What’s News: January 25 Edition
Warning: Economics Ahead
David Sanger, writing in the Times today, is one of the few today to pick up on what I believe will be a major story of 2005, the slide – and potential collapse - of the dollar.
The Bush administration has been publicly proclaiming the Rubin doctrine of preferring a strong dollar, but every one of their policies suggests that they either don’t care or actually prefer a weak dollar. In the short run, a weak dollar makes foreign imports more expensive here and American exports cheaper abroad. Sounds pretty good. In the long run, however, the weak dollar can have a lot of negative consequences. Chief among these is the possibility that foreign central banks, the major purchasers of American debt, will decide that the dollar is less stable then the Euro. In a not altogether unlikely scenario, the central banks run out on the dollar, forcing interest rates through the roof (because we will have to offer a premium for anyone to be willing to buy debt in dollars). Higher interest rates mean that both businesses and consumers have less purchasing power, meaning that the economy will slow or even shrink.
But that isn’t actually even the worst of it. The Bush policy is making us incredibly vulnerable to just two central banks: Japan and China, which are, between the two of them, funding the Bush Spending Spree. That’s right, one of the major sources of funding for America’s military might is our only serious potential state antagonist.
Economists understand that this situation seriously ties our hands with regard to China policy. As Sanger points out, one of the clearest examples of this is the Administration’s utter failure to force the Chinese to let their currency “float.” By pegging their own currency to ours, China protects itself from our imports and keeps the prices of its exports low. Add this to China’s competitive advantages in wages and its regulatory environment (meaning that American businesses has to comply with a lot of rules that Chinese businesses don’t have to) and you see the problem. It’s the economic version of Mathew McConaughey’s great line in Dazed and Confused about teenage girls. In fact, since China constitutes a humongous potential market for American goods, the failure to get them to let their currency float cancels out a good deal of the advantages of a weak dollar.
I will continue to post on this issue as it unfolds.
Other News
The LA Times says that the Iraqi people are coalscing around Allawi:
Election Is Looking Up for Allawi
John Powers at LA Weekly agrees with me that the left better stop beating up on Bush and figure out what the hell it stands for. It’s the issues, stupid. Here are his proposals:
A Vision of Our Own
ArmsControlWonk argues that what the real reason for concern about the Pentagon’s new covert ops activities is that covert ops don’t work and never have:
Covert Operations
