Ignorance Not Bliss, Just Stupid

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Was a time not too long ago, when leaders and citizens of a society enjoyed making, buying, and selling their own goods; when trade and economy depended largely on what people provided and purchased from each other within their society's borders. What happened elsewhere in the world was of little concern, and troubling news from abroad did little to no damage to blissful prosperity and self reliance at home. Ignorance of what happened overseas could ordinarily enhance bliss at home. But, as WWII, the Viet Nam War, and Alvin Toeffler's book 'Future Shock' warned, those days were coming to an end.

And they are ended now. The NY Times ran a story this morning of titanic importance to investors around the globe. It is a very frightening story for investors, markets, economists, politicians, 401K holders, and pension plan holders, and may affect all Americans if the story's events play out. The title of the NY Times article is Buckle Up for the Dollar's Ride. Caution, if you prefer blissful ignorance of potential economic calamity, read no further. If you find comfort in contingency planning, the following quote from the article may prove beneficial.

There is indeed a volatile blend of risks surrounding the dollar. President Bush's new budget proposal would substantially expand the government's debt burden in the next decade, potentially raising doubts about the desirability of its IOU's. Some Asian central banks have declared that they will diversify their reserves away from dollar-denominated assets. If China decouples the yuan from the dollar, it will not need as many dollar-denominated assets to keep its currency from gaining value, nor will its competitors for export markets. In recent times, long-term interest rates have stayed stubbornly low, making it difficult for American companies to attract new investment from abroad.

These ingredients may just be waiting for the right catalyst. If enough people start thinking like those at Bridgewater Associates, the dollar will lose value rapidly. There's no point trading dollars today, after all, if everyone thinks that they will be worth less in the near future. Fundamental economic factors need not worsen any further; in currency crises, perception very quickly becomes reality.

The huge risk here is one of self-fulfilling prophecy as the article's author, Daniel Altman, implies. If China moves to disconnect its yuan from the dollar, and foreign investors begin to realize lower risk and higher yields are going to be found elsewhere in the world and not in the U.S., America will have a few trillion dollars of IOU's which could become viewed as worthless sending the US into a potential default on its treasury certificates and bonds. The cascading effects upon the American economy via huge tax increases to give the world the appearance of future solvency and commitment to make good on its IOU's may very likely be insufficient to bolster the confidence that will be needed to prevent spiraling inflation and recession here at home.

The world has never experienced a default by an nation as large as ours in such an interdependent global economy as we experience today. Global consequences at this point would be pure speculation, though S. American defaults and near defaults in the 1980's and '90's offer some clues as to how other nations and central banks will respond. But that is beyond the scope of this article.

Americans should be forewarned and take this warning extremely seriously. Voters must at this point and continuously forward, pressure the President and Congress to stop playing games with our economy and rein in the growing national debt and deficits, now, today, tomorrow, and for the next couple decades until our national debt is at least as low as it was in the pre-Bush years. Conservatives and liberals alike will argue such draconian cuts are not necessary and the carrying capacity of our economy for debt load does not mandate the kind of spending cuts recommended here. If one focuses simply on our domestic revenues and GDP, that argument might have merit. But, that myopic view fails to take into account the reassurance foreign investors will require to continue to float our debt and prevent default. Short term returns will not offset their long term risk perspectives if Congress does not act immediately by proposing a serious and committed plan to turn deficits into surpluses in order to lower our national debt load 10 years and further out.

Make no mistake. Congress will not willing undertake these kind of cuts. For to make them, many either or choices will have to be made. We cannot continue our current foreign policy which is committing 100's of billions of dollars to overseas ventures for as far as the eye can see. We also cannot continue supporting the broad array of domestic spending programs taxpayers are currently underwriting. Hard choices have to be made. Should we spend millions on promoting marriage as Bush proposed, or cut spending? Should we fund space exploration to Mars and other new ventures or cut back and maintain the less costly research like the Hubble Telescope already producing results. Should we play games with Social Security which won't be out of money until 2041 if we do nothing or should we reform Medicare/Medicaid which is a far greater threat to our economy in a much shorter period of time?

Make no mistake; politicians will bury their heads in the sand rather than point to the mess they have created by taking responsibility for the hard and tough action that is necessary to insure the US does not default on its debts down the road sending our economy into ruin for a generation or more. They will prefer to listen to the economists and journalists who offer arguments that there is no need to worry. But as the linked article above states, both raising taxes and cutting spending are what is needed to reduce the national debt. Congresspersons need a cattle prod shoved up their political arses in order to move them, not toward, but to, fiscal responsibility. The NY Times article closes with the following:

Congress and the White House have shown no sign that they are serious about controlling spending, but the Fed's policy-making committee may already be proving Professor Evans right. After the committee opted to raise short-term rates another quarter of a percentage point last week, its statement acknowledged that "pressures on inflation have picked up in recent months" and asserted its willingness to act forcefully if necessary.

Whichever way you cut it, we're in for a bumpy ride.

The time is now to take action before the NY Times story's implications of a damaged economy becomes a self-fulfilling prophecy. The time is now to get angry and vent that anger upon our Congresspersons via mail, fax, and phone demanding, in no uncertain terms, fiscal responsibility which means cutting spending and raising taxes, or a "NO" vote for their reelection in 2006 will be guaranteed.

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This page contains a single entry by David R. Remer published on March 27, 2005 8:50 AM.

Patriots to Restore Checks and Balances was the previous entry in this blog.

Dethrone the Doctors is the next entry in this blog.

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