We propose the slogan to the Republican party...for they seem bent on
an original method of government finance. They cut taxes...but
increase expenses. Who then will pay for their programs of guns and
drugs? Rather than soaking the rich or wringing out the poor, the
Republicans want to hose anyone dumb enough to lend money to the Bush
Administration at Eisenhower-era rates. They borrow...and then degrade
the currency in which the debt is calibrated.
It is chicanery...but an elegant chicanery; nearly half the lending
comes from foreigners...and the poor foreigners don't vote!
But what's this? The dollar fell again...after a one-day rally. Gold
rose $2.10. And now it appears that the kindness of strangers has
reached its limit. They are voting with their feet.
"An ominous harbinger for U.S. financial assets," writes our friend
Terry Reik of Clapboard Hill Partners, "has been the stunning collapse
in foreign-capital flows...From a peak of $110.4 billion in May, net
foreign flows have fallen to $90.6 billion in June, to $73.4 billion
in July, to $49.9 billion in August, to $4.2 billion in September."
September's net inflow, Terry explains, is only 10% of the monthly
minimum required to fund our $500 billion current account gap. Private
interests overseas have forsaken the dollar in favor of other assets.
So far, only central bank buying of dollars - or, buying U.S. dollar
assets, such as Treasury bonds, thus lending money to the Bush
administration - has kept the dollar from destruction. In September,
for example, while the rest of the world was dumping dollar assets,
the Bank of Japan was spending $40 billion to support the dollar.
"Without this Herculean effort by Japanese authorities," Terry
continues, "foreign flows would have been an unthinkable negative
$35.8 billion."
This apparent bout of sanity among foreigners comes at a bad time. For
every passing day, Americans seem to need more credit just to stay in
the same place. Again, Terry reminds of the numbers: credit grew at a
$2.2 trillion annual rate in the first quarter of 2003...and then
exploded at a $3.3 trillion rate in the second quarter. Debt has
reached $33 trillion, with annual interest of nearly $2 trillion -
even at today's Eisenhower rates - and it's growing seven times as
fast as the economy itself.
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