the Iraq War, the tax cuts) has to be picked up by someone - and Americans don't save enough to fully feed the administration's debt levels.

We've now allowed the federal government $0.8Trillion room on national debt for a total of $8.18Trillion. It's unclear who will buy up those bonds and under what terms. Europeans have no interest in funding us now. Asians officially hold $1.2Trillion of our debt and have the finances to purchase more, but not the desire. Most of that (about $0.82Trillion) is funded from Japan, which has had a very interventionist central bank when the times were good. The times are different now. China, the beneficiary of much of the Trade Deficit gave indications yesterday (and quickly retracted) that it will even sell it's existing US government bond holdings. Because the perilous situation is well recognized, such indications spook the foreign exchange markets, leading others to get rid of their dollars.

Last year Richard Duncan explained the effects of a trade deficit in the book The Dollar Crisis: Causes, Consequences, Cures The credit bubble hasn't broken yet. What happens when the credit bubble breaks? Not only does the government pay interest at much higher rates for new debt and debt they "roll", but many individuals are locked into adjustable-rate debt and will immediately have to react to higher interest payments.

All of this has lead top economists who have been bearish in the past (example1, example2, example3), to now be speaking in terms of economic armageddon.

Where to go from here? Even if we solve the Federal Budget Deficit by getting Bush out in 2008, we still have the Trade Deficit.  Devaluation is being spoken of in many circles, but that's a one-time (hopefully, only a one-time) effect and doesn't deal with the fact that foreign owners of our debt can be more agressive in arranging the terms of the debt.

There has been very little desire of either political party to take on the issue. About all that has been mentioned was Bill Clinton's reference of China and Japan as our bankers at last August's DNC speech. In referring to the Republican's efforts to borrow:

CLINTON: Now, how do they pay for that deficit? First, by taking the Social Security surplus that comes in every month and endorsing the checks of working people over to me to pay for the tax cuts. But it's not enough.

So then they have to go borrow money. Most of it they borrow from the Chinese and the Japanese government.

Sure, these countries are competing with us for good jobs, but how can we enforce our trade laws against our bankers? I mean, come on.

OK, but it's too little. Not only was that too quick and went right past most people's understanding, but it's coming from someone who put in place many of those trade laws.

The progressive left was correct on the issue of trade, and I dare say, also the paleo-conservative right. The paleo-conservative right will try to take the moral high ground first, but they have a tough fight within the republican party. I would like to see a democratic leader take the initative and take the moral high-ground first.

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4a2fab88-ed3b-47a4-8f14-3ec8a24504ac_normal
dollar
The way the dollar's been getting pushed down, and the Euro up, it looks like it's being manipulated (probably by Soros for a little payback to Bush, lol), with the Chinese too, all will buy low to sell high.... heck, Bushies are probably in on it as well. Anyway, great overview, you are right, something will give, and it will hurt.
by Jerome Armstrong 2004-11-27 01:00PM | 0 recs
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We will inflate...
away the debt. It's the only way out now.

Rampant inflation over the course of a decade will reduce the real value of all that debt to manageable levels.

We are talking annual inflation rates of 7-9% for a decade or more.

by coldeye 2004-11-27 04:19PM | 0 recs
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Re: We will inflate...
Yeah, but does an inflation of wages come along with that? Probably not.
by edgeplot 2004-11-27 05:11PM | 0 recs
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Be careful what you wish for
Under no circumstances do we want to see paleo-cons prevail.  They may mimic our economic populism, but the underlying assumptions behind said mimickry should disgust you.
by therob 2004-11-27 01:04PM | 0 recs
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Re: Be careful what you wish for
agreed! (no implications that the paleocons have an overall desireable message). But there's no doubt that divisions will continue within the republican party and will generate some media coverage. Will the people listening to SCLM think that Buchanin and friends are the only fiscally responsible politicians when it comes to trade? We democrats need a leader on trade to get line up behind.
by zigzig 2004-11-27 01:15PM | 0 recs
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I Must Disagree
I don't think the situation is as dire as painted here.  I do think we have serious problems ahead.  However, the dollar is not as low as it was relative to a similar basket of currencies in 1994.  

