ECONOMICS

Think About It
To paraphrase Charles Dickens: “It is the best of times, it is the worst of times.” Last year, our stock market reached an all time high, while our dollar has reached a new low against the Euro, which now costs $1.46 American. Our bull market, which is down 8% year to date, is effectively supported by foreigners, who are buying us out, lock, stock and barrel. According to the U S Treasury, net overall capital inflows into the United States are rising over $100 Billion per month, with corporate bond and equity purchases driving foreign investments to a record high. Meanwhile our Federal debt is growing nearly $1.5 billion per day. In July, the Treasury Secretary asked Congress to raise the debt limit to $ 9.82 trillion, as I had predicted months ago. This is the fifth raise of the Bush administration. The result is that we have now become dependent on foreigners to buy our corporate stock and underwrite our debt.
Using 1985 as a base, outside world holding of U. S. financial assets has increased from $1 Trillion to $13 Trillion today. Worldwide, the dollar is considered extremely cheap, thanks to the Federal Reserve, which has seriously inflated the currency. As noted before, the Fed has even quit publishing M3, which is the most accurate measure of inflation. (You can keep up with an estimated M3 by going to www.shadowstats.com.) The downside of this is that the real value of our wealth in dollars has fallen dramatically. Yet, we are in a tenuous position. If we move to strengthen the dollar, it will likely scare away some of this foreign inflow of capital.
Now, the BLS January 2008 unemployment report shows the U S economy is slowing. Payroll employment has lost 17,000 jobs over the past month. Unemployment stands at 4.9%. And remember, it is consumer spending which now accounts for nearly 70% of our total output of goods and services; while only 60 years ago, we were the leading producer for the world. But consumer debt is reaching an all time high. Consumers have been using borrowed home equity, and are nearly spent out. Now home values have been falling for the past 3 months, and the sub-prime mortgage debacle is still growing.
The Clinton administration changed the criteria for calculating inflation, and the Bush administration heartily endorsed it and followed suit. While government figures show inflation at some 2%, it is under the old formula more like 6%. Why? With a low inflation rate reflected in the CPI, our U S government saves billions of dollars on interest and Social Security payments. Meanwhile, we, as citizens, are left to deal with the real inflation.
At the same time, foreign central banks, corporations and individuals are diversifying their cash reserves out of the dollar and into the Euro. This adds to the dollar’s decline. Now certain oil producers are demanding payment in Euros. We are no longer universally recognized as the world’s reserve currency, a position we had held since World War II. This drains our diplomatic, economic and financial power.
Things can’t be fixed overnight. It will take real fiscal prudence and a lot of belt tightening on the part of everyone, first and foremost our government. There will be a Presidential election next year, with the largest number of potential candidates in recent history. Don’t fall for the man or woman who promises you more out of your government. It is an outright lie which they cannot deliver, and will cost you directly in your pocketbook. Look, instead to the man or woman who acknowledges the government is not our daddy, and is not totally responsible for our upkeep and wellbeing. We of all people deserve to be the most hated if we leave this burden upon our children and grandchildren, who for the most part look up to and respect us. We must develop and demonstrate the courage of our founding fathers.