Federal Reserve Chairman Bernanke has announced his intention to increase the money supply. This is called “quantitative easing.” Basically it means printing more money. The Fed is expected to pump $500 billion more into the financial system, on top of the $1.75 trillion already spent, trying to lift the economy (Sacramento Bee, Oct. 16, 2010).
The logic is simple, and well-known: (1) This will stimulate the economy. (2) It will continue to devalue the dollar, which people say is good, because it will improve our exports. (3) And it will bring bring back a “healthy” level of inflation, which is better than deflation.
But I agree with Yale historian Paul Kennedy that The dollar’s decline has been disastrous (See “Don’t’ Surrender U.S. Influence to Beijing” - New York Times, Sept. 29). When I came to this country in 1960, the dollar was worth FOUR times as much as the typical European currency, e.g. the Mark, the Dutch Guilder, the Swiss Frank, etc. We were 4 times richer than the Europeans. Now, the dollar can’t even keep up with the Euro. When that currency was introduced in 1999, it was worth less than a dollar. Today, it is worth $1.40, and rising. If a weak dollar benefits us, we should be real happy when the dollar declines to the value of the Mexican Peso.
Railing against the federal budget deficit is the favorite pastime of Republicans, Tea-Partiers, conservatives, and everyone who hates “the government.” It is their chief campaign issue. True, the federal deficit is very large, and very scary.
But few bother to distinguish between the government deficit problem, and the much more intractable TRADE DEFICIT problem. The current federal deficit is temporary, and it is caused by unwarranted tax breaks for the wealthy.
On the other hand, the trade deficit is long-term, intractable, huge, and growing. Currently, America imports $600 billion more every year than it exports. This has been going on for DECADES. China has accumulated $2.65 trillion so far. Add to that what we owe to Middle-eastern sheikdoms, to Germany and to our other creditors.
While the two deficits are intertwined, I am flabbergasted that hardly anyone ever distinguishes between them, or recognizes that the trade deficit problem is the more serious of the two. Most of those brave “fiscal conservatives” aren’t even aware of the distinction! One of the few exceptions is economist and Nobel laureate Paul Krugman. See his "Killer Trade Deficits," (New York Times, August 16).
What happens if you earn $100,000 and spends $120,000 every year, for 40 years? You end up devoting ever more of your income to financing your growing debt. There comes a point when you spend 100% of your money on finance charges, and 0% on groceries. You starve, or you borrow more and more. You are trapped in a vicious cycle. You have become a slave to your creditors. This is what America has become. We are owned.
The solution? Simple. Same as what any bankrupt household must do: work away the debt.
How?
1. Tighten the belt. Consume less.
2. Sell more goods, import less.
3. Raise taxes - temporarily.
1. Tighten the Belt: When Greeks and other Europeans default, they tighten their belt. But for some reason, Americans are expected to consume MORE, not less, even though our debt-to-GDP ratio is approaching that of Greece’s (nearly 100%).
When Japan and Europe suffer heavy government deficits, they raise taxes, at least temporarily. But for some reason, our politicians advocate LOWERING taxes, under the mantra of job creation.
2. Export more, import less: This evokes the antique concept of “Mercantilism” and the loathed concept of “Protectionism.” I favor both: Historically, societies have become rich and powerful by exporting more and importing less. Louis XIV’s finance minister Colbert and the British Imperial government understood this. It is imperative that America resume producing and selling goods. If this takes tariffs, so be it. When a Honda costs twice what a Chevrolet costs, I’ll go back to buying Chevrolets.
3. Raise taxes for 10-15 years. Whittle away the government debt. Presently, the government spends $300 billion a year on financing its debt. As the debt declines, money will be freed up for other budget items, and taxes can be reduced - a virtuous cycle. leave comment here
3 comments:
The Federal Reserve basically uses debt financing. This means that any time money leaves the Federal Reserve it goes out as credit, and the bank gets interest. This is more the reason for our national debt than a trade deficit. It is a method or moving money from common citizens to bankers. The only way around this is to not borrow money from the Federal Reserve.
A number of people associated with Bernanke and the Treasury Secretary made a lot of money off of the housing bubble. The result was that banks stopped lending and people stopped borrowing. Also people began to sell stocks and put cash on the sidelines.
Financial elite, by printing money, can profit by causing inflation because they now hold property that will be easier to pay off and the money on the sidelines will become less valuable. This is a 1-2 punch.
First, your property is devalued, so many people sell it. Next money is devalued, so people will buy property again. The financiers make money on both moves, the average person looses on both.
An excellent piece, Tom. I also like Gordon's comment. As he points out, the inflationary cycles help those who borrow the most money (mainly the rich and the government) because they can pay back their loans with dollars that are worth less than the ones they borrowed. By keeping the prime rate low, the Fed encourages the banks to loan money, but they only do so at rates that provide them with large profits. In theory, this is supposed to stimulate business and create jobs, but in practice most of the money seems to end up in the hands of the bank executives. It's rather hard to improve the trade balance when most of the nation's wealth is in the hands of a few people who can make more money manipulating investments than making Chevrolets or computers. Eventually you have nothing to trade, and people abroad begin to realize that your "empire" is built on sand. A few economists like Krugman and Robert Reich are beginning to realize this, but most of the rest of them don't seem to have a clue. Heaven only knows how some of them got a Nobel Prize!
Gordon and Gene, thank you for your comments. Like you, Gene, I rarely disagree with Paul Krugman and Robert Reich.
Gordon: another solution (to our international indebtedness) occurs to me: We can go into hyperinflation, like Germany, Hungary and others did in the 1920s. I still have a stack of Hungarian PENGO bills: Some are TRILLION PENGO bills - worth a loaf of bread at the time.
This way, our debts to foreign countries would evaporate.
(I am being funny, you realize. The domestic costs of hyperinflation would be catastrophic).
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