Americans were alarmed last June as the price of oil raced
toward $150 per barrel. Today, as the price falls toward $100, Americans feel
relieved. They have forgotten that prior to the Bush regime�s wars, the price
of oil was $30 per barrel.
Similarly with the dollar. Despair ruled as the dollar fell
to 1.6 to 1 euro. Now with the dollar�s rise to 1.4 to 1 euro, relief bathes
the markets. The fact that the dollar will never return to parity with the euro
is out of sight and out of mind.
In declines, as in rises, speculation can run ahead of
fundamentals. Just as speculators in oil futures markets can drive the price
too high, currency speculators can drive a currency too low.
The dollar�s problems are the enormous US trade and budget deficits
and the fact that there appears to be no way to close either. Offshoring of US manufacturing and service
jobs has enlarged the trade deficit while shrinking the domestic income tax
base. In addition to its energy imports, the US has large trade deficits in
When inflation is properly measured, the US economy has
experienced little, if any, real economic growth in the 21st century. Yet,
according to economist Joseph
Stiglitz, the total cost of the Bush regime�s wars in behalf of US and
Israeli hegemony is $3
trillion. Without a rapidly expanding economy, there are insufficient tax
revenues to cover these costs.
The US is dependent on
foreigners to finance its $600 billion annual government budget deficit and
its $800 billion annual trade deficit. The US government relies on foreigners
to recycle their $800 billion trade surplus dollars to buy US Treasury bonds
and mortgage debt.
Foreigners were becoming reluctant to continue the same rate
of recycling. This reluctance contributed to the dollar�s slide and to the
worsening situation of Fannie Mae and Freddie Mac, which need to issue their
own bonds in order to support their mortgage holdings.
The US Treasury took steps to avert, or perhaps more
accurately to push off into the future, a crisis. Foreign central banks agreed
to purchase dollars so that low US interest rates could persist through the
November election. High interest rates now would make the mortgage crisis unmanageable.
To keep the recycling going, the US Treasury took the
mortgage giants under its wing in order to reassure foreign investors.
According to a September
8 Reuters report from Beijing, �China
owned $376 billion of debt issued by US government agencies, principally Fannie
and Freddie, as of mid-2007.�
If the Treasury�s new relationship with Fannie and Freddie implies
a guarantee of the bad mortgages as well as the bonds issued by the two
companies, it is possible that the Treasury has put at risk its own ability to
The Treasury already has to borrow $600 billion a year to
finance the operations of the US government. How much in addition will the
Treasury need to borrow, or co-sign, in order to keep the two companies afloat
and to keep mortgages from defaulting?
The total could be greater than the US Treasury�s
It remains to be seen whether the Treasury has put troubled
debt on the same footing as its own or brought trouble to Treasury bonds.
If the latter, America�s superpower days are over, and the
world will be spared the neocons�
Craig Roberts [email
him] was Assistant Secretary of the Treasury during President
Reagan�s first term. He was Associate Editor of the Wall Street Journal. He has
held numerous academic appointments, including the William E. Simon Chair,
Center for Strategic and International Studies, Georgetown University,
and Senior Research Fellow, Hoover Institution, Stanford University. He was
awarded the Legion of Honor by French President Francois Mitterrand. He is the
author of Supply-Side
Revolution : An Insider�s Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the co-author with Lawrence M.
Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for
Peter Brimelow�s Forbes Magazine interview with Roberts about the recent
epidemic of prosecutorial misconduct.