December 4, 2004
The plight of the dollar was on the front page the New York Times today. Americans have been buying Asian goods but the U.S. has not been selling American goods to Asians The balance of payments is now so out of kilter that together Japan and China hold 1.4 trillion dollars in American debt in the form of government securities and mortgages. They are deeply invested in these instruments for one simple reason: it maintains the value of the dollar, thus keeping Japanese and Chinese goods inexpensive--and therefore competitive--in the American market. If the dollar falls, it will take more dollars to buy a DVD player or a personal computer, and Asian industry will find that its sales to the U.S. will fall like a stone, throwing both Asia and probably the rest of the world, into an economic meltdown. Because this is an unthinkable outcome, the two Asian economic giants have dutifully financed our deficit for the past ten or so years.
We warned readers of this situation almost five years ago. Debt, even national debt, cannot accumulate forever. Eventually, creditors become nervous and start insisting on payment. When the debtor is the United States government, relatively immune from normal collection procedures, the response is to begin selling our debt instruments on the open market, an action that will invariably prompt other debt holders to do the same. A glut of U.S. Treasury paper on the world market can have only one outcome: a precipitous fall in the value of the dollar.
This year, as the Times points out, other countries purchased $620 billion of our debt, an amount that represents 5.7% of overall economic activity. They did it to avoid disaster, but like a Ponzi scheme, avoiding disaster simply makes the adjustment, when it comes, even worse.
Creditors are finally becoming really nervous, or otherwise the news would not appear on the front page of the most important newspaper in the world. China and Japan, on the other hand, are caught in the game just as tightly--perhaps more so--than the U.S., because as soon as they begin to sell U.S. Treasury paper, the market value of their holdings will decline faster than the proceeds of the sales
As the dollar begins to falter, the U.S. will be forced to finance its deficit by paying a higher interest rate. Treasury paper will descend to the level of junk bonds, as creditors demand a higher interest rate to cover the risk of default. Higher interest rates in the U.S. will put heavy brakes on the economy, deepening the recession we are now experiencing.
To this precarious fiscal situation, we now add the very likely shortfalls in both oil and gas production and the simultaneous surge in energy prices, as expanding economies vie with each other to buy adequate supplies from either a flat or diminishing supply of what is truly the lifeblood of our civilization. Today, almost all of the oil-producing nations price their output in dollars. That is why the dollar is now the preeminent currency in the world: nations must pay dollars for oil. Therefore, dollars are indispensable.
A decline in the dollar will put pressure on the producing nations to price their oil sales in a more stable currency, such as the euro, which now is rapidly appreciating against the dollar. If you realize that Saddam Hussein was making noises about pricing Iraq's oil in euros instead of dollars, you may begin to understand why the Bush administration found it necessary at all costs to invade Iraq and depose Saddam. You also might begin to understand why the U.S. continues to pop up the venal, totalitarian and corrupt royal family of Saudi Arabia, the world's largest oil producer.
First, we can blame our leaders from 1980 on for their short-sightedness. Not a single president from Reagan on has been even remotely honest with the American people about energy, the environment, or what was happening to the economy. By keeping interest rates high, and therefore keeping the dollar high, the Reagan administration literally gutted our industrial plant, creating a Rust Belt from formerly wealthy cities and states with well-paid workers and a high level of public services. A strong dollar, bolstered by high interest rates, kept energy prices low and consequently made us dependent upon imported oil, as we bought gas-guzzling SUVs and light trucks like drunken sailors. Successive administrations, beholden to big business, deliberately ignored the findings of the scientific community that humans were altering the environment in ways that threatened our survival.
Second, we can blame foreign leaders for putting up with our balance of payments deficits. If they had started selling dollars twenty years ago, we would not have many of the problems we have today. As the dollar declined, the price of imported energy would have gone up, and we would have started thinking hard about how we might live with less driving, smaller vehicles, heat-efficient housing and decent public transportation.
