Masthead graphic based on a painting by Gudrun Thriemer.

Sunday, March 09, 2008

Economic show and tell: facts to reflect upon.

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.

Peter Morici , a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission, sees those price changes as “a plain vote of no confidence in the Bush-Bernanke economic model.”

The dollar is cheap these days becasuse international investors have fled the dollar for gold and euros because Ben Bernenke, chairman of the US Federal Reserve, has no plan that would require US banks to fix their business practices and resurrect the market for bonds backed by bank loans.

Morici traces the problem to a trade deficit that has doubled under Bush. The deficit must be financed either by attracting foreign investment to new productive assets in the United States or by selling currency, bank deposits, Treasury securities, bonds and the like to foreigners. The latter 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” (Morici ATol Mar 7 08).

China's role in this catastrophe is often mistaken for unlimited power. Morici points out that “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.”

Another ATol economic analyst, Chan Akya, concludes that
“Chinese exporters [will] first lose their major market and have to start firing people, while a belated widening of the currency trading band will keep local asset prices as well as food relatively unaffordable for millions of people."

Although Akya expects China's GDP growth to continue between 6 and 8 percent for the next five years, Mao's iron rice bowl will break. Akya expects price controls from the government and political upheaval from the Chinese people.

This is already beginning to happen in other parts of Asia. Marwaan Macan-Markar reports from Bangkok that the global price for rice is so high that the World Food Program is telling East Timor to look for local suppliers.

Akya expects that “first the US and then Europe with Japan all slide into negative economic growth.”

Akya expects that the coalition government of India will not survive the next elections which will happen in 12 months. The government has allowed its currency to rise mainly to control inflation at home. Growth, he believes, will decline to 5-7%.

For Akya, the dollar isn't just cheap, it's dead.

The US government is now forcing the IMF to sell its gold holdings in hopes that some holder of gold will be provoked to buy US dollar-denominated assets instead. Akya expects this strategy to backfire. New losses for the IMF will “leave the institution at a new nadir of relevance as far as the emerging financial order is concerned.”

Looking for a substitute reserve currency, Akya rules out the euro because he sees Europe as a “purveyor of dangerously overpriced goods to an overtaxed population.”

“As sellers of commodities, Middle Eastern nations could never get their currencies as reserve holdings for processing nations such as Asian countries. For much the same reason, countries in Africa and South America are rendered irrelevant for this purpose” (Akya ATol Mar 4 08). Recommend this Post

Sphere: Related Content