Why the Dollar is So Cheap?
- From: periodistalibre@xxxxxxx
- Date: Thu, 6 Mar 2008 11:32:40 -0800 (PST)
By PETER MORICI -
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.
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