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David Karp / AP Photo The gridlock in Washington is more than just a political problem. Jeffrey E. Garten on the dollar’s coming decline—and the terrible ripple effects ahead.
Most analyses of the president's State-of-the-Union speech Wednesday night have dwelled on its potential impact on his electoral fortunes in 2010 and 2012 in the face of widespread angst in the country and political gridlock in Washington. But among the longer-term consequences of our political meltdown is something that could overshadow the fate of the stimulus, financial reforms, the wars in Iraq and Afghanistan, and the next presidential election itself: the slow but inexorable decline of the U.S. dollar. For over 60 years, the greenback has been the world's key currency, underwriting a good deal of American prosperity and influence in the world. Over the next decade, it will decisively lose its exalted status.
A permanently weaker dollar means that military commitments and foreign assistance will become much more expensive in real terms.
The dollar will be depreciating for a number of reasons. Foremost is our soaring budget deficit, well over $1 trillion annually; our ballooning national debt, which increased last year by a third to reach $7.6 trillion; and the inability of the political system to deal with the problem, which will only get much worse as 75 million baby boomers become eligible for Social Security and Medicare. On Wednesday night the president talked of freezing some domestic spending, but given how dramatically budget outlays have expanded these past few years, his initiative was at best symbolic. Mr. Obama said he would create a presidential commission to examine policy alternatives, but the recommendations will not bind the Congress. A day before, Congress refused to create a commission with teeth, the Republicans saying it was a stalking horse for higher taxes, the Democrats saying that the commission would aim to cut social programs.
The problem with a continuation of this farce, which has been going on in some form for years, is that our debt repayments will eventually be debilitating, causing us later this decade to borrow nearly a trillion dollars a year just to pay interest. We could of course throw ourselves into severe austerity to honor our debts, slashing spending and raising taxes to levels as yet not even being discussed by our politicians. But a politically easier way would be to devalue the dollar—perhaps by allowing more inflation—so we can pay our creditors in currency that is less valuable than it was when the debt contract was made. It is hard to believe there is any other outcome for our gutless political system than to choose the second way out.
Another reason why Washington will push the dollar south is that a weaker greenback will stimulate sales abroad by making them cheaper in world markets. In his Wednesday night address, the president pledged to double exports over the next five years, a massively ambitious goal. Unfortunately, the U.S. has little choice but to try, because the big surges in consumer demand are no longer in America but in countries like China, India and Brazil.
Beyond what the U.S. will do to depreciate the currency, some of our biggest creditors will also be looking to reduce their holdings of dollars—dumping them on markets and further eroding their value—because they will not want to hold a deteriorating asset. China, the single largest lender, has already been vocal about its concerns, but so has Pimco, America's largest fund specializing in bonds. The problem is that we need these lenders not only to keep up their lending but to vastly expand it.
View as Single Page 12 Back to Top January 30, 2010 | 6:39pm Facebook | Twitter | Digg | Share | Emails | print var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } State Of The Union, Currency, President Obama, Dollar, Medicare, Social Security, Budget Deficit, National Debt, International Monetary Fund, Brazil, Inflation, Congress, India, China (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: 123 crypto
In September of last year I predicted this would happen. I also guessed that the unemployment rate would exceed 15%. Some on tdb laughed at my prediction and made fun of the unemployment figures. Unemployment is now at 17.4%. I know Washington is saying that we have a 10.3% rate. But if you figure it correctly it IS 17.4 percent. China has begun their move by cancelling all future orders of military equipment from us. Military equipment has been our largest source of money for a long time because we have had the best. There are few jobs left to lose. Fifteen banks have gone belly up This year, with more sitting on the brink. If you have been fortunate enough to save any money protect it at all costs. I believe we are in for a long haul folks.
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 7:38 pm, Jan 30, 2010 camperLet me get this straight....If we print dollar bills on toilet paper, ship it to China, then they ship it back to us...sell it at Walmart...Walmart sells it to us....we wipe our rear ends.... and somehow a wind mill is built in Montana. And why is this wrong?
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:16 pm, Jan 30, 2010 case1234What is not talked about is the push to create trade deals exposing the US to risk yet China has a open market only when it sees fit. We get the full brunt of market capitalism yet they shield themselves. Is this not a problem? any why do right wingers (and some on the left) ignore this situation. We are not prepared to be a nation of investors. The US will not be a nice place to live with 20 % unemployment.
Flag It | Permalink 1:21 am, Jan 31, 2010 RevPettiboneWe're approaching the hour of our discontent and the administration is painting an unreal picture to stave off panic. What with the monetization of real debt and future debt not yet recognized, all that's left to get ready for is a forced amortization of the debt to equity ratio facing the commercial real estate market.. Just wait till that bubble begins to burst later this year..... Professors and accountants aren't businessmen possessing the where with all to make wise corporate decisions, so we shouldn't be surprised no one at 1600 really knows what to do next. That's what you get when you hire someone because it feels right.......