However, it is a problem that the nation must address.  The current Administration is worse than a partisan group of idelouges, it is a collection of incompetents.  

I think this is a good candidate for our issue of 2005.  We should pick one and hammer it.

by Robwaldeck 2004-11-27 01:08PM | 0 recs
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Re: I Must Disagree

To me, the important thing is not how dire our situation is at the moment, buth the degree to which our ability to control the situation is diminishing.

Consider the government's options, for example, if we were to reenter a recession right now. When real interst rates are 4% and inflation is stable and Federal deficits are modest, there is a lot of fiscal and monetary stimulus ammo available.

Today? Negative real interest rates from the Fed. Infaltion creeping up and threatening to leap up as the dollar plunges. Massive Federal deficits.

We've walked out to the end of the plank and our President's response is: "Wanna buy some wood?"

by Ottnott 2004-11-27 01:23PM | 0 recs
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Re: exchange rate
right. though since 1994, the dollar has spiked and declined against the european currencies (40% decline against the Euro in the past few years?) I wouldn't say that the dollar/euro is a fair example to look to. There are some similarities:  Part of that rise and decline of the dollar/euro was the cash inflows and outflows because the europeans got in and out of our stock market pre and post tech-bubble. The continued decline has more to do with the weak dollar across all currencies. My feeling is that the europeans never owned our debt like the asians do now, and so it's a different ball-game.

I'm not saying we go out and own gold, and I'll let Stephen Roach talk about armageddon - he's smarter than a lot of us and talks to a lot more powerful people. But, let's not have this issue broadside us if it does heat up.

by zigzig 2004-11-27 01:43PM | 0 recs
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Re: exchange rate
Eugene just posted this article from the New Left Review over at dkos at the bottom of the Steve Roach diary: ROBERT BRENNER, NEW BOOM OR NEW BUBBLE? The Trajectory of the US Economy
linked text

This is an excellent and comprehensive analysis of our current economic dilemma.

by Gary Boatwright 2004-11-27 07:44PM | 0 recs
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Stock market is not growing (if in EUROs) under W
I took data since 1999 about dollar vs. euro
from http://fx.sauder.ubc.ca/data.html
and recalculated DOJ index in EUROs.
You will find serios problems started in Nov. 2002
and gap increasing ever since. Stock market is not growing, if you measure it in euros!

What is funny that US capitalists have to worry
about Bush even more then working and middle
classes. US Stock market is not growing during
Bush administration!
I took data from http://fx.sauder.ubc.ca/data.html
and recalculated DOJ index in last 5 years in Euros (converted from dollars):
It was 8072 in Jan.99, then 11609 in Jan.2001
before Clinton left office, then 7581 in Jan.2003
after 2 years of Bush, then 8307 in Jan.2004
and finally 8127 in Nov. 2004

U.S. policymakers have so far appeared happy
with a weaker dollar! See:
http://reuters.com/newsArticle.jhtml?type=businessNews&storyID=6920472
http://reuters.com/newsArticle.jhtml?type=businessNews&storyID=6919733
US economy going down then? See:
http://business.bostonherald.com/businessNews/view.bg?articleid=55356
what is more funny, Pat Buchanan agreed with for a
1st time in his life:
http://www.amconmag.com/2004_11_22/buchanan.html#

by WeNeed3rdParty 2004-11-27 03:36PM | 0 recs
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Re: U.S. happy with weaker dollar !?!?
the traditional idea with a weaker dollar is that imported goods are more expensive, so Americans are unable buy overseas goods in such quantities, and the trade deficit "improves". With any luck Americans (and the rest of the world as the theory goes) will purchase American goods and more American jobs follow.  I don't doubt that this short-sighted argument is what's behind behind "happy policymakers" (and what gets relayed in the unquestioning media).  There's a long way to go until we're in such a turnaround, but it does need to happen.

