Why the dollar is so cheap, and euro and gold are so dear
By Peter Morici
Online Journal Guest Writer
Mar 7, 2008, 00:23
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.
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 of 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.
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.
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.
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.
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
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 Bush�Bernanke economic model.
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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