Flag It | Permalink 3:00 am, Jan 31, 2010 sophia5Aren't many of those so-called "Chinese" factories ( formerly American ) actually still driven by American Corporations, and if so . . . are those American Based products we receive from China actually "imports" in name only, if those factories are still overseen by American run business ? Isn't China's economy dependent largely on those factories, and should we "collapse," won't those factories collapse as well, sending a ripple through China? Is there's an economist out there who can explain how our spending effects China's economy and all those factories? I guess the question comes down to . . . does China really have us by the Balls, Treasury Bills and all?
Flag It | Permalink 12:01 pm, Jan 31, 2010 flyoverlandThe problem with this strategy, which has been used for years is it only works if it makes your goods cheaper for other countries to buy. We don't make anything anymore. Take it from the guy who told you to sell your stocks at 1150 on the S&P, you better move into stocks, funds or ETF's that will move with commodities. Do not lock up your cash long term. The value of the dollar vis a vis other currencies is one thing, inflation at home is the other shoe that will drop.
Flag It | Permalink 12:09 pm, Jan 31, 2010 after-preChina? Okay you mean to tell me, the federal government doesn't know that China makes goods, has the labor force, then sells us the goods, and we are in debt to them and fueling their economy? I didn't graduate from high school, got a G.E.D., live in subsidized housing and got screwed over by and while working on the election, received no compensation nor reward., and i can figure out what the problem and these assholes collect hundreds of thousands of bucks annually in salary to run our society? What a joke. cough cough
Flag It | Permalink 12:43 pm, Jan 31, 2010 flyoverlandafter-pre, The world is full of educated idiots. Both parties want us to believe that unless you went to an Ivy League school you have no right to an opinion. the smartest guy I ever knew ran a hamburger stand in Southern Illinois. He graduated from the 8th grade, but spent four hours a day in the library. Once, when I was pontificating about some economic theory I'd learned in school, he stopped flipping a burger, turned and said, "that a bunch of crap." I asked what he meant and he said, "the only economic theory that means shit is the hamburger theory. How many hamburgers can I buy with my dollar? The rest doesn't mean shit." Think about it. When I ran a public company, Harvard guys would bring me deals to buy with creative descriptions of profit: operating profit before one-term write-offs, etc. I'd always ask, how many hamburgers can I buy from the earnings? It saved me from making many stupid decisions and today, I can afford steak.
Flag It | Permalink 1:52 pm, Jan 31, 2010 after-preOur government is bit tardy- they are called CREDIT UNIONS- and began just following the first great depression, typically they cater to centralized workers unions, and have money pools plus incentives-with better interest rates and personalized investment plans according to pensions.
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 12:36 pm, Jan 31, 2010 JohnnyappleseedActually credit unions were incepted around 1917, and no depositer has lost any money since they were charted, local folks running a local business , similar to banks except they are more accontable, and a hell of a lot nicer to deal with.
Flag It | Permalink 8:56 pm, Jan 31, 2010 verycoldI wasn't laughing at you. Look even very liberal economists predict unemployment around 11 percent this year. They said that last year when the Obama administration insisted it would not exceed 8 percent. So adding in all the different scenarios of those working part-time or reduced hours, or no longer receiving unemployment benefits, the number will reach 20 percent. Once a week I have to drive a bit north. I start counting all the empty stores along the way and each week the number increases. Just this week alone I personally know of 3 places that have closed their doors. It doesn't even matter if it is new construction or old leased buildings, they are just slowly being vacated. My prediction back a year ago was that the commercial properties would see a 30 percent vacancy rate . I am sure at this point we are close to that number . During the S&L the number of banks going under was far greater than the present situation. However this is a constant dribble and the rules keep changing. So banks already struggling are being asked to have more reserve capital and yet are being bashed by this president to lend more. Lending requires the ability to pay back the loan. Banks don't lend to small business out of the goodness of their heart. Normally as a recession winds down, the pent up demand gives the signal to lenders that the time is right to risk those loans. This is what is NOT happening now. BTW, while the WH likes to tout the GDP increase reported on Friday as a signal the economy is over, I would argue that it was more about replenishing inventories. Equally go back and look at the revised GDP numbers. They are always quite a bit less than first announced WE MUST NOW DEAL WITH THE DEFICIT NOW. You cannot tell me that the budget could not get whacked by 10 percent causing little disturbance.
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 1:28 pm, Jan 31, 2010 dxgmmpaI am on the same page with this opinion. The problem I see is that this congress and president have no desire to take the steps needed to change direction. Even if the GOP wins back the House in 2010 and steps up and acts like the fiscal conservatives they should be you have a president that most likely will veto the bills that cut spending for 3 more years assuming he is a one term president.
