Analysis: Betting on the falling dollar
By Martin Sieff
UPI Senior News Analyst
From the Business & Economics Desk
Published 5/20/2003 2:02 PM
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WASHINGTON, May 20 (UPI) -- The re-election economic strategy of the Bush administration is now clear: continue to slash taxes in the expectation this will boost business confidence and jump start the economy. At the same time, let the dollar tumble -- as enormous budget and trade deficits make inevitable anyway -- and that will boost exports, slash imports and also stimulate domestic performance.
Will it work? Maybe. But we doubt it.
Over the past two years, we have repeatedly predicted in UPI Analysis that the administration's policy of relying on tax cuts alone to boost investor and consumer confidence would fail to launch a new boom cycle and so far, alas, we have been right.
Last August, we also predicted months of continued gyrations on what we called the "Yo-Yo Dow" and that is continuing too.
Boosted by rapid victory in Iraq, the end of war uncertainty and the likelihood of continuing low energy prices abroad and more tax cuts at home, the Dow Jones industrial average has soared back above 8,500. Also, the hundreds of billions of dollars that the administration has pumped into the economy, sending annual federal budget deficits sky high again, has so far kept the inflationary wolf from the door. But alarming predators can still be heard howling outside it.
Unemployment levels have crept up to 6 percent and show no signs of dropping. Also, federal spending cuts have put massive pressure to maintain welfare and public services on the states, leading many of the biggest to rack up relatively enormous deficits of their own.
Within the past week, two trends that define the consistent economic policy themes of this administration dramatically reasserted themselves. First, President George W. Bush got his latest -- $350 billion -- tax cut through both houses of Congress. And second, not surprisingly, the dollar continues to tumble.
Classic Adam Smith purists such as columnist William Safire writing in the New York Times continue to sleep easy in their beds and exude confidence when they get out of them. For classic economic theory says that devaluing the currency makes imports more expensive and exports far cheaper. Therefore orders will rush into U.S. companies from overseas, the trade gap will magically close, all those worrying jobs the economy has started to hemorrhage will come flooding back in, and the president will be re-elected on a tidal wave of peace, security and prosperity -- or, at least, prosperity -- in November next year.
The re-election indeed looks likely on current political trends, as we noted on Monday in UPI Analysis, but ironically the biggest threat to it could be the administration's own economic policy. For recent experience suggests that the tumbling dollar will not automatically cause the smooth and prosperity-generating readjustment that Treasury Secretary John W. Snow obviously anticipates.
That is because, first of all, the fundamental reason for the enormous annual trade deficits wracked up by the U.S. economy over the past 20 years -- and getting bigger all the time -- are largely structural in nature and making U.S. exports cheaper will not increase them remotely enough.
The United States has ceded its role as the largest industrial and high-tech producing nation on Earth to China, Japan and the other rising tiger nations of East Asia. The demand for consumer durable goods such as washing machines, television sets, DVD players and a lot more automobiles than Detroit can produce anymore by itself is not going to go away. Also, nations such as Japan and the European Union nations are not going to stop doing what they need to protect their domestic steel and other heavy industries.
High-tech information and service industries have never been able to fill that gap before, and they certainly are not going to do so now. They remain very much in the doldrums since the collapse of the great Internet speculative bubble began in March 2000 and there is no sign of a new boom on the horizon there.
This administration, and this president, priding themselves on being the heirs of Ronald Reagan, have indeed followed some of the same policies he implemented with such success 20 years ago. Like Reagan, they have slashed taxes and allowed the annual federal budget and international trade balance of payments deficit to rocket into the stratosphere.
When Reagan did that, the economy recovered from a serious recession and roared ahead with the longest, greatest, most successful and most widely and fairly distributed recovery in American history.
But there was another reason for that not being followed by the Bush economic team. For Reagan kept the dollar strong and allowed interest rates to soar sky high in the short term. As a result, foreign investment flooded into the United States in the hundreds of billions of dollars. Japanese banks and Saudi Arabian oil billionaires alike knew they had good cause to be confident that Reagan and his Federal Reserve Chairman Paul Volcker were determined to lick inflation and retain fiscal stability come what may.
But Bush, his Council of Economic Advisers and his Fed Chairman Alan Greenspan have been sending a very different message to global investors. They are keeping interest rates in the bargain basement. The dragon of deflation, unknown to Reagan and his economists 20 years ago, is now raising its head. And the combination of flat-lining interest rates with a tumbling dollar, coming on top of the enormous structural trade deficit and Bush's blasé unconcern about the federal government's ever-widening one, gives international investors a very worrying picture.
Also, 20 years ago, the United States was an obvious haven for a booming Japan and an Arab world still fearful of the Soviet communist threat to invest in. But over the past year, Saudi Arabian investors have quietly withdrawn hundreds of billions of dollars of investment from the domestic United States, and Japan remains mired in its recession woes with its banks desperate to survive in Tokyo, let alone dreaming of plunging anew into U.S. investments.
With the tumbling dollar sending messages of fear, not reassurance into international markets, the euro of the European Union for all its own structural weaknesses has stepped into the breach for want of anything better. The euro is soaring against the dollar. It has risen more than a quarter in value -- 27.6 percent -- against it in the past year.
A year and a half ago, we issued the following warning in UPI Analysis: "The Bush team have undermined international investor confidence in the strong dollar that Bill Clinton and his Democrats, seen since the days of William Jennings Bryan as the party of cheap money and fiscal imprudence, maintained so long and so well through two presidential terms.
"If the yen or even the long-despised euro should generate more investor confidence than the dollar, then the enormous flow of global investment that has kept American prosperity and growth thundering ahead for two decades could vanish. Then the economic downturn would rapidly reach crisis proportions and the hardship would reverberate from coast to coast across the American continent.
"No one around Bush seems to take this danger seriously for a second. But then, none of them seems to be worried for a second that they have abandoned the most important fiscal principles that so served Ronald Reagan so well for so long 20 years ago."
Snow has placed the nation's bets for economy recovery on a plummeting dollar, and he has already gotten it. Whether he also gets the recovery he is betting on is another story. He could get something far worse.
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