The weaker dollar is part of the solution, but broaden the scope a little bit. Our massive debt  requires foreign lenders. It makes it even more unlikely that foreigners will purchase and hold onto our debt in the future (there's a risk premium: would you purchase a certain amount of dollars in the future if you knew there was a chance those dollars would be devalued?  You'll lock into foreign exchange forwards, which in effect will be pushing the market against you. The FX market is large, but probably not large enough to handle the liquidity of the Federal deficit) Americans can't fund the total amount of US debt, so I don't know what breaks.

by zigzig 2004-11-27 04:12PM | 0 recs
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So why did not Kerry talk about this
Just like Perot did in 1992.  

Would you advise someone to buy a $700,000.00 house at this time?

by jasmine 2004-11-27 04:59PM | 0 recs
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Re: So why did not Kerry talk about this
Agreed.  Few remember, and even fewer are likely to admit it.  Ross Perot was the single most important person responsible for the federal government's return to fiscal responsibility in the Clinton years.  He was able to articulate the ramifications on individual Americans, of continuing federal budget deficits.  It became one of the main issues in the campaign.  And with the Budget Reconcilliation Act of 1993, President Clinton and the Congress pointed us toward solvency in the federal budget.  Interesting what a viable third-party candidate can do, eh?
by Elwood Blues 2004-11-27 06:05PM | 0 recs
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Re: So why did not Kerry talk about this
Kerry mentioned "pay as you go" but that was it. This could have been a much stronger campaign issue that would have really boxed Bush in on addressing this problem. Of course Gore boxed Bush in on the Social Security "lock box" and Bush ignored that too.

Lou Dobbs has been addressing this issue and our current account deficit every night in his "Exporting America" series. This issue is huge.

by Gary Boatwright 2004-11-27 07:15PM | 0 recs
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Re: So why did not Kerry talk about this
The Social Security "lock box" issue is indirectly tied to this issue of access to cash to borrow off of. I don't understand it enough, but it seems that privatizing SS is a way to, in part, create a steady stream of capital (couple hundred billion per year?) that is available in the markets for the government to borrow off of. In essense, it may be a red herring to say that privitizing SS is just due to the lobbying of the investment banks to try to generate more fees for themselves - the more important issue may be to (in part) fund the deficits. Someone feel free to flame me (with details) if I'm off track here.
by zigzig 2004-11-28 02:18AM | 0 recs
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Re: So why did not Kerry talk about this
sorry, didn't mean to say "fund the deficits" at the end (how our kids will eventually pay for all of this is a different issue). I should have said.. privatizing SS will make cash available to borrow off of?
by zigzig 2004-11-28 02:40AM | 0 recs
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Why does all this support protectionism?
The problem here isn't that we trade openly with Asia but that our government manipulates foreign currency exchanges to gain votes.  Clearly, John Snow lowered the value of the dollar to drive down the price of steel and auto exports. This is protectionism at its worse. Robert Rubin maintained a strong dollar, while encouraging free trade, and it helped boost the economy in the 1990s.
by elrod 2004-11-27 07:01PM | 0 recs
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Stirrings from conservative Republicans
Go over to the bottom of MyDD's blog roll and click on The Hill. You will find this article from yesterday "Centrists and conservatives join forces for fiscal restraint": linked text

The party's fiscal record since President Bush moved into the White House has frustrated and embarrassed conservative and socially liberal House Republicans alike. Federal spending has jumped 23 percent in the past three years, and discretionary spending, which Congress appropriates in annual and emergency bills, is up 39 percent, according to the conservative Heritage Foundation.

Those statistics are discomforting to members of a party that seized control of Congress in 1994 with a platform of fiscal discipline and limited government.

House lawmakers have increased spending by using subtle tactics almost indiscernible to much of the House. Bills authorizing hundreds of millions of dollars have been placed in the suspension calendar, a schedule supposedly reserved for noncontroversial bills, such as those naming post offices. ...

"We would like a very anti-spending tilt in the House rules and will go as far as the Republican members permit," said Rep. Mark Kirk (R-Ill.), the new co-chairman of the Tuesday Group, a caucus of about 35 GOP centrists. "This all plays out just prior to the Congress resuming its work. That rules package is one of the key things we do."

