- The Washington Times - Thursday, December 9, 2004

Foreigners put up 90 percent of the $2 billion required every day to make sure Uncle Sam’s checks don’t bounce. The profligate uncle thus can write checks that are accepted as payment as long as they are never cashed. This sleight-of-hand shell game is what keeps the international monetary system from imploding. Shakedown rackets and Ponzi schemes are usually less transparent.

American foreign creditors now hold an estimated $11 trillion in U.S. “paper,” or 43 percent of the superpower’s privately held national debt, up from 30 percent since Mr. Bush became the 43rd president. China, Japan and Saudi Arabia are among the biggest dollar stakeholders, and they have seen their assets fall 35 percent against the Euro and 24 percent against the yen.

The Bush administration pooh-poohs any connection between tax cuts coupled with soaring deficits, from the federal budget to the national debt, and an insatiable appetite to borrow and spend. What about the $3 trillion surplus left by the Clinton administration that is now a projected $5 trillion to $7 trillion deficit? Nothing to worry about, we are told, because there is a plan to halve it without so much as a small war tax to make us finally understand “we’re a country at war,” as Mr. Bush keeps telling us.

The $220 billion cost of Afghanistan and Iraq this far has not changed any minds in the White House that the pre-war tax cuts must be maintained. More borrowing should do the trick. The more U.S. bonds and T-bills are sold abroad, the less need to curb the ravenous appetite for foreign goods. Thus, the United States can have its cake and eat it too.

The $420 billion defense budget, almost more than the rest of the world spends on its armed forces, will top half a trillion dollars before the end of Mr. Bush’s second term, and social programs will keep pace, all without tax increases. The United States is expected to borrow $670 billion this year, according to estimates made last week by the Organization for Economic Cooperation and Development (OECD). The 10 Nobel laureates whose recent open letter urged a dose of fiscal restraint to curb current manifestations of “fiscal irresponsibility” were dismissed as eggheads talking through their mortarboards.

London’s prestigious Economist thought the situation was alarming enough to put “The Disappearing Dollar” on its cover this week. It showed a dollar bill as a leaf on a tree, half eaten by a worm.

Foreign central banks, the major purchasers of U.S. securities, are spooked. Either they stand idly by and watch the value of their reserves continue to plummet — or they begin moving them into euros, or a basket of several currencies. Saudi Arabia has sold some U.S. paper for cash to go into new projects in the kingdom. China (with $515 billion) and Japan ($720 billion) have switched steadily out of dollars throughout 2004.

The Bank for International Settlements reported over the weekend dollar-denominated deposits fell to 61.5 percent of total deposits by OPEC members in the second quarter of 2004 — from 75 percent in the third quarter of 2001. Euro-denominated deposits rose to 20 percent from 12 percent over the same period.

Asia as a whole has accumulated $2.2 trillion in foreign reserves. The U.S. trade deficit with China, now nearing $150 billion for 2004, grows alarmingly from year to year. Wal-Mart alone imports $18 billion worth of Chinese-made goods for its stores. When China and India can compete across the entire spectrum of high-tech networking jobs, globalization begins to lose its allure. China’s sidewalk moneychangers are betting the renminbi (RMB) is now a stronger currency than the dollar. Chinese companies are luring Chinese American executive talent from U.S. multinational corporations with higher compensation packages.

Seemingly unconcerned, the Bush administration says the external deficit has little to do with conspicuous consumption and much to do with the sluggish economies in Europe and Japan. Fast buck economists — or reckless high rollers — argue the disappearing dollar could be the answer to all of the administration’s problems, as it will automatically shrink the U.S. deficit. And the more the dollar falls, they explain, the more expensive European and Japanese goods become, choking off their exports to America and boosting now much cheaper U.S. exports.

But such a laissez-faire policy — besides poisoning anew trans-Atlantic and trans-Pacific relations — will only encourage the dollar stakeholders all over the world to unload ever faster. The dollar is expected to shrink an additional 30 percent during the Bush 43B mandate. This could then be the biggest default in history, wiping out anyone holding dollar assets, and burying the dollar as a global reserve currency.

The Europeans blame intemperate U.S. borrowing and meager household savings. They know the more the dollar drops, the more claudicant their economies.

A run on the dollar would knock the props from under American global alliances and further erode what little support the United States has left for defeating the insurgents in Iraq and midwifing a democratically elected government. The only victor in such a tragic denouement would be Osama bin Laden and his global network of extremist troublemakers and terrorist destroyers.

In his last video, just before the Nov. 2 elections, bin Laden referred to religiously inspired Arab volunteers with whom he fought the Soviet occupation of Afghanistan in a war he says, “bled Russia for ten years, until it went bankrupt and was forced to withdraw in defeat.”

Bin Laden clearly believes he can do it again. “So we are continuing this policy of bleeding America to the point of bankruptcy,” he said, speaking without his habitual automatic weapon in the picture.

A horizon of endless deficits and a dollar with the buoyancy of a lead balloon is a recipe that can only please the countless millions who wish us ill.

Arnaud de Borchgrave is editor at large of The Washington Times and of United Press International.

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