- The Washington Times - Saturday, February 2, 2008


So, what lessons are learned from last week’s Wall Street follies? For some, it’s just another example of those wily but crazy French — messing up the way they did in 1940, leaving us Americans to pick up the pieces. To some, it’s more evidence to support the thesis that Federal Reserve Chairman Ben Bernanke isn’t as clever as Alan Greenspan and may not be up to the job.

Republicans and Democrats at both ends of Pennsylvania Avenue — and virtually all the presidential candidates — have warmly embraced a $150 billion stimulus package, or maybe more. One candidate, Republican Mike Huckabee, has taken a different course, noting we will have to borrow the $150 billion from China, and when Americans spend the windfall, most of it will go to China. “I have to wonder whose economy is going to be stimulated the most,” he said during the debate in Boca Raton Jan. 24. Mr. Huckabee favors another approach: building more highways so people in Florida — the audience for his idea — don’t have to spend as much time in traffic jams. Politicians of all denominations are competing to see who can shovel more money quicker into voters’ pockets. In an election year. Shocking, shocking.

People are looking for arguments that the spasm that went through financial markets last week was a stand-alone phenomenon without any deeper significance. The U.S. economy is “fundamentally sound,” President Bush said. Herbert Hoover used those same words in 1929, and they really should have been banned from the political vocabulary a long time ago.

Obviously, the failure of the French bank, Societe Generale, to prevent a low-level trader from losing billions of dollars in lunatic speculating, and its frantic, clandestine efforts to minimize losses by dumping its holdings onto a drastically falling market increased the flood of selling on every major market except America’s, luckily spared by the Martin Luther King holiday.

However, a growing number of influential economists are looking into their crystal balls and seeing something akin to the story in Genesis of Joseph and the seven lean years. The big difference is that instead of storing up the extra grain during the fat years as Joseph taught the Egyptians, with the encouragement of Alan Greenspan we not only ate all the grain, we ate the seed corn and borrowed against future harvests to eat even more.

At the heart of the problem is Americans’ unwillingness to live within their income — both domestically and internationally. Year after year we as a nation continue to spend more than we earn. In 2006, we bought $900 billion more overseas than we earned. Through the first nine months of 2007, that had shrunk a bit, but we are still spending billions of dollars each day that we have to borrow overseas. Because of the flood of dollars we send overseas every day, the value of the dollar naturally is falling through the floor. Since January 2007, the dollar has lost 15 percent of its value against the euro. In the last five years, it has lost about 65 percent.

Some will say that’s great, because it is good for exporters, and we will be buying fewer imports, because their prices will be higher than domestic competitors’. Well, yes, some domestic industries will benefit.

It should be easier for Boeing to sell a few more planes in competition with Airbus. But every silver lining has a cloud. First of all, many parts in Boeing planes are made overseas. so those costs go up, and lots of Airbus’ parts are made in America, so they go down.

Secondly, many Americans will continue to buy imported cars, televisions and beer and wine, and a weaker dollar just means more dollars go overseas to pay for them. Then there is the 600-pound gorilla in the room — oil imports. Our imports continue to rise, and the exporters keep jacking up the price. Traditionally, all international transactions involving oil have been paid for in dollars. But exporters, seeing the dollars they get for their oil continually losing value, have even more incentive to raise prices, or switch from dollars to euros, or both. That means even less demand for dollars, and thus an even lower value.

Meanwhile, the lower dollar encourages more sales of U.S. raw materials and manufactured goods overseas, which raises domestic prices and fuels inflation. In 2007, the consumer price index rose by 4.1 percent — the highest rate since 1990 — largely because of higher energy and food prices.

So Americans face higher prices for everything they buy, both foreign and domestic. They have been buying more for years, based at first on their paper gains from the dot.com boom and then on their homes.

So now the bottom has fallen out of the real estate market, and Americans have continued to finance their deficit spending by borrowing on their credit cards. Americans now have an estimated $6 trillion in debt on their plastic. Either they must stop spending or start selling stuff to pay that off, or both.

And what is the standard remedy both for a falling currency and for a rising inflation rate? Why it is to raise interest rates, of course. And what chance is there of that in an election year?

George H. Lesser has reported for more than 30 years on international political and economic developments for both U.S. and European publications. He has been based in Washington, D.C., New York, London and Brussels, and lives in Washington, D.C. and Florence, Italy.

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