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In Case You Missed It. $ Recovers, Oil Falls
5 December 2007The US dollar is now worth more than the Canadian dollar.
Oil is below $89 a barrel. MSNBC Article
Are we in the clear? I doubt it. The underlying fundamentals that drove the US $ down and drove oil up are still there, the risk premiums (the drive up in prices due to speculators) are probably what has diminished in the last week.
An article from a Reagen Treasury Official, Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan administration. He is credited with curing stagflation and eliminating “Phillips curve” trade-offs between employment and inflation, an achievement now on the verge of being lost by the worst economic mismanagement in US history.
This source of US economic growth is exhausted and imploding. The full consequences of the housing bust remain to be realized. American consumers lack discretionary income and can pay higher taxes only by reducing their consumption. The service industries, which have provided the only source of new jobs in the 21st century, are already experiencing falling demand. A tax increase would cause widespread distress.
The budget deficit cannot be closed by taxation without driving up unemployment and poverty. American median family incomes have experienced no real increase during the 21st century. Moreover, if the huge bonuses paid to CEOs for offshoring their corporations’ production and to Wall Street for marketing subprime derivatives are removed from the income figures, Americans have experienced a decline in real income. Some studies, such as the Economic Mobility Project, find long-term declines in the real median incomes of some US population groups and a decline in upward mobility.
Japan and China, indeed, the entire world, realize that they cannot continue forever to give Americans real goods and services in exchange for depreciating paper dollars. China is endeavoring to turn its development inward and to rely on its potentially huge domestic market. Japan is pinning hopes on participating in Asia’s economic development.
The dollar’s decline has resulted from foreigners accumulating new dollars at a lower rate. They still accumulate dollars, but fewer. As new dollars are still being produced at high rates, their value has dropped.
If foreigners were to stop accumulating new dollars, the dollar’s value would plummet. If foreigners were to reduce their existing holdings of dollars, superpower America would instantly disappear.
Foreigners have continued to accumulate dollars in the expectation that sooner or later Washington would address its trade and budget deficits. However, now these deficits seem to have passed the point of no return.
The sharp decline in the dollar has not closed the trade deficit by increasing exports and decreasing imports. Offshoring prevents the possibility of exports reducing the trade deficit, and Americans are now dependent on imports (including offshored production) for which there are no longer any domestically produced alternatives. The US trade deficit will close when foreigners cease to finance it.
I am not linking to the article, because at the end Dr. Roberts make a few politico statements I can’t stomach. And I’ll not be a party to it.
However I think when he sticks to economics he makes some good points.
I have young children and a daugther in college. I hear more and more from other parents of young children of tradeoffs being made between soccer cleats, ballet shoes and the cost of living.
The answer is not more social spending programs, the likes of which are a source of the problem not an answer. At every debate the Democrats propose more money, and the Republicians say nothing. Except Ron Paul. Now I doubt he has a snowball’s chance in hell, but he has my vote.
Robert Reich of the Clinton adminstration had a very interesting piece on NPR (forgive me, I live next to a mountain and it is the only station my alarm clock can pick up) this morn. If I can find his commentary on line I’ll use it for tomorrow.
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