Where is the US economy headed?

He said Americans who buy only American goods are not affected if the value of the U.S. dollar goes down. I was terrified

... our government spending is out of control.

cicerone imposter wrote:

... our government spending is out of control.

I thought you were an advocate for the expansion of Medicare to the general Public.

There is plenty of dollars to be saved by removing ourselves from Iraq; about 2.7 billion every week.

Miller wrote:

cicerone imposter wrote:

... our government spending is out of control.

I thought you were an advocate for the expansion of Medicare to the general Public.

Ofcoarse! I believe in a system that combines private insurance with government subsidies for those who can't afford it. There is plenty of dollars to be saved by removing ourselves from Iraq; about 2.7 billion every week.

November 13, 2007, 12:52PM EST text size: TT

Dollar Crisis: Economic Pearl Harbor?

If China abandons the dollar for the euro, Americans will surely suffer. So far, that prospect has sparked mainly U.S. indignation
by Gabor Steingart

What do Brazilian supermodel Gisele Bündchen and the People's Republic of China have in common? The answer, as of last week, is that both distrust the dollar.

Patricia Bündchen, the twin sister and manager of the world's top model, announced that Gisele now prefers to be paid in euros rather than dollars. Almost simultaneously, the Chinese central bank predicted that the dollar is likely to lose its status as the world's leading currency.

One could easily overlook a supermodel's currency preferences, but China is a different story. It's the beast breathing down America's neck.

The most important country in the world for the United States isn't Great Britain, Germany, Saudi Arabia, Russia or Iraq. China holds that dubious distinction, because it is also the country the US can least do without. Without its willingness to buy an almost unlimited supply of US treasury bonds, there would be no American spending miracle. Without a spending miracle there would be no economic growth. In other words, without China the US superpower would lose a significant share of its economic clout.

So far Beijing has behaved like the benevolent shopkeeper who willingly extends credit to his customers. The Americans receive shipments of Chinese-made television sets, toys and underwear, but the Chinese do not import a comparable volume of US goods. The gap between buying and selling amounts to about $5 billion every week.

The Chinese are satisfied with buying US treasury bonds, partly to keep their most important customer afloat. The central bank in Beijing already holds currency reserves of $1.4 trillion.

The Chinese have looked on with great patience as their best customer has gradually lost its ability to supply goods.

But the men in power in Beijing cannot be indifferent to the dollar's decline. It devalues their central bank's dollar reserves, the monetary embodiment of some of the fruits of China's export machine.

For the United States, a Chinese decision to abandon the dollar would be tantamount to Pearl Harbor without the war. It would represent a challenge to the world's biggest economy by the world's fastest growing economy. Millions of people would see their standard of living suffer as a result, and American self-confidence, already shaky, would crumble even further. The United States would suffer a serious blow on its very own turf, the economy.

Americans can hardly blame Beijing for their troubles. The Chinese aren't exactly kamikaze politicians, concocting some secret plan to attack the dollar. On the contrary, the preparations are taking place in full view. Translated into Texan, what the Chinese politely told the Americans last week simply means: Unless something happens, all hell will break loose.

For years the US economy has suffered one dramatic setback after another. A historic trend reversal began with the rise of the Asian economies -- first Japan, then China and now India. The United States, a once-proud exporting nation, became the world's biggest importer. In only 15 years, from 1992 to 2007, the US balance of trade deficit has surged from $84 billion to $700 billion.

Within a single generation, the world's biggest lender has become its biggest borrower, a circumstance the United States has made no serious attempts to change. And what has been Washington's standard take on the shift? The dollar is our currency, but it's your problem.

Thus, the tone of the US government's callous and thick-skinned reaction to China's announcement last week came as no surprise. There was a reason the dollar became the world's reserve currency, US Treasury Secretary Hank Paulson said in a slightly offended tone.

But the truth is that the United States would be better off if Paulson and the administration of President George W. Bush would take decisive action instead of sulking. The US's ability to deliver goods should be increased and its industrial base should be reinvigorated. Government and consumer spending, which in reality is doing nothing but eating away at the country's future, should be curbed. Although growth would decline as a result, it would be a more sustainable form of growth.

Last week's remark by a Chinese central bank official should be interpreted as a warning, not a threat. Indeed, China has no choice but to respond, given the dollar's ongoing weakness.

For these reasons, an attack on the US economy is probably the most easily predictable event of the coming years. And if it happens, the attacker will even be able to justify its actions as self-defense.

What is the difference between the US government in 1941 and the administration in Washington today? Perhaps there is none. A Japanese attack on the US Pacific Fleet at Pearl Harbor was unimaginable, even though US intelligence had picked up clues that it could happen. Washington, at the time, was convinced that the Japanese wouldn't dare stage an attack on a target 5,000 miles away, and that they wouldn't succeed if they did.

The crews on America's ships were sleeping as the Japanese bombers approached Pearl Harbor.

Economic Pessimism Highest in 17 Years

Pessimism about the economy has jumped to its highest level since November 1990, according to the Washington Post-ABC News Consumer Comfort Index.

Sixty-eight percent of Americans say the economy is getting worse, a 13-percentage-point increase since October, and nearly 30 points above the long-term average for the question. [..]

Déjà vu all over again: 1992 revisited

There are continuing - and accelerating -- signs of perceived distress from the American public.

The percentage of Americans who are satisfied with the way things are going in the U.S. is now as low as it has been since the summer of 1992. The percentage of Americans who say the economy is getting worse is the highest Gallup has measured since it started using the current measure - back in 1991. The president's job approval is at 32%, which prior to the current president's ratings this year and last year is the lowest since 1992. Approval of the job Congress (i.e., the people's elected representatives) is doing is at 20%, and prior to this year we have to go back to 1992 to find a time when it has been this low. [..]

For those of use who study such things, there's also a shift evident in the data by which the economy is gradually rising to the point where it is eclipsing Iraq as the population's most important concern. This is probably due to two factors. One, the news from Iraq is better. Two, worries about the economy are beginning to drown out concerns about Iraq. But whatever the cause, this too is beginning to look a lot more like the 1992 environment.

Things were perceived by the average American as so terrible in 1992 that the way was opened for a maverick Texas billionaire to jump into (and then out of and then back into) the presidential race, and ultimately to claim 19% of the popular vote. And, of course, the way was opened for an obscure Arkansas governor to position himself as the hero of the people, both feeling their pain on the economy while shrewdly providing sharp contrast to the incumbent president (born with a "silver spoon in his mouth") who appeared relatively out of touch with what was happened to the nation's common men and women. [..]

Prior to 1992, observers assumed that George H.W. Bush would sail to re-election based on his victorious execution of the first Persian Gulf War. Prior to this year, observers have assumed that the Iraq war and foreign policy could be the central issues of next year's campaign. Those predictions did not come true in 1992, and they might not next year either.