On the bedside table:
Debt Nation
Then there are the future obligations such as Medicare, Social Security and government pensions. This huge problem worried the former Federal Reserve Chairman Alan Greenspan. He told congress: “As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill”. Even though he was part of the problem, not the solution, Greenspan might be correct in this assessment, especially if attitudes favoring privatization in economic organization don’t change soon.
Each time the Republicans (and increasingly Democrats as well) cut taxes for rich people and corporations we get further away from being able to fund these crucial social programs. Over the past 25 years, a huge percentage of the country’s financial holdings have been systematically moved away from governmental management and oversight and into the hands of corporations and the richest Americans. Those few who have covertly "acquired" our country’s wealth, built up through the blood, sweat and tears of working Americans over the years, refuse to re-invest enough in the future of the country. Instead they take the money and run. To make up the difference, we go further into debt.
One would think that this amount of debt would worry the president and the congress. But apparently it does not. The US Congress recently (March 2006) voted to increase the Federal debt limit to 9 trillion dollars. Any other nation in similar circumstances would have had to approach the IMF for help. The IMF would then have forced that nation to cut spending and devalue its currency. But, because we make the rules, the US does not need to do this. The question is: how long can this continue before the world looses faith in the greenback, sending it crashing to unimaginable levels.
The Asians
The Asian countries such as China, Japan and others that hold most of the debts have been happy to indulge our poorly managed deficit spending for years. This has been a two-way Street as America has kept our markets open to their products and they have financed our spending.
The value of the greenback so far has been kept artificially high by China, Japan and oil-exporting countries. These countries have financed US debts over the years thus allowing interest rates to stay relatively low. In this climate, nurtured for years by Greenspan, Americans are encouraged to keep spending even as their debts mount.
Realistically, there is only so much risk these lenders (Asian and oil-exporting countries) are willing to take. There has to be a limit. Any serious devaluation of the dollar will considerably reduce the value of their national reserves (mostly kept in dollars) and the value of their debt holdings (certificates, bonds, etc.). At the same time, the devaluation will affect their exports to the US. A weaker dollar makes their products more expensive in our country, thereby reducing their export earnings. Most Asian countries keep the majority of their reserves in dollars. China, with very large reserves has already begun to slowly reduce its dependency on dollars by converting part of its reserves to other currencies. If other Asian countries - with their vast dollar holdings - follow suit, then it will be disastrous for the value of the dollar. No-one is interested in holding a weakening currency.
That is not the only problem eminating from China; below is a snapshot taken by the Economic Policy Institute in October 2003 (Keep in mind the trends discussed have continued in an accelerated fashion through this day):
China's currency manipulation and U.S. trade:
In recent years China's booming economy, fueled by large inflows of foreign direct investment (FDI) and rapid export growth, has emerged as a significant force in the global economy. In 2003, China surpassed the United States as the world's largest recipient of FDI, and its bilateral trade surplus with the United States reached $117 billion in the 12 months up through August 2003.
But China is not playing by the same rules as everyone else: China pegs the yuan to the dollar at a fixed rate and strictly regulates imports and the allocation of foreign exchange. In order to maintain the yuan's fixed value, China must create a residual supply of yuan to counter growing demand for its currency; China achieves this by buying dollars in foreign exchange markets. Between December 2000 and July 2003, China more than doubled its foreign reserve holdings from $168 billion (16% of its GDP) to $361 billion (31% of its GDP).
How should the United States respond? On nine occasions between 1988 and 1992, the U.S. Treasury found that similar external surpluses accompanied by much smaller accumulation of foreign reserves constituted evidence that countries—including China—were manipulating their currency's value for competitive trade advantage. When such a finding is made, U.S. law requires the Treasury Secretary to undertake negotiations to end such manipulation. Current evidence indicates that China is engaged in just such a manipulation of the yuan for competitive gain. --end--
Unfortunately, our leaders have become so addicted to the financial safety blanket provided by the foreign loan sharks, in this case the Chinese, that they predictably shy away from confronting Bejing on these dangerous ploys. Judging by last month's visit of China’s premier Hu Jintao to the United States our leaders, both governmental and corporate, aren't up to the challenge of enforcing our trade laws. The fawning and obsequious behavior of the world’s most powerful politician (Georgie boy) and businessman (Bill Gates), and their deafening silence, was depressing.
