The Enemy is _Really_ Us

Stephen Pizzo: 'The enemy really IS us'
Date: Wednesday, April 19 @ 10:11:56 EDT
Topic: Economic Policy


Stephen Pizzo, News For Real

Say hello to the America's account deficit. And it's gonna get you.

Not scared? Well, outta be. Because, under Bush, this little puppy has grown into a pit bull, and now it's right at our neck.

What is it?

The best way to understand it is to imagine that the nations of the world are companies that do business amongst themselves. They do so much business that rather than exchange cash with each transaction, they keep a record of credits and debits. Some companies sell more than they buy so they have a positive account balance. Others buy more than they sell, so they they have an account deficit. Ideally, over time, it should all balance out. Ideally.

But it doesn't. Countries with cockeyed fiscal policies almost always run account deficits. And, in order to keep doing business those countries run up a tab with the other countries. In other words, they borrow the money they need to remain in the game. That tab is secured with IOUs -- in the case of nations bonds.



How Bad is It?

Bad. Really bad. And, getting worse. The US is currently running an annual account deficit with the rest of the word of over $800 billion a year, and rising. Soon it will be a trillion dollars a year. The US has become the world's unrivaled debtor nation. No other nation on earth is as deeply in hock as we are.

So What?

America, once the richest nation on earth, has become Blanche DuBois – living off the kindness of strangers. And, as strangers go, they get no stranger than some of America's largest creditors: Saudi Arabia, China, UAE.

Pop quiz:

Question: What part of the world hates America the most right now?

Answer: The Arab world. Duh.

And guess which nations have the biggest account balances? Middle East, Arab, oil producers. In 2002 those oil exporting nations had $400 billion in loose change rattling around in their account balance, account. In 2005 that had grown to $700 billion... almost as much as we will have to borrow this year. And with $70 a barrel oil, you can bet that by the end of this year those little buggers will have shoved a trillion extra bucks into their account, much of it compliments of America's drivers.

(Factoid: Americans are spending $212 million a day more for gas than they did last year. A DAY!)

Up until this year those strange strangers have been kind, lending us all the money our government needed to stay in business, by investing in dollar assets, particularly bonds. But they really don't like us -- any more than we like them. And, while we have no other option but to do business with them, they have other options. And they are beginning to exercise those options when it comes to where they stash their cash.

Until recently the US could be smug about this precarious marriage of convenience. After all, the US was the only economy in the world that was growing and offered a secure investment environment.

Ah, but that's not so any longer. Japan is emerging from 15-year slump caused by their own fiscal and business bubble back in the 1980s. Unlike us, they've wised up, straightened out and are on the rebound. We, on the other hand, are about to reap the bitter harvest of America's second dalliance with supply-side VooDoo economics. Likewise, China has become the world's most attractive growth market ripe for foreign investment.

Which is why those strangers have suddenly become demonstrably less kind to us. According to a recent report by the US Treasury, in the 12 months ending this past January, oil-exporting nations invested less than $50 billion in US securities. During the same period last year they invested $100 billion.

How Serious is This?

Pretty damn serious.

“We (the US) need enormous amounts of capital inflows just to tread water.” (Lewis Alexander, economist, CitiGroup.)

What Can we Do Now? Once you get into as deep a hole as the Bushies have dug there's only one thing you can do – raise interest rates -- and keep raising them until US dollar investments become too attractive for foreigners to ignore.

This tactic, while postponing the inevitable, simply makes the inevitable more inevitable. By paying high interest to foreign investors even more dollars go “that-a-way,” further ballooning our account deficit. And, as America's credit rating continues to plummet we are forced to raise rates higher and higher to mitigate the higher risk we've become. It's the Debt Death Spiral.

What's it to You?

Where do I begin? Housing costs skyrocket, utility companies must pay more to finance capital improvements and that gets added to your bill, credit card companies, already loan sharks whose rates would have made John Gotti blush, will raise rates even further. Which will force more consumers into bankruptcy, which will force credit card companies to raise rates higher yet to cover those loses – the consumer version of the Debt Death Spiral.

But the biggest impact will be on the American government itself. Our military strength today is financed with borrowed money. Our domestic infrastructure, roads, bridges, airports, seaports, increasingly depend on borrowed money to finance repairs and improvements. Every time Congress passes a highway bill, they paying for it with borrowed money. Every time.

If the account deficit were an approaching hurricane we'd be evacuating right now. If it were an enemy preparing to launch an attack, the President would have sounded general quarters, jets would be scrambled, the fleet dispatched to meet the enemy.

But listen... what do you hear? Nothing. Silence. No preparations, no sense of alarm at all. Why? Could I be wrong about all that? Now that we're a free trading, open markets, cheap labor one-world economy, maybe the rules of business physics that have been repealed. (You know, like the dot-com boom in the 1990s repealed them.)

There's absolutely no sense of alarm at the Bush White House. They believe in miracles. They believe that, just as Christ divided the fish and loaves feeding hundreds from a single lunch bucket, that they can do the same. For unbelievers there's Keynesian economics. For the Bushites, it's faith-based economics. Real economic theory fills thousands of books, none with pictures. Faith-based economics is much simpler -- cut taxes on the rich and they will share. Simple indeed.

I can hear you now. “I've been reading this blog for almost two years now and you've been predicting that the end is near since the get-go. And the end has not materialized.”

The trouble with this kind of trouble is that it is never preceded by marching bands. There will be no warning from Homeland Security. And right up to the day the shit hits the fan, TV talk shows will be filled with the noise of economists debating how many trillions of dollars can dance on the head of a pin.

No, this kind of trouble creeps up on nations. The Roaring Twenties in the US. Everyone was having such a good time no one asked the key question: “Is the activity fueling all this sustainable? Is this the real deal, or are we just jerking off? The answer arrived unannounced on a very ordinary morning in October 1929. The gay and carefree "Life is a Caberet" society of 1920's Germany was reduced to ashes by the wild fire of run away inflation.
"The many parallels between 1924 Germany and present-day United States are cause for concern. We have not yet reached the depths to which Germany descended in that era, but few can look at the constant depreciation of the dollar since the early 1970's and fail to be alarmed. It seems we differ from 1924 Germany only in the duration between cause and effect. While the German experience was compressed over a few short years, ours has been more protracted. I think this has occurred for two good reasons: First, American central bankers have learned enough from the German experience to delay and extend the consequences of printing too much fiat money. Second, Germany was a small state isolated from the rest of the world --- a pariah nation of sorts --- and, as a result, it had a difficult time finding a market for its government bonds. German deficits had to be financed internally --- an impossibility which greatly accelerated the printing of fiat currency." (More)
We, unlike Germany of the 20's, have been able to borrow money rather than print. The day we can't borrow any more, we too will print.

So, the next time you are breezing through the business section and see the words, “US account deficit,” stop and read the damn story. Because the rules of business physics have not been repealed. They still apply, and breaking them still carries serious penalty.

Bush has broken them, and broken them and broken them. He figures the rules don't apply to him. That, by ignoring those rules he can get things done quicker and more efficiently. He is like a man who resents the limitations imposed on him gravity, so instead of taking the elevator down from the 30th floor, he can get down quicker by just stepping out a window.

Yes, he will get down faster than if he'd taken the elevator. That part of his theory, at least, was correct.

stephen(at)pizzo.com

Source: News For Real
http://newsforreal.com/





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