Democrats & Liberals Archives

It's Your Money

You are the proud owner of any assets you have been able to accumulate in a lifetime. They are already worth less, maybe a lot less in most other currencies than our own. This is one of the real impacts of the long term decline of the dollar which has just begun dropping. This massive loss in asset value is also a completely predictable byproduct of the Bush tax reduction policy. The deficits caused by this policy and the energy policies of the current and past administrations are becoming mammoth drags on your personal asset base.

Of course any real property you might own will almost certainly also decline in its already weakened dollar value as the world-wide buying power of the dollar depreciates. Read, your home, into that decline in asset value, which is the only asset most of the Middle Class in the USA own. That decline will certainly happen if this lower value for the dollar lasts long enough to help our balance of payments deficit. The dollar's decline will not help us finance our government deficits. Nor will it impact our balance of payment deficits as significantly as Mr. Greenspan and others in this Administration believe that it may.

The average Chinese hourly wage is 64 cents according to an article in this week's Business Week Magazine. It will be a long time before devaluation of the dollar will affect that clear benefit of relocating factory jobs in China. There read never! The double deficits are hurting us already but things can and probably will get a lot worse. A deliberately weakened dollar is eloquently argued against in the December 7th edition of the NY Times by Jeffrey E Garten, titled Don't Let The Dollar Take The Fall.

The Economist in its December 4th edition titled its editorial, The Disappearing Dollar. Now of course the Economist might be a wildly liberal rag because it did not endorse Mr. Bush for reelection, but it is not. It is the most prestigious of Europe's popular economic journals. It is published in Britain, our staunch ally. I do not always like what I read in this weekly magazine, but I can always count on it to be well thought out and reflective of conservative European economic values.

The point of reading this article would be to help us think about our extraordinary vulnerabilities as the printer of the world's reserve currency. The article points out that we in the USA are living high on the power that a reserve currency holds in the world market. That is the power to write checks that are never cashed because the currency is stable. Because of the dollar's stability people have long held their currency reserves in dollars. For a very long time the dollar has remained stable, in part, because it is the world's most powerful reserve currency. The Economist rightly warns that the dollar's current rising instability threatens that status.

The world outside our borders holds around 11 trillion in dollar based assets. The Europeans holding dollar based assets have already absorbed a loss of nearly forty percent in those valuations. That loss is in respect to the same assets if they were held in Europe and denominated in their own currency, the Euro. That is a huge loss of value in a very short period of time and will not encourage investment in the USA by Europeans in the future.

The worst case scenario is, if instead of buying US assets the people who hold those eleven trillion dollars in bonds, stocks and other property start selling. If that does happen the value of the dollar could go into freefall. Then we would see a time when our bonds reach interest rates equal to those we have charged third world countries in the past. We will be unable to fund the projected governmental and balance of payments deficits without paying those rates. That would mean a huge rise in the cost of servicing private and government debt. A subsequent massive drop in the value of dollar denominated assets like homes and retirement investments will follow here at home.

How likely is that outcome? It is certain to happen if we do not change the reckless fiscal course we are on as a nation. That is not an easy task with new political capital in the hands of our President. He is the man who has possibly unwittingly, but certainly single-handedly done more to bring us to this impasse than any other single person in our history. I will continue to blow my little trumpet and hope against hope that it is not the Trump of Doom.

Speaking of the Trump of Doom, only our nation's media could make a popular financial Icon of Trump. This is a man who at the same time as he is celebrated for his fiscal acumen is using Bankruptcy court to protect his control of his greatest assets, his Casinos. He is trying to protect his control of those assets from his investors and creditors, read there your bank and your pension fund. If the world fires us as the keeper of the world's most powerful reserve currency it will be a fate well deserved. The rest of the world will lose greatly too if that happens. It will be painful in the extreme for everyone involved. That is the biggest reason why it has not already happened.

There is no bankruptcy court to protect nations against their fiscal irresponsibility. The term You're fired, will take on a whole new meaning. It will go beyond anything contemplated by The Donald if we are fired as the keeper of the world's greatest reserve currency. He and other moguls will lose along with the rest of us. That will be cold comfort indeed for the Middle Class of this nation. Trump's blind-to-awareness apprentices in the economics of short-term-thinking will have too much ugly reality to worry about to care what Trump thinks when that happens. God bless and keep you all safe in these amazing economic times.

Posted by Henri Reynard at December 7, 2004 9:39 AM