Kirk said freshmen will come to Washington with a "fresh mandate" to check spending. Veteran lawmakers are most receptive to spending curbs early in a session, Kirk said, immediately after they've been in contact with constituents who complain about the size of government and before they've spent too much time on the Hill, where the pressure to spend is constant.

Kirk is working with leaders of the 90-strong Republican Study Committee, giving the spending-reform effort strength enough to threaten to enact reforms even if the leadership is unenthusiastic.

The question is whether these fiscally conservative Republicans who have come out of the closet can challenge DeLay and Hastert. Hastert has imposed a new rule in the House that was diaried over at dkos linked text that would only allow bills to come up for a vote in the House if they had a majority of the Republican majority. Frist has also made similar threats against "liberal" Republican mavericks in the Senate.

This is a great issue to beat Republicans over the head with if one or more Democrats are willing to step forward and take a stand.

I've been trying to find the roll call vote for lifting the National Debt Ceiling. I've been to CSPAN and Thomas and googled without any luck. I'm probably passing right past it. Did Democrats force Republicans to vote for raising the debt limit or did they bail them out again? Any suggestions?

by Gary Boatwright 2004-11-27 07:12PM | 0 recs
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Re: bill for increasing the public debt limit
The bill was S. 2986. The vote was number 213. Mostly along party lines, 52-44. The "democrats" that jumped were Zell Miller and Breaux. Otherwise we could have forced 50-50. The democrats not voting included Hillary.
by zigzig 2004-11-28 03:30AM | 0 recs
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The Republicans will never
balance the budget. They will spend and spend and spend in order to appease their constituents, who really just talk about fiscal restraint until it affects them personally.

The Republicans will also continue to cut taxes, or rearrange taxes to benefit the wealthy.

Result: exploding structural deficits.

This will precipitate a fiscal crisis - either rampant inflation or soaring interest rates.

by coldeye 2004-11-28 07:28AM | 0 recs
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Economic Armageddon
Here's what Stephen Roach, analyst for Morgan Stanley said:
Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004

Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.
     But you should hear what he's saying in private.
     Roach met select groups of fund managers downtown last week, including a group at Fidelity.
     His prediction: America has no better than a 10 percent chance of avoiding economic ``armageddon.''
     Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, ``it struck me how extreme he was - much more, it seemed to me, than in public.''

The issue is coming much sooner than 2008. The replacement of the dollar as world currency. The inability to finance our government with more debt is coming soon and not at a theater near you. And the Repugs plan massive borrowing to finance their privatization of social security. I don't think they are going to find any takers. Who wants to hold bad currency? Robert Reich says put your dollars in gold, give gold for Christmas "NOW."
Bill from Oregon

by cmpnwtr 2004-11-28 07:35AM | 0 recs
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Good Posts
I would like to add some things to the thoughtful discussion on macro-economics.

  1. Most Americans are net importers, the loss of dollar denominated purchasing power will hurt most Americans.

  2. The US represents 25% of the world's economy. We are 5% of the world's population. Something has to give.

  3. All outsiders lament government spending. All insiders cannot help but spend. Why? Because a free lunch is popular with the people, but the pain is not. A poster brought up the fact that 1994 brought in fiscal conservatives. They decided they wanted to stay in power so they borrowed their way out of a recession. Now the democrats lament spending, but always do so in a way that suggests that they would spend as much or more on the "right" things, like the welfare state.

  4. Kerry had bad campaign advice. He should have looked to Clinton in 1992. The only words out of his mouth were "the middle class". The democrats cannot win if they lose the middle class. You may think that caring for the needy is your first objective. No. That is the reward you get for taking care of the middle class. Also, Perot talked about "bubble jobs" which he was correct in predicting, but he also said Clinton couldn't balance the budget in 6 years, which Clinton did.

  5. Beware protectionism. Look up "Smoot Hawley" on the internet and see which party and which color of state was behind it.

  6. It may be a good thing that "values" have come to the fore in this election, because with the economy as it is, we all need to start praying!
by Paul Goodman 2004-11-28 06:42PM | 0 recs

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