Federal Reserve Chairman Bernanke has announced his intention to increase the money supply. This is called “quantitative easing.” Basically it means printing more money. The Fed is expected to pump $500 billion more into the financial system, on top of the $1.75 trillion already spent, trying to lift the economy (Sacramento Bee, Oct. 16, 2010).
The logic is simple, and well-known: (1) This will stimulate the economy. (2) It will continue to devalue the dollar, which people say is good, because it will improve our exports. (3) And it will bring bring back a “healthy” level of inflation, which is better than deflation.
But I agree with Yale historian Paul Kennedy that The dollar’s decline has been disastrous (See “Don’t’ Surrender U.S. Influence to Beijing” - New York Times, Sept. 29). When I came to this country in 1960, the dollar was worth FOUR times as much as the typical European currency, e.g. the Mark, the Dutch Guilder, the Swiss Frank, etc. We were 4 times richer than the Europeans. Now, the dollar can’t even keep up with the Euro. When that currency was introduced in 1999, it was worth less than a dollar. Today, it is worth $1.40, and rising. If a weak dollar benefits us, we should be real happy when the dollar declines to the value of the Mexican Peso.
Railing against the federal budget deficit is the favorite pastime of Republicans, Tea-Partiers, conservatives, and everyone who hates “the government.” It is their chief campaign issue. True, the federal deficit is very large, and very scary.
But few bother to distinguish between the government deficit problem, and the much more intractable TRADE DEFICIT problem. The current federal deficit is temporary, and it is caused by unwarranted tax breaks for the wealthy.
On the other hand, the trade deficit is long-term, intractable, huge, and growing. Currently, America imports $600 billion more every year than it exports. This has been going on for DECADES. China has accumulated $2.65 trillion so far. Add to that what we owe to Middle-eastern sheikdoms, to Germany and to our other creditors.
While the two deficits are intertwined, I am flabbergasted that hardly anyone ever distinguishes between them, or recognizes that the trade deficit problem is the more serious of the two. Most of those brave “fiscal conservatives” aren’t even aware of the distinction! One of the few exceptions is economist and Nobel laureate Paul Krugman. See his "Killer Trade Deficits," (New York Times, August 16).
What happens if you earn $100,000 and spends $120,000 every year, for 40 years? You end up devoting ever more of your income to financing your growing debt. There comes a point when you spend 100% of your money on finance charges, and 0% on groceries. You starve, or you borrow more and more. You are trapped in a vicious cycle. You have become a slave to your creditors. This is what America has become. We are owned.
The solution? Simple. Same as what any bankrupt household must do: work away the debt.
How?
1. Tighten the belt. Consume less.
2. Sell more goods, import less.
3. Raise taxes - temporarily.
1. Tighten the Belt: When Greeks and other Europeans default, they tighten their belt. But for some reason, Americans are expected to consume MORE, not less, even though our debt-to-GDP ratio is approaching that of Greece’s (nearly 100%).
When Japan and Europe suffer heavy government deficits, they raise taxes, at least temporarily. But for some reason, our politicians advocate LOWERING taxes, under the mantra of job creation.
2. Export more, import less: This evokes the antique concept of “Mercantilism” and the loathed concept of “Protectionism.” I favor both: Historically, societies have become rich and powerful by exporting more and importing less. Louis XIV’s finance minister Colbert and the British Imperial government understood this. It is imperative that America resume producing and selling goods. If this takes tariffs, so be it. When a Honda costs twice what a Chevrolet costs, I’ll go back to buying Chevrolets.
3. Raise taxes for 10-15 years. Whittle away the government debt. Presently, the government spends $300 billion a year on financing its debt. As the debt declines, money will be freed up for other budget items, and taxes can be reduced - a virtuous cycle. leave comment here