The Bush administration’s newest budget proposal is out and as Loren Steffy, the Houston Chronicle’s business columnist, points out, it “is a trillion little pieces of fantasy”:
WE will be out of Iraq and, for that matter, Afghanistan, by the end of the next fiscal year. No troops, no economic support of any kind.
The alternative minimum tax, that secret tax system ensnaring more and more middle-class families, will vanish without costing the government a dime in lost revenue.
The tax cuts that have saved some of the wealthiest among us hundreds of dollars a year will continue indefinitely. This, too, will cost the government nothing.
That spiffy alternative energy technology that President Bush said in his State of the Union speech last week will help end our oil addiction? It can be funded on a shoestring.
Those are just a few of the twisted fantasies you have to embrace if you want to follow the president down the rabbit hole of his latest budget proposal.
In short, the Bush budget is an increase to our already massive federal deficiit waiting to happen. It overstates projected revenue just as it understates projected expenses. It lowers taxes on the wealthiest in our society while cutting programs, like student aid, popular with America’s sinking middle class. And it ensures deficits for as far into the future as the Congressional Budget Office cares to look, although some experts believe even the CBO’s grim estimates understate the problem of our ever accelerating national debt.
Add in the record US trade deficit and consumer debt figures, and one thing becomes clear: America’s economy is running on the fumes of our foreign investors’ benevolence:
The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to “political turmoil,” billionaire investor Warren Buffett warned.
“Right now, the rest of the world owns $3 trillion more of us than we own of them,” Buffett told business students and faculty Tuesday at the University of Nevada, Reno. “In my view, it will create political turmoil at some point. … Pretty soon, I think there will be a big adjustment,” he said without elaborating.
Which begs the question, why are our Republican political leaders, and especially President Bush, so sanguine about our nation’s economic future? Do they literally believe that the US economy is too big to fail?
More, including an explanation of what I’m talking about when I use the term “too big to fail,” on the flip side.
Too Big To Fail
“Too big to fail” is a term of art that comes from the federal government’s regulation of the financial industry. It originally arose after the Great Depression as the generic term for the Federal Reserve’s stated policies toward certain financial institutions whose continued viability was considered essential to the health of America’s financial industry, and our economy. However, at this point, “too big to fail” is a policy which has been adopted by the governments of many countries, and applied to many different types of financial institutions, ranging from insurance companies, to Wall Street hedge funds. In brief, its essential points can be described thusly:
The potential failure of a large bank presents vexing questions for policymakers. It poses significant risks to other financial institutions, to the financial system as a whole, and possibly to the economic and social order. Because of such fears, policymakers in many countries—developed and less developed, democratic and autocratic—respond by protecting bank creditors from all or some of the losses they otherwise would face. Failing banks are labeled “too big to fail” (or TBTF).
What too big to fail means in laymen’s terms is that governments will intervene to prevent the failure and/or collapse of certain large firms as a means to preventing a larger catastrophe. The idea is that when the government “rescues” a large financial company which has a significant share of its market, it will prevent an industry wide collapse which might lead to the other business failures and even economic collapse. Many economists have questioned the application of “too big to fail” measures in specific instances, but few have argued that the policy itself should be abandoned entirely.
Can a country be too big to fail?
There are historical examples of a “too big to fail” approach having been employed to rescue entire countries whose financial system and economy were on the verge of collapse. The most famous example occured during President Clinton’s presidency, in 1995, when the IMF (backed by loan guarantees from th United States and other countries) prepared a $50 billion loan package to avert a currency crisis in Mexico. Subsequently, the IMF and the G7 countries have employed similar bail outs in Asia, Russia and Latin America.
The Bush Economy
Since the Bush administration took control in 2001, our total outstanding national debt has increased from $5.7 trillion to over $8.1 trillion. In other words, in five years, Bush has increased the total national debt by nearly $2.5 trillion, or 70% more than all previous Presidents in our history combined.
Of that debt which isn’t owed to the Social Security fund or other intragovernmental creditors, $2.1 trillion is held by foreign investors, principally China, Japan and the United Kingdom. Over $1 trillion is held by China alone. Due to our trade deficits, in effect, China and other countries are financing America’s spending spree. Indeed, one could argue that they are the principal backers of our global war on terror, since our own government refuses to collect enough taxes to pay for that war on its own nickel.
