Wall Street suffered a one-day panic last week when a rumor floated that South Korea’s central bank was looking to dump some of its reserves of U.S. dollars. The Koreans quickly denied the rumor and order was restored, but you can’t blame Asian bankers for getting nervous. As of December 2004, Japan, China, Taiwan and South Korea were together holding over one and a half trillion dollars of U.S. currency.
So many manufacturing jobs have shifted from the U.S. to East Asia in the past 30 years that Americans buy our clothes, electronics, cars and a host of other products from there. The goods come west, the money goes east and accumulates in banks. This is what is meant by a trade deficit.
The Bush administration, for four years, has tried to balance our trade deficit by pursuing a “weak dollar‿ policy. The idea is that allowing the dollar to lose much of its value – relative to other world currencies –would encourage foreigners to purchase relatively cheap American goods and services, thus returning those overseas dollars and reducing the trade deficit.
The strategy hasn’t worked. Regardless of how weak the dollar becomes, American manufacturers paying minimum wage cannot compete with Chinese factories paying less than a dollar per day. The weak dollar should be a boon to the tourist sector, with Asians and Europeans bringing strong yen and euros to spend on their holidays. At the same moment the Treasury Department decided to let the dollar plunge, however, the Department of Homeland Security decided to photograph, fingerprint and otherwise harass most foreigners passing through customs. The general lurch toward totalitarianism hasn’t helped either.
The American “weak dollar‿ policy is a disaster for Asian bankers. They sit on mountains of American cash, which is worth less every month as the dollar continues its slide. A bank can try to cut its losses by exchanging dollars for a more stable currency, as South Korea was rumored to do, but no banker wants to touch off a panic that leads to a global financial crisis. The other alternative is to prop up the weak dollar, which Asian bankers do by purchasing U.S. Treasury bonds, or in effect, by making the mountains of American dollars in their vaults even higher and increasing their own risk should the dollar fail.
To cover our trade and budget deficits, the U.S. last year borrowed $650 billion. This year we will have to borrow $800 billion. That’s over $25,000 every second, day and night, for all of 2005. In three seconds, we’ll borrow more than the average American family earns in a year. The interest on just the money we borrow this year will add $40 billion to the 2006 federal deficit.
Obviously, this cannot continue. Already, nations with fewer dollar reserves than the East Asians – like India, Russia and South Africa – are quietly exchanging dollars for euros, even though the exchange rate is not favorable. Since 2001, OPEC nations have shifted 20 percent of their oil revenue deposits from dollars to euros. It’s unlikely we’ll see an orderly transition in world currency markets. Either someone, somewhere starts a mad dash away from dollars and toward euros, or the U.S. economy collapses under the weight of George Bush’s deficits.
Bad outcomes can be avoided, but it means the Bush administration and Congress have to act quickly to reduce the federal deficit; that means raising taxes. Since the wealthiest Americans benefited most from the Bush tax cuts, those are the people whose taxes must be raised.
George Bush’s currency policy should come as no surprise to anyone who’s watched his administration. It’s reckless, has consequences that carry the potential for global disaster and expects others to do all the heavy lifting. In these respects, it’s remarkably like his foreign policy or environmental policy.
Dumping Dollars
Wall Street suffered a one-day panic last week when a rumor floated that South Korea’s central bank was looking to dump some of its reserves of U.S. dollars. The Koreans quickly denied the rumor and order was restored, but you can’t blame Asian bankers for getting nervous. As of December 2004, Japan, China, Taiwan and South Korea were together holding over one and a half trillion dollars of U.S. currency.
So many manufacturing jobs have shifted from the U.S. to East Asia in the past 30 years that Americans buy our clothes, electronics, cars and a host of other products from there. The goods come west, the money goes east and accumulates in banks. This is what is meant by a trade deficit.
The Bush administration, for four years, has tried to balance our trade deficit by pursuing a “weak dollar‿ policy. The idea is that allowing the dollar to lose much of its value – relative to other world currencies –would encourage foreigners to purchase relatively cheap American goods and services, thus returning those overseas dollars and reducing the trade deficit.
The strategy hasn’t worked. Regardless of how weak the dollar becomes, American manufacturers paying minimum wage cannot compete with Chinese factories paying less than a dollar per day. The weak dollar should be a boon to the tourist sector, with Asians and Europeans bringing strong yen and euros to spend on their holidays. At the same moment the Treasury Department decided to let the dollar plunge, however, the Department of Homeland Security decided to photograph, fingerprint and otherwise harass most foreigners passing through customs. The general lurch toward totalitarianism hasn’t helped either.
The American “weak dollar‿ policy is a disaster for Asian bankers. They sit on mountains of American cash, which is worth less every month as the dollar continues its slide. A bank can try to cut its losses by exchanging dollars for a more stable currency, as South Korea was rumored to do, but no banker wants to touch off a panic that leads to a global financial crisis. The other alternative is to prop up the weak dollar, which Asian bankers do by purchasing U.S. Treasury bonds, or in effect, by making the mountains of American dollars in their vaults even higher and increasing their own risk should the dollar fail.
To cover our trade and budget deficits, the U.S. last year borrowed $650 billion. This year we will have to borrow $800 billion. That’s over $25,000 every second, day and night, for all of 2005. In three seconds, we’ll borrow more than the average American family earns in a year. The interest on just the money we borrow this year will add $40 billion to the 2006 federal deficit.
Obviously, this cannot continue. Already, nations with fewer dollar reserves than the East Asians – like India, Russia and South Africa – are quietly exchanging dollars for euros, even though the exchange rate is not favorable. Since 2001, OPEC nations have shifted 20 percent of their oil revenue deposits from dollars to euros. It’s unlikely we’ll see an orderly transition in world currency markets. Either someone, somewhere starts a mad dash away from dollars and toward euros, or the U.S. economy collapses under the weight of George Bush’s deficits.
Bad outcomes can be avoided, but it means the Bush administration and Congress have to act quickly to reduce the federal deficit; that means raising taxes. Since the wealthiest Americans benefited most from the Bush tax cuts, those are the people whose taxes must be raised.
George Bush’s currency policy should come as no surprise to anyone who’s watched his administration. It’s reckless, has consequences that carry the potential for global disaster and expects others to do all the heavy lifting. In these respects, it’s remarkably like his foreign policy or environmental policy.
© Mark Floegel, 2005