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Hard Times A-Coming
The Bush Dollar Trap
By DAVE LINDORFF
21/01/08 "Counterpunch"
--- - The first government response to America's sinking
economy was denial. We were told as recently as a month ago by
administration officials and Wall Street charlatans that the
economy was robust and that there would not be a recession. Now
we are told that the economy is in trouble, but that the
government is taking decisive action to shore it up.
We saw how effective the first
"decisive" proposal was. Bush announced a plan to give every
adult taxpayer (no poor people, thank you) $800 in a tax rebate
this April. The stock market responded to this idea by dropping
a few percent. The idea, as I wrote in my last column, was
stupid to begin with because, with the US no longer producing
much of anything, all that bonus borrowed cash would end up
getting spent on imported goods anyhow, doing next to nothing
for the US economy.
So now the Federal Reserve has
weighed in with a 3/4 percent cut in the Federal Funds rate.
Even though commercial banks followed suit, lowering the prime
lending rate by a similar 3/4 percent, the stock market showed
how much good that move would do, dropping almost 300 points at
the opening bell today--about what it had been expected to do
even without an interest-rate cut.
There was one place where the
Fed's action did have an impact though: the exchange value of
the dollar in foreign currency markets. No sooner was word of
the interest rate cut announced, than the dollar fell against
major currencies like the British Pound, the Euro and the
Japanese Yen.
And there's the rub. The Fed is
in a trap. It cannot cut interest rates much more without
causing a collapse in the dollar, which, because of the huge US
trade imbalance, and all those consumer goods and raw
materials--especially oil--that are imported--would lead to
serious and politically dangerous inflation. And there is
another constraint: with the current rate cut, the US now has
the third lowest interest rates in the world. If the Fed makes
another cut, as it has hinted it might in a week or so, only
Japan would have a lower interest rate environment than the US.
That makes the dollar a very undesirable currency for foreigner
investors, which means they won't want to hold dollars, and they
won't want to hold US stocks.
Yet if the Fed doesn't cut
interest rates even further, the stock market will continue to
plunge, which again discourages foreign investors from pouring
their money into the U.S., which in turn puts downward pressure
on the dollar.
This was all predictable.
An economy that is almost wholly
dependent on consumer spending, which is the case in the US, is
in big trouble when consumers start to worry about the security
of their jobs, and when they see inflation eating away at their
disposable income. They naturally just stop spending. And that
is happening, too.
So get ready for some hard
economic times. The next step will be soaring inflation, as
strapped companies in China, India and elsewere start raising
their prices for goods shipped to the US and paid for in
dollars. Then the Fed will have to respond by raising interest
rates again, in an effort to shore up the currency. And with
that will come deeper recession and an even lower stock market.
The Bush chickens--endless
deficits as far as the eye can see, and a $2-trillion military
debacle that has no end in sight and that is sucking money out
of the country like a giant industrial vacuum cleaner--are
coming home to roost. The President and Vice President clearly
hoped that they could pass the wreckage of their eight years in
office on to the next president and run off to retirement and
senior stateeman status before it all blew up, but their luck
ran out. The economic shit has hit the fan. Chances are that the
war that they have tried to tuck away in the closet with a
"surge" in troops and a brutal campaign of aerial bombardment,
will also blow up on them before the year is out.
That's small consolation for all
of us who have to live with the ensuing disasters, but at
least--if we can't see them properly impeached and indicted, and
if the Democrats in Congress don't manage to screw things up
further so they can be blamed for the mess too--we'll have the
satisfaction of seeing Bush and Cheney run out of town next
January on a rail.
Dave Lindorff is the author of
Killing Time: an Investigation into the Death Row Case of Mumia
Abu-Jamal. His n book of CounterPunch columns titled "This
Can't be Happening!" is published by Common Courage Press.
Lindorff's newest book is "The
Case for Impeachment", co-authored by Barbara Olshansky.
He can be reached at:
dlindorff@yahoo.com
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