And it would be fair to say, these foreign investors are also financing anyone whose taxes have been cut by Bush and the his Republican controlled Congress.
Now, our foreign creditors have good reasons for investing in US debt instruments. One reason is the trade deficit we run up each month primarily benefits countries, like China, who are experiencing rapid economic growth. I don’t have to tell you how much of what we buy in our stores was manufactured in other countries. All you have to do is look at the labels of your clothes, or examine carefully the electronic gizmos we all so cherish, to discover that many of them originated outside the good old US of A. By buying our debt, they help keep our economy liquid and thus continuing to buy the products they export to our markets.
Another reason that so many countries are willing to buy our debt is because the dollar is the principal medium of exchange for the one product that drives the global economy: oil. Today, almost all trades for oil and gas are conducted in dollars. Indeed, some have speculated that one of our reasons for invading Iraq was to return its oil sales to markets where trades are denominated in dollars.
Indeed, my original pre-war hypothesis was validated in a Financial Times article dated June 5, 2003, which confirmed Iraqi oil sales returning to the international markets were once again denominated in U.S. dollars – not euros.
The tender, for which bids are due by June 10, switches the transaction back to dollars — the international currency of oil sales – despite the greenback’s recent fall in value. Saddam Hussein in 2000 insisted Iraq’s oil be sold for euros, a political move, but one that improved Iraq’s recent earnings thanks to the rise in the value of the euro against the dollar.
The same commentator argues that our current bellicose rhetoric regarding Iran’s nuclear program may have as much to do with its proposed new oil “bourse” in which oil trades will be denominated in euros, not dollars:
Concerning Iran, recent articles have revealed active Pentagon planning for operations against its suspected nuclear facilities. While the publicly stated reasons for any such overt action will be premised as a consequence of Iran’s nuclear ambitions, there are again unspoken macroeconomic drivers underlying the second stage of petrodollar warfare – Iran’s upcoming oil bourse. (The word bourse refers to a stock exchange for securities trading, and is derived from the French stock exchange in Paris, the Federation Internationale des Bourses de Valeurs.)
In essence, Iran is about to commit a far greater “offense” than Saddam Hussein’s conversion to the euro for Iraq’s oil exports in the fall of 2000. Beginning in March 2006, the Tehran government has plans to begin competing with New York’s NYMEX and London’s IPE with respect to international oil trades – using a euro-based international oil-trading mechanism.
Obviously, any such market for oil which doesn’t rely on the dollar would have negative consequences for the United States. The less the dollar is the benchmark currency for oil and gas, the single greatest global commodity, the less attractive investment in America, whether done directly, or indirectly through the purchase of our treasury bonds, will become. At some point, investors may decide to “dump” the dollar by selling off their treasury bills and other US investments, which would have very negative consequences for our economy. Think rapid inflation and zero to negative economic growth. It’s not a pretty picture.
So why is Bush so nonchalant?
Nonetheless, Bush sails blithely on (or at least he appears to in his public speeches) with nary a regard for our economic future. He seems immune to criticism that his budgets and the cost of his adventures in the Middle East are leading our country into dangerous and uncharted territory, economically speaking. Even as he cuts spending for social programs and veterans benefits, he more than makes up for it in tax cuts for the wealthiest Americans and corporations, and in spending on massive defense contracts, many of which are questionable, at best.
One can only believe that Bush doesn’t think the laws of economics apply to the United States. He must be of the opinion that, either through military intimidation, or fear of global depression in the wake of any collapse of America’s economy, he can continue to con foreign investors into buying our debt to finance our continuing trade and federal deficits.
Perhaps he’s right. Perhaps the world will bail us out in the event of any imminent collapse of our economy resulting from, for example, a currency crisis or deep recession. Maybe the United States economy really is “too big to fail.” Certainly, his actions make it appear that he’s willing to bet our collective future on a belief in the kindness of our foreign creditors.
It’s not a bet I’d be willing to take, however.