Swans Commentary » swans.com February 28, 2005  





by Milo Clark





(Swans - February 28, 2005)  Playing with matches sometimes starts a fire. Sticking fingers in that fire sometimes gets them burned. But not always.

Basing economic strategies on that assumption seems like kids playing with fire, giggling back of the barn when one farts. Remember trying to light farts with those big stick farmer's matches?

Watching and trying to make sense out of current economic moves by the Bushies drives home how little seems to have been learned from outstanding educational opportunities available at Phillips Academy at Exeter, Yale University and Harvard Business School.

Even The New York Times in a very recent editorial is noticing that most foreign central banks, especially those of Asia and including Putin's Russia, are reducing holdings of U.S. Treasury securities. The NYT noticed that the South Koreans announced such a policy and the foreign exchange markets briefly convulsed. Such are the jitters involved that both Japan and PRChina, bickering over most everything else these days, jumped in with reassuring noises and actions.

The dollar has enjoyed a brief two-month rally after a sputtering start at the New Year. Most pundits unencumbered with a pro-Administration bias have been making nervous comments about the short term nature of this rally.

The fundamentals which operate underneath foreign exchange markets are ruthlessly explicit. An expanding current account deficit combined with uncontained budgetary deficits and huge ongoing charges held "off-budget" by administration numbers jugglers digs deeply into confidence in the dollar as the international repository of value. I'll spare you the details.

As the once United States of America now bullies its way with sheer military power, the Bush people are counting on the overwhelming weight of the American economy to push through. As "insurgents" are gnawing at sheer military power in Iraq, so are hedging strategies from central banks to foreign exchange desks cutting into Administration arrogance.

As a measure of these countervailing forces we can look at the current spat of charm offensives involving Rice, Rumsfeld and W himself. We can also look at the uncomfortable interval in replacing the very sensitive job of chief trade negotiator.

In parallel, I notice those closely aligned with the Bush administration, Republican in name if not fact, are rolling out the major artillery to defend the core message of no tax increases. They point out that Bush I backed off in the face of unrelenting evidence that government had to shrink dramatically elsewhere than in entitlement programs and allow modest tax increases, which they claim cost him his reelection. These barrages smash and crash editorial pages and op-ed columns. Political shock and awe.

In response or out of just plain meanness, we see the current Bush II budget hacking at the skeletons of entitlements and aimed at the lower socio-economic areas in a vain effort to appear moderating.

With his last term, blessings upon us, in process, is there a remote possibility that his drive toward sainthood sooner than Ronnie will pry open his eyes enough? The ruthless fundamentals noted above are time-based series gathering force much like an avalanche.

To propose any forms of tax increase -- notice the uproar over an off-the-cuff suggestion to up the Social Security ceiling from the current $90,000 -- risks the hardcore Republicans. To avoid the gathering storms tearing at the dollar is to risk much more. However, like all time-series events, maybe he can hold off and dump the messes on his successors in the Oval Office. After all, that is one way Ronnie got his sainthood.

Let us not forget that a core element of Republican strategy is to tempt bankruptcy so that succeeding administrations cannot find funds to restore social programs. To return the government briefly to surplus, Clinton accepted the end of welfare as we knew it.

A cheapened dollar makes exports less expensive and imports more expensive. That policy buggers foreigners and screws less affluent Americans. If the budgetary practices being followed held down or eliminated deficits, cheaper dollars could reduce current account deficits assuming Americans went off their binge consumption of imports.

Paradox remains the nature of actuality.

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Milo Clark on Swans (with bio).



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URL for this work: http://www.swans.com/library/art11/mgc152.html
Published February 28, 2005