Temporary Respites from Permanent Decline
By Paul Craig Roberts
10/09/08 "ICH " -- - Americans were alarmed last June as the
price of oil raced toward $150 per barrel. Today, as the price
falls toward $100, Americans feel relieved. They have forgotten
that prior to the Bush regime’s wars, the price of oil was $30
Similarly with the dollar. Despair ruled as the dollar fell to
1.6 to 1 euro. Now with the dollar’s rise to 1.4 to 1 euro,
relief bathes the markets. The fact that the dollar will never
return to parity with the euro is out of sight and out of mind.
In declines, as in rises, speculation can run ahead of
fundamentals. Just as speculators in oil futures markets can
drive the price too high, currency speculators can drive a
currency too low.
The dollar’s problems are the enormous US trade and budget
deficits and the fact that there appears to be no way to close
either. Offshoring of US manufacturing and service jobs has
enlarged the trade deficit while shrinking the domestic income
tax base. In addition to its energy imports, the US has large
trade deficits in manufactures.
When inflation is properly measured, the US economy has
experienced little, if any, real economic growth in the 21st
century. Yet, according to economist Joseph Stiglitz, the total
cost of the Bush regime’s wars in behalf of US and Israeli
hegemony is $3 trillion. Without a rapidly expanding economy,
there are insufficient tax revenues to cover these costs.
The US is dependent on foreigners to finance its $600 billion
annual government budget deficit and its $800 billion annual
trade deficit. The US government relies on foreigners to recycle
their $800 billion trade surplus dollars to buy US Treasury
bonds and mortgage debt.
Foreigners were becoming reluctant to continue the same rate of
recycling. This reluctance contributed to the dollar’s slide and
to the worsening situation of Fannie Mae and Freddie Mac, which
need to issue their own bonds in order to support their mortgage
The US Treasury took steps to avert, or perhaps more accurately
to push off into the future, a crisis. Foreign central banks
agreed to purchase dollars so that low US interest rates could
persist through the November election. HIgh interest rates now
would make the mortgage crisis unmanageable.
To keep the recycling going, the US Treasury took the mortgage
giants under its wing in order to reassure foreign investors.
According to a September 8 Reuters report from Beijing, “China
owned $376 billion of debt issued by US government agencies,
principally Fannie and Freddie, as of mid-2007.”
If the Treasury’s new relationship with Fannie and Freddie
implies a guarantee of the bad mortgages as well as the bonds
issued by the two companies, it is possible that the Treasury
has put at risk its own ability to borrow.
The Treasury already has to borrow $600 billion a year to
finance the operations of the US government. How much in
addition will the Treasury need to borrow, or co-sign, in order
to keep the two companies afloat and to keep mortgages from
The total could be greater than the US Treasury’s credibility.
It remains to be seen whether the Treasury has put troubled debt
on the same footing as its own or brought trouble to Treasury
If the latter, America’s superpower days are over, and the world
will be spared the neocons’ hegemonic wars.
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