Exporting Our Mistakes

Every time I think Bushco can’t possibly outdo itself in its stupidity, it manages to prove me wrong.

I’m hoping that this latest pronouncement – mentioning the possibility of “economic sanctions” against the country to whom we owe more than any other – is just a case of “throwing a bone” to our lapdog media with the full expectation that it will be briefly digested and subsequently forgotten the minute we refocus our attention to some breaking “news” about truly urgent matters, such as the status of Britney Spears’ underwear.

Because if Bushco is actually serious, then we could all pay the price (as usual).

I know this was prompted by the fact that Treasury Secretary Henry Paulson is on his way over to China (may be there by now) to pressure them to open their markets and loosen their currency policies.

I don’t know if the yuan is pegged to the dollar yet or not, but we could be hosed if China decides to do that and then cut its holdings of our debt, as discussed last April.

Because by doing so, the following scenario envisioned by Paul Craig Roberts could be realized pretty quickly (indeed, what he states about real estate assets is already happening)…

The dollar's sharp decline and projections of continuing trade and budgetary red ink are undermining the dollar's role as reserve currency. A number of central banks have announced that they will be diversifying their currency holdings and will not be buying dollars at the same rate as in the past.

This will put more pressure on the dollar. At some point the flight will begin. Instead of buying fewer dollars, central banks will sell dollars hoping to get out before the dollar hits bottom.

Suddenly, the advantage of being the reserve currency becomes a nightmare as the world's accumulations of dollars are brought to market. An enormous supply and weak demand mean a very low exchange rate for the once almighty US dollar.

Overnight those cheap goods in Wal-Mart, which are the no-think economist's facile justification for Wal-Mart's decimation of communities, small businesses and employment, shoot up in price.

Interest rates will escalate as the government struggles to finance its endless red ink. Heavily indebted Americans with adjustable rate mortgages will attempt to sell homes just as rising mortgage rates reduce buyers. Real estate assets, the rising value of which have been keeping the economy going, will give back gains.

I’m definitely not in love with China on this, but my ire is directed primarily at our government and this mindset of giving corporations whatever they want, even if it means sacrificing our jobs. As a result, they’ve adopted the penny wise and pound foolish attitude of encouraging development in both China and India to obtain products and services for less while refusing to safeguard employment in this country that allows us to maintain our standard of living (I’m not opposed to development in those countries, but something is seriously wrong when they profit and we suffer).

Leveling economic sanctions against the country holding the lion’s share of our debt is the equivalent of firing a popgun at them. China, as a result, could diversify its currency holdings with the dollar in descent, and given what that would do to our economy, that is the equivalent of responding with fire from an AK-47.