FacebookTwitterGoogle+RedditEmail

Why the Dollar is So Cheap

The dollar is trading at all time lows against the euro and gold for good reasons. The Bush Administration has flooded the world with greenbacks, and global investors have little confidence in the management of the U.S. economy.

During the Bush years, the U.S. trade deficit has doubled. Thanks to dysfunctional energy policies and tolerance for Chinese mercantilism, the deficit has exceeded $700 billion each of the last three years and is more than 5 percent of GDP.

The Bush energy policy emphasizes incentives for domestic oil production and letting rising prices instigate conservation but those have failed. Domestic crude oil production is falling, the price of gas has risen from $1.51 to $3.21, automakers have populated U.S. roads with fuel guzzling SUVs, and petroleum now accounts for about $380 billion of the trade deficit.

Cheap imports from China have chased millions of Americans from manufacturing jobs, as the U.S. purchases from the Middle Kingdom exceed sales there by nearly five to one. The trade deficit with China is about $250 billion.

China has engineered this competitive triumph by keeping its yuan even cheaper than the dollar, euro and gold. Annually, it sells at deep discount about $460 billion worth yuan for dollars, euros and other currencies in foreign exchange markets. That provides a 33 percent subsidy on Chinese exports and keeps Chinese goods cheap on the shelves at Wal-Mart.

The Bush Administration has sought changes in China’s currency policies through diplomacy and has failed. Paradoxically, Treasury Secretary Henry Paulson has managed to tar as protectionist any proposal for U.S. government action to offset Chinese subsidies.

The remainder of the trade deficit is largely autos and parts from Japan and Korea, who through various means have kept the yen and won cheap too.

The huge trade deficit must be financed either by attracting foreign investment in new productive assets in the United States or by printing IOUs. Investment has only provided about 10 percent of necessary cash, so each year the United States sells currency, bank deposits, Treasury securities, bonds, and the like to foreigners. Those claims on the U.S. economy now total about $6.5 trillion.

That floods world financial markets with U.S. dollars and paper assets that function much like U.S. 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 U.S. consumers by the 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 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 generated fat fees, big profits and generous bonuses for bank executives.

Now investors ranging from U.S. insurance companies to the Saudi Royals are not much interested in buying bonds created by large U.S. banks, and the banks can no longer make loans to many credit-worthy consumers and businesses. Without credit, the U.S. economy cannot grow and prosper.

The Federal Reserve has direct regulatory responsibility for the large U.S. banks, and it is Ben Bernanke’s job to require them to fix their business practices and resurrect the market for bonds backed by bank loans.

Yet, Federal Reserve Chairman Bernanke has offered no plan to address these problems, or even acknowledged the urgency of the situation. And, without a well functioning banking system, the U.S. economy heads into recession of uncertain depth and duration.

International investors, recognizing the U.S. economy lacks competent helmsmen at Treasury and the Federal Reserve, are fleeing the dollar for the best available substitute–the euro and gold.

When George Bush was inaugurated, the euro was trading at 94 cents and gold cost $266 an ounce. Now they are trading at $1.52 and $985 an ounce. That is a plain vote of no confidence in the Bush­Bernanke economic model.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

 

 

 

 

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

September 19, 2018
Binoy Kampmark
Needled Strawberries: Food Terrorism Down Under
Michael McCaffrey
A Curious Case of Mysterious Attacks, Microwave Weapons and Media Manipulation
Elliot Sperber
Eating the Constitution
September 18, 2018
Conn Hallinan
Britain: the Anti-Semitism Debate
Tamara Pearson
Why Mexico’s Next President is No Friend of Migrants
Richard Moser
Both the Commune and Revolution
Nick Pemberton
Serena 15, Tennis Love
Binoy Kampmark
Inconvenient Realities: Climate Change and the South Pacific
Martin Billheimer
La Grand’Route: Waiting for the Bus
John Kendall Hawkins
Seymour Hersh: a Life of Adversarial Democracy at Work
Faisal Khan
Is Israel a Democracy?
John Feffer
The GOP Wants Trumpism…Without Trump
Kim Ives
The Roots of Haiti’s Movement for PetroCaribe Transparency
Dave Lindorff
We Already Have a Fake Billionaire President; Why Would We want a Real One Running in 2020?
Gerry Brown
Is China Springing Debt Traps or Throwing a Lifeline to Countries in Distress?
Pete Tucker
The Washington Post Really Wants to Stop Ben Jealous
Dean Baker
Getting It Wrong Again: Consumer Spending and the Great Recession
September 17, 2018
Melvin Goodman
What is to be Done?
Rob Urie
American Fascism
Patrick Cockburn
The Adults in the White House Trying to Save the US From Trump Are Just as Dangerous as He Is
Jeffrey St. Clair - Alexander Cockburn
The Long Fall of Bob Woodward: From Nixon’s Nemesis to Cheney’s Savior
Mairead Maguire
Demonization of Russia in a New Cold War Era
Dean Baker
The Bank Bailout of 2008 was Unnecessary
Wim Laven
Hurricane Trump, Season 2
Yves Engler
Smearing Dimitri Lascaris
Ron Jacobs
From ROTC to Revolution and Beyond
Clark T. Scott
The Cannibals of Horsepower
Binoy Kampmark
A Traditional Right: Jimmie Åkesson and the Sweden Democrats
Laura Flanders
History Markers
Weekend Edition
September 14, 2018
Friday - Sunday
Carl Boggs
Obama’s Imperial Presidency
Joshua Frank
From CO2 to Methane, Trump’s Hurricane of Destruction
Jeffrey St. Clair
Maria’s Missing Dead
Andrew Levine
A Bulwark Against the Idiocy of Conservatives Like Brett Kavanaugh
T.J. Coles
Neil deGrasse Tyson: A Celebrity Salesman for the Military-Industrial-Complex
Jeff Ballinger
Nike and Colin Kaepernick: Fronting the Bigots’ Team
David Rosen
Why Stop at Roe? How “Settled Law” Can be Overturned
Gary Olson
Pope Francis and the Battle Over Cultural Terrain
Nick Pemberton
Donald The Victim: A Product of Post-9/11 America
Ramzy Baroud
The Veiled Danger of the ‘Dead’ Oslo Accords
Kevin Martin
U.S. Support for the Bombing of Yemen to Continue
Robert Fisk
A Murder in Aleppo
Robert Hunziker
The Elite World Order in Jitters
Ben Dangl
After 9/11: The Staggering Economic and Human Cost of the War on Terror
Charles Pierson
Invade The Hague! Bolton vs. the ICC
Robert Fantina
Trump and Palestine
FacebookTwitterGoogle+RedditEmail