The Curious Bush Recovery

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While
I am admittedly not a professional economist, I am an "evil
capitalist' with some interest in the field. From this perspective,
a quick examination of recent economic data is showing odd and scary
trends that defy the general consensus that we are in a great "Bush
recovery." And the more closely this data is analyzed, the
stranger it gets. As with everything else concerning this administration,
it leaves one wondering what the hidden agenda is and who is pulling
the levers.

Things
just don't happen this weirdly by themselves.

The
first oddity is the lack of job creation. Normally, by this time
in the recovery cycle, millions of jobs would have been added to
the national economy. As businesses move out of the wary psyche
of recession and into the daylight of prosperity, they eventually
hire more workers to meet increasing demand.

This
recovery has seen no such hiring surge. In fact, some recent data
shows that the manufacturing sector now has fewer employees than
it did back in 2000. This must be the first time in US history that
a recovery has fewer manufacturing jobs than the recession that
preceded it.

But
unlike many of the other oddities, the obvious explanation for this
one is that the recovery is creating manufacturing jobs…in
China. That giant nation has seen an historic surge in industrial
production, much of which is destined for our shores.

While
this is no great mystery, things do get a bit more bizarre when
one looks at the twin behemoths of our trade and budget deficits
in conjunction with the dollar's trends on international markets.

In
a nutshell, the US government is spending money at a heretofore
unprecedented pace…and is going into debt at a rate seldom seen
before in human civilization. And much of this spending is not defense
or terrorism related. Education, housing, and numerous other social
programs have exploded under this president at rates far in excess
of the "liberal" Clinton administration. This president
is about to become one of a very few in history to never have vetoed
a single bill during a 4 year term in office.

Accompanying
this surge of government indiscretion is our trade deficit. These
past months, it has rocketed to stratospheric levels. Americans
have been importing far more than they export for many decades,
but the current rate could set an all-time record.

What
makes this even scarier is that the trade imbalance is occurring
in conjunction with two other factors.

First, Americans have essentially ceased saving money. We are financing
this import binge on credit (thanks, in part, to the Federal Reserve's
manipulation of interest rates). The average US household now has
somewhere in the neighborhood of $7–8000 in credit card balances…and
growing. EZ credit and mortgage refinancing schemes (fueled largely
by the government-manipulated and quasi-governmental mortgage industry)
have encouraged Americans to raid their one last store of wealth:
the equity in their houses.

Second,
is the fact that this massive trade deficit is occurring amid an
historic slide of the US dollar on the world's currency exchanges.
In normal times, a large trade deficit depreciates a nation's currency
relative to other nations' currencies. The market thus returns things
to equilibrium by making imports more expensive and exports cheaper.

But
in the Bush-Greenspan universe, nothing seems to operate as it should.

Last
month we nearly set a record for a monthly trade deficit, but it
occurred after a long 30% slide in the value of the dollar against
a variety of world currencies. Our exports should be booming, and
imports should be prohibitively expensive…bringing our deficit to
a balance.

But
the trade deficit somehow got worse.

Numerous
policies can be blamed for the continued hemorrhage. The fact that
OPEC continues to accept only dollars for oil purchases is a biggie.
If America was any other nation, the recent plunge in the value
of our currency would result in a gigantic surge in the price of
oil. This alone would short-circuit the recovery and slump the economy
back into recession…shutting off our ability to import and thus
bringing the trade deficit to balance.

But
since the dollar is the medium of oil purchases, OPEC gets hosed
when the dollar drops, while we continue to import oil at the same
price.

One
might ask why OPEC goes along with this charade. In fact, some oil-exporting
nations have discussed switching to the Euro, to gold, or to a basket
of currencies. But this would undoubtedly raise the ire of some
very heavily armed people.

The
last guy who switched from dollars to Euros for oil purchases was
Saddam Hussein. He changed over in 2000, and found himself in a
jail cell just a couple of years afterwards (as to whether these
two events are connected in any way, I'll leave it to the reader
to decide).

Secondly,
we are able to continue on this path to oblivion because the wonderful
Chinese government maintains a fixed exchange rate between its currency
(the yuan) and the dollar. Thus, if the US dollar drops on international
currency exchanges, the yuan does as well…meaning that the baubles
we buy from China at WalMart do not change in price when the dollar
drops.

And
the Chinese (and Japanese) also help Uncle Sam's voracious appetite
for money by circulating the dollars from their trade surplus back
to the US in the form of US Bond purchases.

In
essence, the Bush recovery consists of the Japanese loaning us money
to purchase things from the Chinese that we really can't afford.

The
Asians are financing our government's budget deficit with dollars
obtained from our Asian trade deficit.

This
is not a stable economic strategy…it is a bizarre high-wire act.

Since
the market doesn't like to be dallied with, it always finds a way
to make itself heard. The flaw in this crazy theory of economics
is the willingness of Asians to continue to buy US bonds. The question
is quite simple: Why buy a bond with a 1–2% yield when the
currency in which the bond is denominated is plunging? The investor
loses on the spread big-time (it should also be added that the investor
has a further disincentive when he realizes that the USA is so far
in debt that we'll never be able to pay it back…even with devalued
dollars)

Sooner
or later the geniuses over at the Japanese Central Bank are going
to begin to ask themselves this very question. Right now, they probably
don't pull the plug because they 1) are afraid of precision-guided
munitions (after all, some of their cities have only recently stopped
glowing from the last run-in they had with Uncle Sam), and 2) realize
that their own industries rely on giving Americans their money back
to buy more junk.

Talk
about a dysfunctional relationship!!

But
this can only go so far. Sooner or later, the Asians are going to
realize that we can't pay the money back…and that even if we could,
the plunging dollar makes it ludicrous to loan us any more.

Then,
interest rates on US bonds will have to rise to lure more investors.
And then the budget deficit explodes, the economy slows down due
to higher rates, and things get really ugly.

There
are a lot of little guys in leotards swinging through the air under
the big top. Sooner or later, someone isn't going to be at the right
place at the right time.

Now
some folks might ask who I am to question the Federal Reserve Chairman.
To which I reply with the old adage: "Remember, it was amateurs
who built the Ark, and professionals who built the Titanic."

February
19, 2004

Steven
LaTulippe [send him mail]
is a physician currently practicing in Ohio. He was an officer in
the United States Air Force for 13 years.


        
        

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