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

Blue Money

by Paul Petillo
American Reporter Correspondent
Portland, Ore.

PORTLAND -- Ford Perfect wasted no time inserting the small yellow fish into Authur Dent's aural tract. thus allowing him the use of, as "The Hitchhiker's Guide to the Galaxy" describes it, the oddest thing in the universe.

Although it is a convenient literary tool for the late Douglas Adams, the Babel fish, which is not actually a fish but an evolutionary oddity in the form of a leech, decodes what you hear "by effectively removing all barriers to communication between different races and cultures." The guide does go on to say - the guide actually speaks - that this newfound understanding via the Babel fish has led to more and bloodier wars than any since creation.

The Republican majority in the Senate announced last week that they had finished a long-sought change in how the average American could declare bankruptcy. These astute lawmakers saw fit to push through a well financed agenda designed to aid those poor beleaguered financial institutions that issue America credit. They did this by spinning their action as something that would benefit the populace as a whole.

We weren't seeking confrontation - just understanding - and what the Babel fish supplied after listening intently to last week's events left me somewhat alarmed.

These pillars of finance along with the majority of the lawmakers - all from the same side of the aisle - claim that because they will no longer need to charge higher interest rates on the consumers who handle their credit without any difficulty, they will be able to pass this savings on to the average consumer.

If you listen to them without the high tech means I employed, that means we all win. Because the Senate, and as soon as the House receives the written bill next week and our more-than-willing President signs it, has made declaring bankruptcy more difficult under this new bill, millions of deadbeats who have lost the battle with medical bills and ever-easier flood of credit that arrives in the mail will now have to pony up. No more free rides on the credit card industry.

This will eliminate the "fresh start" that many folks seek when the burden of debt becomes overwhelming. Concerned Democrats sought to protect the elderly from losing their homes, the sick whose medical catastrophes have stretched costs beyond the limits of their insurance, and the many members of our armed services and veterans who face severe financial difficulties. But the bill passed.

While the President declares this a victory, he shares the winner's circle with the lobbyists and of course, the financial institutions, who committed millions to the campaigns of the GOP to allow the American public the benefits of lower a cost of goods in the marketplace. They were determined not to be defeated again by the likes of President ZBill Clinton, who killed their earlier bill with a pocket veto.

No sooner had that veil of deceit been revealed then the Federal Reserve Chairman, whose release of the Beige Book caused much worry among Wall Streeters with their own kind of Babel fish. Theirs suggests trouble when there's the slightest hint of inflation. The book also needed some translation in terms of wages - which they saw as being okay, when in fact they were stagnant - and job creation, which will be vetted in the coming months as lackluster at best.

Alan Greenspan and his famous sidekick, Fed governor Ben Bernanke, have identified the problem. Amid comments about deficits and the nation's indebtedness, a rather precarious finger was pointed at global savers. These unlikely nations, some of whom have been involved in financial crises of their own, have unwittingly amassed too much in savings, and because of these huge stockpiles of cash, are crippling the world.

The United States has embraced consumerism to such a degree - while in turn spurning saving - that the trade deficit ballooned even further in the previous month. While the $58.3 billion deficit is not as bad as November's record, and equally troubling because of the lower overall cost of oil during the latest measurement, our appetite for foreign goods is swelling the coffers of nations who save all those US dollars.

The verbal attacks against these developing nations, who somehow do not share this country's unbridled optimism for globalization and growth instead embracing the need for a rainy day fund, are meant to denounce the parsimony of these cash rich devils who are seemingly hellbent on creating economic stagnation. Mr. Greenspan and Mr. Bernanke are doing their best to keep the dollar on the ledge it is now occupying.

The Babel fish suggests that all of this verbal dancing merely means that should the American consumer become one of those evil savers, the economy would face serious trouble.

Should the dollar fall, it will force interest rates higher here at home, grinding whatever growth is beginning to an agonizing halt. The two economists understand, although they seldom say so, that because we are not prepared from a savings standpoint for any sort of economic downturn, hoping the world cooperates may be our only hope.

Words from high ranking officials whose business is selling us goods and financing the debt we incur because of those purchases were all that was needed to cause the dollar to fall.