Flag It | Permalink 12:21 pm, Feb 1, 2010 ronald64The weakening dollar will persist as a chronic symptom of the underlying structural flaws in the US economy. It's no coincidence that China, India and Brazil are the fastest growing markets for consumer demand. They have been the destination of choice for American manufacturing jobs for nearly two decades. Those American manufacturing jobs were replaced with frivolous service sector jobs in the casino economy that has supplanted venture capitalism as the engine of economic activity. These service sector jobs, including real estate, mortgage underwriting and home services to name a few, were created by an artificial inflation in home values that was in turn converted to income via refinancing and equity lines of credit. That source of income is not going to be regenerated anytime soon. Congress is even more unlikely to make difficult political choices in the wake of the Supreme Court's ruling against the FEC basically giving corporations unrestricted access to candidates. Congress has been unable to enact meaningful health insurance reform under the pressure of a health insurance bureaucracy that has no interest in reducing costs. The health insurance battle may signify the last significant chance to foster domestic job creation for quite some time, given that Congress at its best only fosters full employment for lawyers and accountants. It will take a radical restructuring of the political landscape for things to be otherwise.
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:58 pm, Jan 30, 2010 connie47Un-politicized facts posted at TDB. Very refreshing.
Flag It | Permalink | Reply 7:04 am, Jan 31, 2010 JohnnyappleseedActually if you look at the backers of the industrial concerns they are from Europe, they also have union, environmental, and fiscal problems, their unemployment rate is indicative of the same problems we are facing. We need someone like Romney who gets the financing and budget problems this country is facing.
Flag It | Permalink | Reply 9:00 pm, Jan 31, 2010 WeaverThis news is unsettling, but not surprise. I have a question for the savvy engineers out there... China is well known for shoddy workmanship and product. Bad steel. Will the world still be forced to buy China's substandard eco-materials? Look at Haiti. This is serious.
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 10:32 pm, Jan 30, 2010 ronald64Forced to buy inferior product out of economic necessity. Cheap labor and lax regulation are a manufacturer's shangri-la. Health insurance is probably much less expensive in China as well.
Flag It | Permalink | Reply 10:40 am, Jan 31, 2010 TimTipper"our ballooning national debt, which increased last year by a third to reach $7.6 trillion" Ummm, I think we blew by that mark years ago.
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 10:51 pm, Jan 30, 2010 George FialaOnly one of an article full of wrong or misleading statements. Remember Ross Perot was making the same arguments 15 years ago. Von Mises 75 years ago. In fact, it is the success of US corporations in amassing ever higher profits that lead us to this situation. If we are worried about government debt then we simply need to raise taxes and lower government spending by asking private corporations who do business with Federal and state and city governments to raise their productivity and slightly lower their profit expectations. It is all doable. George Fiala
Flag It | Permalink | Reply 9:41 am, Jan 31, 2010 AnthonynAmen Tim,...until recently our trade deficit alone has approached $1 trillion per year, we are by far the biggest debtor in the world
Flag It | Permalink | Reply 10:02 am, Jan 31, 2010 JeremyicI think I'm going to start saving a little more money.
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 1:58 am, Jan 31, 2010 Chicago48Why?
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 5:54 am, Jan 31, 2010 pulmanomancerGood point - in an era of rampant inflation, which this predicts, you're better off not having savings. When the US government inflates away its debt, they'll also inflate away your debt ... or your savings.
Flag It | Permalink 5:04 pm, Jan 31, 2010 p51mustangCan we convert our savings into Euros first? Just a thought.
Flag It | Permalink | Reply 1:33 am, Feb 1, 2010 DakLakThe decline of the dollar will signal the decline of America and it's power and influence. Obama needs someone to fly around the world checking on the bang for the buck of all the government employees in foreign countries. Living overseas I observe all these 'hard working' characters eating looooong lunches at expensive restaurants living the life of Riley. The DEA and FBI in Cambodia, Laos, Thailand and VietNam are well known to locals and in 3 of the countries their freedom to roam is limited. How can they be effective? You see American government jets flitting in and out yet we have great air service both within and without the country. Granted many of these men are large, no doubt because of their expense accounts, and might not fit in discount carrier seats but we have plenty of scheduled airlines, too. Why does America need numerous military bases in England and Germany, as well as several other Euro countries? Everywhere the U.S. acts as if it has a money printing machine - yet it's debt continues to balloon. It continues to act as if these were Cold War years. A few helicopters here, a few billion in arms there - this is no way to run a government. The War on Drugs is misplaced. If marijuana was legalised the pressure on law enforcement would decrease. The Three Strike law is bankrupting states and achieving little. And all financed on the backs of taxpayers.
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