Vol. 11, No. 2,646 - The American Reporter - May 16, 2005

On Media

by Robert Gelfand
American Reporter Correspondent
San Pedro, Calif.

SAN PEDRO, Calif. -- The dollar has been falling like a stone even as economic forecasters are predicting further turmoil. Rather than ask why this is happening, we should probably be asking why it hasn't happened sooner and why it hasn't been even worse. And, later, I have my own hypothesis.

For those of you who remember trying to ride out the economic turmoil of the 1970s or the real estate roller coaster of the 1980s and '90s, there hasn't been all that much time when we could think of our economy as normal. Perhaps this is to be expected - the business cycles of the pre-Keynesian era and most everything since 1970 testify to that - but for those of us who grew up in the 1950s and 1960s, it seemed that there was something that we could call normalcy.

Welcome once more to interesting times.

Economics is not one of our mass media strong suits, particularly when we are talking about the television networks, the radio or the daily newspapers. News weeklies do a little better, but they tend to concentrate more on business innovations and spectacular failures. What little deeper thinking is to be found is confined to a few columnists.

The falling value of the dollar and our rising balance of trade deficits have been noted in passing in the back pages of the business sections of local newspapers, but you will find little argument or explanation there as to why these are important. It is a subject almost entirely absent from the radio dial, and as for television, car chases apparently gain more rating points than our economic future.

Now a few mainstream journalists have noticed that our chickens are coming home to roost. Perhaps it has to do with the fact that Alan Greenspan has finally taken official notice of the trade deficit and the de facto dollar devaluation. Paul Krugman has been flogging the subject for years, but the right wing has been successful in painting him, at least to other right wingers, as being partisan and controversial.

There has been discussion here in The American Reporter. Notably, the recent piece by Randolph Holhut ("Economic Armageddon? It May Come Sooner Than You Think") describes one trend in current economic thought. Its basic premise, if I may be allowed to editorialize here, is that the fundamental principles of economics have not miraculously disappeared just because supply-siders are in power. Our continued American weakness for borrowing to pay our ongoing living and warring expenses - not for productive investment - cannot be and will not be continued indefinitely. At some point, perhaps soon, the house of cards will collapse.

Well, I have used a lot of cliches - chickens coming home to roost, houses of cards, the dollar falling like a stone - but sometimes the old cliches are the best cliches. The arguments now being resurrected by the school of thought I like to call the economic apocalyptics may now be correct, whether or not their specific predictions will be fulfilled.

As an aside, those of you with particularly good memories may recall comments I made in earlier columns about the trade deficit, Paul Krugman's credentials and the small group of scholars who warn Cassandra-like about the dangers of American indebtedness.

Notice that there really wasn't much media attention to these matters throughout the president's first term. The election results may have changed all that. Faced with another four years, even the normally math-averse are beginning to respond.

And now it's official - The New Yorker has taken notice. A discussion of the declining value of the dollar appears in its Dec. 6, 2004 "Talk of the Town" (on the Internet at http://newyorker.com/talk/content/?041206ta_talk_cassidy).

It is a short piece, and to be honest, not all that marvelous as a teaching device. It summarizes some more-or-less well-accepted principles and tries to explain why we are now in economic peril: the fact that the relative values of currencies have been determined by open market trading since the 1970s, the fact that the United States went from being a creditor nation to "the world's biggest debtor," the fact that our trade deficit is now at 5% of our GDP, the fact that the central banks of China and Japan are propping up the dollar by financing our national debt, and so on.

The New Yorker summarizes: "Ultimately, the value of a currency is an international verdict on the honesty and competence of the government that issued it. President Bush may have recovered in the domestic polls, but in the currency markets his ratings are still falling. And, with his Administration determined to pursue further tax cuts and costly Social Security privatization, his numbers don't seem likely to turn around soon."

In other words, the New Yorker seems to be saying, the current policies that our administration follows will lead to further loss in the dollar's value and may lead to that economic apocalypse that critics warn about, as foreign central banks and currency markets lose confidence in the United States.

The New Yorker piece summarizes one point deftly: "The dollar's fall, along with the trade and budget deficits, is a classic symptom of a country living beyond its means... . The federal government is spending about four hundred billion dollars a year more than it raises in taxes, which means that the Treasury has to sell about thirty-four billion dollars' worth of bonds every month to remain solvent."

To put it another way, we are like somebody who is applying for new credit cards in order to continue paying the interest on the old 'maxed-out' credit cards. At some point, there is the reckoning. The credit card debt analogy does break down in one terribly important way, though. The United States of America can't just walk into Bankruptcy Court, have its debts wiped out, and walk out to start a new life. National debts have serious long term consequences.

The fact that our national spending has gone back to its old undisciplined ways will have ramifications not only in our economic well being but in our journalism and literature. An era of economic apocalypse journalism will surely follow, as writers try to explain why exponential growth of debt cannot go on indefinitely.

It is not really a new idea in the history of American thought. My bookshelf holds a thin paperback by William Simon, titled "A Time For Truth" and published in 1978. Simon, Secretary of the Treasury under presidents Nixon and Ford, wrote angrily about deficit spending, high taxes and what he considered to be smothering overregulation of American business.

Throughout the 1980s and '90s, the economic apocalyptics continued to turn out scary books about the impending worthlessness of the dollar, mass depressions and ultimately the law of the jungle overtaking our streets and bedrooms. In 1993, Harry E. Figgie and Gerald J. Swanson published Bankruptcy 1995: The Coming Collapse of America and How to Stop It. They argued that the growing national debt was threatening to reach the point where we would be spending all we have just to service the interest payments. (In the era of the late 1980s and early '90s, the growth of the national debt was one of the few public policy issues where the term "exponential" really could be used with accuracy).

Then there is Ravi Batra, an academic economist whose The Great Depression of 1990 mixed traditional economics with a theory about economic cycles which result from successive cultural eras.

Somehow in spite of all these people giving desperate warnings, our economy didn't collapse like that metaphorical house of cards. Perhaps they overstated the case, perhaps they were dead wrong, or perhaps things changed just enough and just in time so that their dire predictions were avoided.

This is where my hypothesis comes in. Our recent history of uncontrolled debt accumulation began in the Reagan presidency, continued into the Clinton years, abated briefly during the later Clinton years, and has now returned with a vengeance under George W. Bush. The point that international financiers must have noticed is that the current Bush policies were not inevitable. We don't necessarily have to collapse into terminal indebtedness.

We know this is the case because the Clinton presidency proved it.

We showed once that we can turn our economic stupidity around. That is probably the reason that the international financial community has not lost faith with us completely, as yet. They can't be sure, but they can hope that we come to our senses.

For those who are not economists, questions abound. Will there be serious inflation as there was in the 1970s, leading to increases in the prices of everything from milk to housing? Will there instead be a collapse in real estate values provoked by widespread bankruptcies, themselves the product of higher interest rates?

How can we know?

Probably nobody can know what our economic future is going to bring. The one important point from the media standpoint is that the situation is probably becoming more volatile. Whichever way things swing, it will be more violent.

The international currency markets are watching what we do. If I am correct, they are expecting a turn away from the current policies but don't know when. In the meantime, during this Bush presidency, the value of the American dollar has dropped by about a third in Europe. Depending on what we do as a nation, it could get worse or better. It is going to take economically literate journalists to explain the situation to people.

Copyright 2005 Joe Shea The American Reporter. All Rights Reserved.