If some South Korean banker mentions a shift in exposure to Treasuries, the dollar slides. When Japanese Premier Junichiro Koizumi makes comments about moving away dollar investments and American debt - diversifying, in other words - the dollar takes a step closer to the edge. Should those things happen, and we were quickly assured by the Finance Ministry of that country that they would not, the effect would be devastating for the American public, a group that is mostly ignorant of the brewing international crisis in their currency.

Here is what they don't know. Should the major Asian holders of U.S. treasury notes decide that their exposure - currently at 56 percent among China, Japan, South Korea and Taiwan - decide to diversify, far too many things would need to align themselves to avoid the inevitable disaster. Alan Greenspan makes light of the matter, suggesting that a shift in foreign investment is inevitable. What he doesn't say - and the Babel fish does - is that private investment would need to pick up the slack. The only way to do that is to prove that interest rates are low, growth is steady, and that America has a handle on the debt we currently have.

The reaction to these words challenge the Bush administration and their strong dollar policy. Granted, much of the reason the dollar has shown such ongoing weakness has been largely due to the strength of other currencies.

Had China pegged their Yuan to the Euro, a currency that is up 52 percent or the South African Rand, which has doubled, this whole mess of a weak dollar could have been avoided. Instead, the Yuan is pegged to the dollar, which means that it needs to be sold for greenbacks, which build up in reserves, and which in turn areinvested in treasuries. These are the same treasuries that are showing signs of having lost some of their attractiveness.

The Babel fish translates these Asian finance ministers, the ones who quickly aped the quotes of their bosses, as a smiling indication that they intend to diversify. To them and their banks, cutting losses is much more prudent than financing an American president.

Our hunger for anything cheap, preferably imported, and highly leveraged continued and the report that followed came as no real surprise. The translation did, however.

Who would have thought that the widening trade deficit could be celebrated as proof that the economy is growing? Our mounting trade deficits, wghich are not expected to fall anytime soon, and our growing budget deficits, are twins of significant import, and are no longer being ignored by the world's investors. The Babel fish translates this situation to Americans as, "If only those Europeans would start spending, the world would be a better place."

Each new round of borrowing - for tax cuts, for revamping Social Security - or of spending cuts brings new doubts that our policies are worth the world's financial backing.

Republicans have begun to debate the wisdom of continued tax cuts in light of too few attempts at spending cuts. The federal deficit, based on the President's $2.57 trillion budget currently being discussed in Congress, shaves entitlement programs while doing little to address the deepening hole the country has dug for itself. This, the Babel fish tells me, is a smokescreen.

As of last week, a moment in time that was marked as the fifth anniversary of the dotcom bust, greatest slide in American wealth in our history, the average investor has learned that the forces of the marketplace are not to be ignored.

From the lofty highs that tech stocks - and to a lesser degree, Alan Greenspan - took us, to a place of unbelievable wealth achieved with little effort, to the devastating crash that followed, taking with it not only technology standards but stalwarts of the broader economy as well, we have learned little about investing.

The term bubble has never been a good one. Bubbles, when they burst, leave little evidence of their existence. I see plenty of financial wreckage still around, and the possibility of more.

We have simply shifted our hopes and dreams into the equity in our homes. Although there is a case for a bubble in the housing market, which is thought of as a mostly regional phenomena, the fact that many Americans still believe that owning a home, or more specifically, financing the long-term purchase of property, is worth achieving is testimony ot the continued influence of the Fed chairman.

Much like the distance between value and business that became the hallmark of those irrational late '90s, the chasm between the worth of homes and their true value has widened, giving Americans a false sense of security.

We have apparently learned little from those heady days five years ago, and still don't quite embrace diversity and a long-term approach to investing.

But the average investor or homeowner will be hailed as victorious, the spendthrift and engine of economic growth, and ultimately, will be the one left with the bill.

Should the dollar fall, the foreign appetite for our debt dry up, and our policy of using deep deficits to grow the economy fail, and if interest rates rise, the average American will lose. How much is still being debated.

With the safety nets of entitlement and government protection now seen by Republican leaders as unnecessary burdens for future generations, and re-translated as the price individuals should have to pay for living in such a great nation, the present is shaping up as the harbinger of a new era, one that promises the status quo, The one ushered in five years ago, a time of surpluses and exuberance, is no longer acceptable. Thus spake the Babel fish.

Paul Petillo's latest book is <"Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill). He is the managing editor of BlueCollarDollar.com, a common sense approach to money

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