Third, we can specifically blame the Bush administration for the enormous tax cuts for the wealthy that did little to alleviate the recession and exacerbated the problems with our balance of payments. We can further blame the Bush administration for deliberately dismantling the modest protections for the environment and in pandering to the public's love affair with the motorcar. We can blame the Bush administration for changing what had previously been a slow march to financial disaster into a gallop.
Fourth, we can blame Congress for its short-sighted support of the presidential policies that have brought us to this point. They are a sorry lot.
Fifth, and perhaps most of all, we can blame ourselves. We are to blame for allowing our political system to fall into the hands of unprincipled men whose sole purpose is to stay in office and who will do or say anything that will keep them there. We are to blame for refusing to acknowledge what the scientific community has been telling us for years. We are to blame for trading some of our most important freedoms for the promise of cheap oil, bigger automobiles, and more security. As Benjamin Franklin observed, those who make that bargain deserve neither freedom nor security. We are now in a position in which we stand to lose both.
I am deeply pessimistic. Our government appears to be doing its best to keep things going as they are now as long as possible and then, when it all falls down around our ears, to impose what can only be described as a facist regime, backed up by the military and a militarized police force, much like some of the nastier South American regimes our government has supported over the past hundred years. The American people have become so wilfully ignorant, so docile, and so taken by fear and anxiety that they have allowed the infrastructure of oppression to be established before their very eyes.
The author is no expert in all the things that would be necessary to avoid the coming abyss, but it doesn't take a genius to pick out some of them.
We simply must reduce our consumption of oil and gas. If we don't do it now, when we can cushion the ill effects, we will face either oil priced out of our reach or severe shortages. The dependence of agriculture upon petroleum must also be greatly reduced. Europeans enjoy roughly the same standard of living as ourselves with half the per capita energy consumption. We will probably have to endure considerable inconvenience in the transition, but the only alternative is something much worse in a few years.
We must institute a crash program in renewable energy. Presidents and congresses have resisted this for 24 years, under pressure from the energy industry. We no longer have the luxury of keeping our heads in the sand.
We must reduce our balance of payments deficit. That means that we will have to buy less from overseas or sell more to Japan and China. If that means that the dollar must fall, or that we have to institute a general tariff, it must be done. Every dollar that goes overseas is a dollar not earned by a worker in the U.S.
Every administration and congress since 1980 has promoted and adopted legislative and policy changes that have transferred wealth and income from the middle and lower classes to the extremely wealthy. The U.S. has the highest level of inequality of all the industrial nations. The Bush administration, by its tax reductions for the very wealthy and its elimination of the estate tax, has exacerbated that trend. This must stop and even be reversed. Steeply progressive income and estate taxes are fair and sensible. Somehow, we must muster the political will to bring this about.
There is no excuse for not having a national health plan. Our nation spends twice the percentage of the GDP on health care as other industrial nations, but our health is no better. Too great a percentage of what we spend on health care goes into the pockets of CEOs of health insurance companies and shareholders. In order to keep the national health plan reasonably priced, we must put a very high priority on public health. Healthy people don't need the level of health care that sickly people do.
Our military-industrial complex must be brought to heel. Having no significant enemies in the world, our level of military expenditure is not only indefensible, it is evil and a threat to humanity.
Finally, and perhaps most importantly, we must disabuse ourselves of the belief that happiness consists of owning a lot of stuff, whatever that "stuff" may be. We might mouth the old saw that wealth doesn't bring happiness, but we don't believe it in our own hearts, because we have been conditioned ("brainwashed") into believing that happiness comes from having and consuming. Whatever value that belief had a hundred years ago, it is now leading us to disaster, as we plunder the world to sustain our acquisition of stuff.
Both conservatives and liberals have betrayed the American people. You did not hear these issues debated in the presidential debates of 2004. You have not heard them debated on television, nor in the newspapers. There is a tacit agreement among the powerful in this nation that these remain non-issues. Nevertheless, they are the elephant in the bathtub. We ignore them at our peril.