Isn’t there something very wrong with this tunnel-vision that lets an American president and American companies focus on their self interest while ignoring the social constituencies that make their success possible? It's not a stretch to say China needs America more than America needs China. It's also not a stretch to say China needs Microsoft more than Microsoft needs China. Presumably Bush and Gates each have a bully pulpit that could be used to make even mild comments about China's monetary manipulation (not to mention social repression). Is making money the only answer, a la Ayn Rand? Or is there a higher order, a moral commandment for those of the wealthy classes to speak out about wrong wherever they see it? And for those whose privilege and position gives them the power to do this without serious consequence, isn’t it an imperative? And if it isn’t, shouldn’t we demand it of those we elevate to the pantheon? Do we really believe the nonsense that "what's good for Wal-Mart is good for America"?
With this currency manipulation the Sino American marriage is putting the US in a precarious position of reliance. Our kids will feel the brunt of these relationships in the future, as usual.Petro-Dollars
Another threat against the dollar comes from countries such as Iran and Venezuala. The threat comes from the currency in which the oil is to be sold. Iranians are moving to make the Euro the standard currency for oil transactions. Some sympathetic countries such as Venezuala and others may join in. If the Iranians succeed in this, the pressure on the dollar could be catastrophic. Nearly every country has to hold a certain amount of dollars in reserve for oil purchases. If the dollar continues to weaken in value, and there is the possibility of purchasing oil in Euros, then these countries might unload their dollars for safer currencies such as the Euro. What will then happen to the value of the dollar? Our recent foray into Iraq has only served to exacerbate this problem. Even our friends in OPEC, like the Saudis for instance, have voiced their anger with America's tactics in starting and prosecuting that ill-fated venture.
As if there is not enough pressure on the dollar, the U.S. government keeps dumping our future generation's wealth into a giant hole in the desert in that un-winnable war in Iraq. The total cost of the war, including future payments to disabled soldiers, replacement of equipment, etc., might end up in the trillions of dollars. The ramifications of the lives being lost in the war for the future are incalculable. Who knows what great scientific breakthrough won't be achieved because the possible discoverer has been lost in the desert. Not only that, Bush, Dick, Rummy, Paul and Condie are reportedly considering starting another one in Iran (those zany neo-cons again, you really have to keep an eye on them). Any attack on Iran will substantially increase these costs. Even if there is no attack, the tense situation in the region will keep the oil prices at uncomfortable levels, contributing to both a reduction in growth and an increase in our deficit. And more strain on the dollar.
Credit Debt:
To make things far worse, borrowing is a massive problem when one considers the amount of credit card debt that has been accumulated by average Americans. The credit card companies foster this sense that money grows on trees by encoraging reckless spending, you aren't even considered a good customer in their minds if you pay your bills on time. In addition, so many people are so stretched financially due to ever weakening comparative wages that they use their credit cards in a desperate attempt to keep their families clothed and fed from month to month, thus mortgaging their futures. At some point the other shoe will have to drop though. Right? It seems that many people don't quite get it.
Conclusion:
During the Great Depression and through the generations that experienced it, business and stock markets were seen as the causal factor, therefore they were the problem. "Enlightened" government was thought to be the answer and FDR in many ways proved them right. Yet, over time, as the country prospered that image faded and adjustments were needed. Now unfortunately the pendulum has swung forcefully in the opposite direction, too far I think. Our people are so far removed from any such national tragedy, of the type that forces the masses to pull together for a common purpose (to preserve their very existence), that the privileged position of business and markets has crept back into the halls of power and education. They also own the media and it shows.
If we continue along this path of self destruction, whereby we act continuously without considering long-term consequences, the current American deficit and its long-term financial obligations could sooner or later lead to either a marked increase in interest rates or a substantial devaluation of the dollar. On one hand, a substantial increase in interest rates could lead to a major recession, or even depression, in the US which will be felt immediately around the world. On the other hand, a substantial devaluation will cause financial chaos in the world markets.
Sooner or later, both the US and the rest of the world have to address the existing problems. Obviously, this problem is not all the US’ alone. But we can’t ignore the fact that we’re the largest economy on earth (although at current rates of growth China will catch us in 2016) and that we have had the greatest control over the dealings of the world’s financial institutions like the IMF and World Bank. Certainly no one can argue with the pre-eminence of Wall Street as the world’s leading money trading center. I’ve heard it said that if America sneezes, the world catches cold. If we keep up our actions, it won’t be long before the world begins to vaccinate against this possible cold. Then who will pay our bills?
Be seeing you....