Mudcat Café message #1409268 The Mudcat Café TM
Thread #62901   Message #1409268
Posted By: Amos
14-Feb-05 - 10:05 AM
Thread Name: BS: Popular Views of the Bush Administration
Subject: RE: BS: Popular Views of the Bush Administration
The Importance of Being Earnest

Published: February 14, 2005


For all its talk of deficit reduction, President Bush's 2006 budget is a map of reckless economic policies and shows how they have backed the United States into a precarious position in the global financial markets.

Mr. Bush needs to convince foreign investors that he's serious about cutting the budget deficit. Here's why: Each day, the United States must borrow billions of dollars from abroad to finance its enormous budget and trade deficits. Without a steady stream of huge loans, the country would face rising interest rates, higher inflation, a dropping dollar and slower economic growth. The lenders want to see less of a gap between what the government collects in taxes and what it spends, because a lower budget deficit always eases a trade deficit. A lower trade deficit also implies a stronger dollar. And a stronger dollar would reassure foreign investors that dollar-based assets remain their best choice.

As it is, their belief is being sorely tested: in 2003, the European Central Bank lost $625 million to the weak dollar and reportedly stands to lose $1.3 billion for 2004. Japan's central bank, which has the world's largest foreign stash of dollars - some $715 billion - could lose an estimated $40 billion if the dollar weakened to around 95 yen, a level many analysts expect to see this year. No wonder that a week before Mr. Bush released his budget, Japan's finance minister said that Japan had to be careful in managing those dollar-filled foreign currency reserves.

It's not hard to see what brought the United States to this juncture. Mr. Bush's first-term tax cuts were too expensive and too skewed toward top earners to work as effective, self-correcting economic stimulus. Instead, predictably, they've driven the nation deep into the red. Having reduced tax revenue to a share of the economy not seen since 1959, the cuts are a huge factor in the swing from a budget surplus to a $412 billion deficit.

The administration also erred big in deciding to deal with the ballooning trade imbalance by letting the dollar slide. That might have been a winning gambit if it had been paired with a commitment to cut the deficit. Theoretically, a weakening dollar would have begun the process of easing the trade imbalance, while deficit reduction, which takes longer to bring about, would have addressed the gap in a more lasting way. Instead, Mr. Bush has unceasingly pursued deficit-financed tax cuts, even as the weak dollar has failed to fix the trade imbalance. The result is that the country's deficits - and borrowing needs - remain enormous even as dollar-based investments are becoming less attractive.

Lately, Mr. Bush has been talking the deficit reduction talk, but there's no sign that he is willing to walk the walk. In his 2006 budget, he pledges to slash spending, but largely in areas that would have only a small impact on the deficit and where cuts would be politically difficult, not to mention cruel, such as food stamps, veterans' medical care, child care and low-income housing. Meanwhile, he is pounding the table for more deficit-bloating measures - making his first-term tax cuts permanent, at a 10-year cost of as much as $2.1 trillion; putting into effect two high-income tax breaks that were enacted in 2001 but have been on hold, at a 10-year cost of $115 billion; and introducing new tax incentives to allow high earners to shift even more cash into tax shelters, at a cost that would ultimately work out to more than $30 billion a year when investors cashed in their accounts tax-free.

Oh, yes. Mr. Bush also wants to borrow some $4.5 trillion over two decades to privatize Social Security, which is a bad idea even without the borrowing and a horrendous one with it.

The global financial community won't be fooled. The dollar may have bouts of relative strength, as it has recently. But these are due largely to currency traders' focus on short-term advantages, like Federal Reserve interest-rate hikes, which are perceived as a positive for the dollar, or the appearance of profit-taking opportunities. Inevitably, the budget and trade deficits will reassert their drag on the dollar, and then on Washington's ability to comfortably borrow money from abroad.