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Commentary: Bush As King Canute

It should not take a crystal ball, let alone the prophetic powers of a Nostradamus, to see what is going to come next. The United States continues to run the greatest annual budget deficits in its history and the greatest balance of trade deficits of any nation in recorded history.
by Martin Sieff, UPI Senior News Analyst
Washington (UPI) Jan 26, 2005
The White House announced last Tuesday that the federal budget deficit for 2005 was projected to rise to $427 billion. That is $96 billion more than the confident prediction the Bush administration made last July, saying the deficit would be "only" $331 billion.

The news broke the very day after a survey of 65 central bank managers around the world from September to December 2004 conducted by Central Banking Publications in London found that more than two-thirds of them were increasing their exposure to the much maligned European Union main currency, the euro, and dumping the weakening dollar instead.

Commenting on the survey, UPI's Donna Borak wrote, "The days of the dominant dollar may be running out." Indeed.

Two and half years ago, in these columns, we compared the economic policies of President George W. Bush to the activities a thousand years earlier of King Canute of England. Canute famously placed his throne on the seashore and told the incoming sea tide to turn back. It didn't listen to him.

The famous story is actually somewhat unfair to old King Canute. He is supposed to have staged the display to prove to his courtiers he was only a man and knew that he couldn't control the big wide world just by telling it what to do. This appears to have been one of the many lessons in economics and sound fiscal management the president did not learn when he was at the Harvard Business School.

We made the Bush-Canute comparison the week that the long-mighty dollar for the first time in more than two years fell below the value of the euro, the currency that Euro-phobic Bushies and neo-conservatives in particular love to despise.

And in that analysis on July 16, 2002, we predicted, "The fall of the dollar against the euro is no volatile random flicker of a few days, or something that can be blamed on a fluke, or a few evil currency traders or those pesky Democrats. It has been steadily increasing in speed and severity in recent months.

The dollar has fallen well over 10 percent of its value against the euro and the yen since the start of the year. Four months ago, in mid-March, the euro was still worth a measly 86 cents. Now it is worth a dollar. We predict here in UPI Analysis that it will soon be worth very significantly more than that."

Indeed it is, two and a half years later, the euro now routinely tracks at $1.30, if not more.

It should not take a crystal ball, let alone the prophetic powers of a Nostradamus, to see what is going to come next. The United States continues to run the greatest annual budget deficits in its history and the greatest balance of trade deficits of any nation in recorded history.

Even worse, it has failed to compensate for those policies, as President Ronald Reagan did a quarter century ago, by letting interest rates soar and making clear its determination to keep the dollar strong, come what may, and maintain international business confidence.

Even Federal Reserve chairman Alan Greenspan, the usually uncritical ally and supporter of Bush, warned last November that foreign investors might well reach a limit in their desire and capability to finance the U.S. current account deficit.

That danger is appreciably closer now, as the still-soaring budget deficit figures and the Central Bank managers' survey indicate.

When will that cut-off point come? No one knows. It might be next week, or it might not be for years. The shrewdest financial minds on Wall Street were stunned when the great collapse hit on Black Tuesday, 1929. But with the benefit of hindsight, it had clearly been building up for a long time.

There would be a lot more warning this time. On Monday, Chr is Giles, economics editor of the respected Financial Times newspaper in London warned, "If new official flows (from Asian central banks) to the U.S. were to be curtailed the dollar would plunge, creating a huge hole in the accounts of central banks holding dollars."

Giles also reported signs this was already beginning to happen. "The Bank of Thailand said this month it was considering reducing the proportion of its $50 billion reserves held in dollars from 80 percent to 50 percent. Russian officials have made similar noises," he wrote.

Right now, no nation plays a more crucial role in keeping the dollar and the U.S. financial system afloat than giant China. Giles reported, "The People's Bank of China has let it be known that China increased dollar reserves by $207 billion in 2004, financing nearly a third of the U.S. current account deficit, estimated at $650 billion."

But will China continue to do that if the United States continues to support Taiwan against the enormous pressure from the mainland to abandon its drive for full independence? Or if the United States stumbles into a conflict with Iran, a close friend of China's, in the next few months? Will China still sit tight on its mountain of dollars or dump some of them on the market?

And will an embattled Russian President Vladimir Putin take out his anger at the United States for supporting the victory of President Viktor Yushchenko in neighboring Ukraine by carrying out the growing number of warnings and threats circulating in Moscow to make its oil export dealings in euros rather than dollars? What if Saudi Arabia, still the lynch-pin swing producer of the global oil economy, did the same?

For four years, we have been steadily tracking in these columns Bush's determination to keep interest rates low, the obliviousness of his administration to the soaring U.S. balance of trade deficit and the recklessness with which he has been spending money he did not have like water.

The president pushed through as his first, major economic measure, a vast $1.35 trillion tax cut that was weighted to benefit the super-rich who did not need it, and that would not help the middle and working classes of the American people at all. Then, after the mega-terrorist attacks of Sept. 11, 2001, he pumped hundreds of billions of dollars into the economy in security and defense build-ups.

Now the world's central banks are fulfilling a warning given by Fabio Scacciavillani, a senior economist at the Goldman Sachs Group Inc. in London two and a half years ago.

He told the New York Times "that the weakness of the dollar was driven by concerns over the gaping trade deficit in the United States 'and the need to finance this deficit at a time when stock markets are weak and not attracting much capital from abroad.'"

Back in that July 16, 2002 column we offe red the following prescription for U.S. financial instability, along with the reason it would not happen: "Raising interest rates would help, something that this administration has never dared to do because it puts its own short-term political gain ahead of the long-term, well-being of the U.S. economy and the American people. Then, government spending should be cut and Bush's beloved but never popular $1.35 trillion tax cut should be rescinded. But pigs will fly and the Dow (will) return to above 10,000 before that will ever happen under this administration."

Well, the Dow returned to over 10,000 all right and has stayed there for a long time. It closed Tuesday night at 10,461.56, a gain of 92.95 points on the day. But pigs have yet to fly and the dollar has already lost around a third of its value on what it was worth then.

The president continues to talk up the American economy. But the judgment of international investors and the man agers of the world's central banks against him and his policies is flowing in as remorselessly as the tide did around King Canute.

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