It may be the only way out of the trap. --------------------------------------------------------------- Yep, and "they" are right. Why. The key result of the election was to put the neocons more firmly in strategic command than ever. Now "normally" our 2nd term Imperial Chimp would be the perfect candidate for a fall guy when - or it should be said, if - the high real interest rate/tight money hammer gets dropped on America. Perhaps that is what Greenie was thinking when he voted for Bush with his artificially low rates: "Then I'll play Volker in the second term". But Greenie may not be counting on the determination of our neocons - their determination not to fail in their (criminal) project.
Remember, 2nd term Nixon was Springtime For Neocons (and for the Israeli Likud), and both Rummy and Cheney cut their teeth in the aftermath of the hapless Ford. All current neocon actions make clear their determination to forge onward at _all costs_. And it is clear that they got the Chimp completely in their pocket.
So they will do nothing to undermine their newly validated political and social base in the USA. They won't raise taxes, and they will do anything to prevent a spike in real rates, including unpreceedented interference in the hallowed perogatives of the "independent" Fed. I'm not hearing any noises about "fiscal responsibility" coming from the neocon quarter.
So we'll see: No doubt Greenspans' price for his Bush vote was reappointment. But has Greenie calculated correctly in re the neocons?
A reread of Nitzan & Bichler's "The Global Political Economy of Israel" (esp. ppgs 143-153) might be in order, since this looks to be the political economy of the USA, except without all the obvious constraints that applied to Israel in the 1980's (and the USA itself was one of the biggest constraints). Or maybe N & B can just write a new book, but on the USA. -------------------------------------------------------------------- Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.
You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent. -------------------------------------------------------------
That could be the Asians, Japan and China, as well as British capital. They all better be short-term bagholders for their own sake. But even then, they'll still take a hit - and that is why "conventional wisdom" noise about "fiscal responsibility" will come from these quarters, as in the FT: ---------------------------------------------------------- China tells US to put its house in order By James Kynge in Beijing, Chris Giles in London and James Harding in Santiago Published: November 22 2004 18:36 | Last updated: November 22 2004 18:36 http://news.ft.com/cms/s/f16a4694-3cb1-11d9-bb7b-00000e2511c8.html (sub req'd)
And.. Say it softly: the solution is a tax rise By Stephen Cecchetti Published: November 22 2004 20:55 | Last updated: November 22 2004 20:55 .... We can start to see why governments with large dollar reserves would be concerned about both keeping the dollar from depreciating and ensuring that US treasury bond interest rates do not go up. Both of these would result in capital losses for the entities holding the foreign exchange reserves. Given that these reserves are huge - more than $800bn in Japan and more than $500bn in China - the potential losses are big, as is the potential embarrassment. A 10 per cent appreciation of the renminbi means a capital loss of $50bn for Chinese authorities. Assuming the duration of their bond portfolio is three to five years, a 2 percentage point increase in US interest rates means another loss of $30bn-$50bn. It is hard to see a way for the Asians to get out of this bind without American help. Statements by the treasury secretary will not do the trick. Foreign exchange intervention will be equally ineffective unless it signals that something fundamental has changed.
For traders to stop hammering the dollar, the Bush administration has to provide a credible signal that fiscal policy is going to change very soon. So far, they have only made things worse. The president has said he wants to make his first term tax increases permanent, provide some further tax cuts for individuals and corporations, and reform social security. Together these measures look likely to raise treasury debt by another $3,000bn or so. Where is this going to come from?
There is a limit to foreigners' willingness to finance American consumption, and the fall in the dollar is the first sign we are reaching it. As difficult as it is for the president to admit, the solution is a tax increase. This will decrease domestic consumption, reducing the current account deficit, reduce the issuance of treasuries, and make the US a good place for long-term investment the way it was in the 1990s. Only then will the dollar stabilise and the risk of a dramatic interest rate increase be reduced.
Americans are usually the first to extol the virtues of capital markets in disciplining policymakers who implement unsustainable fiscal policies. We know from watching the emerging world that when fiscal deficits and current account deficits grow too large, hot money flees a country, driving its currency down and interest rates up.
If the US government does not do something soon, it will experience the fate of Latin American countries and suffer a financial meltdown. Dollar depreciation is just the beginning. The foreign exchange traders are doing reconnaissance for the bond vigilantes. If nothing changes, watch out.
The writer is professor of international economics and finance at Brandeis University and research associate at the National Bureau of Economic Research
http://news.ft.com/cms/s/e09019a0-3cbd-11d9-bb7b-00000e2511c8.html
(You need a sub)
Except see above on the neocons. So we'll have dollar depreciation and inflation - but _real_ interest rate increases are doubtful. Remember, Volckerism corresponded to the first appearance of the "twin deficits" of the early-mid 1980's. Hard to see how what caused the problem in the first place will act as the "solution" now.
But getting all three would qualify as a catastrophe, since high real rates would crater the US consumer just as they (and US manufacturing) would be losing their overseas purchasing power. Then it would be the fall of the neocons.
-Brad Mayer