Greece, America, And The Budget Panic

Greece is begging for money. The home of the world’s original democracy is essentially bankrupt and is now forced to ask the rest of Europe for a bailout. Many of our nations’s newspapers, along with Conservative commentators and dim bulbs like Dana Milbank, are suggesting that the United States will take its turn if nothing is done with our fiscal crisis. Folks, we are spending a great deal of money at the moment trying to dig out from the collapse of the $8 trillion housing bubble. As a nation, we are also facing unprecedented inflation in the health care sector. We are not however, on the road to bankruptcy…period.

Please put politics aside on this issue, as it is about basic macroeconomic realities and not the difference between Democrats and Republicans. Greece finds itself in desperate straights because they are in the Eurozone (yes, it is a real place and not a bad joke); they no longer have a currency that adjusts to regional economic realities. We have the U.S. dollar and a central bank (The Fed) that can influence the supply of money. In other words, we have the flexibility to meet our challenges whereas Greece does not.

The argument represents one of the great ironies of our current national debate; that many want to see The Fed abolished, and that many more have been terrified by their news sources about the declining value of the dollar. What follows is a simple list of realities on the budget and our debt situation.

  1. Between 40% and 50% of our annual budget deficits will disappear as a result of the economy returning to a more normal unemployment rate of 7%. The value of lost tax revenue due to unemployment is greater than $400 billion, and the cost of extended unemployment insurance is also into the hundreds of billions.
  2. The trade deficit and the budget deficit are ALWAYS linked. A trade deficit means that money is leaving the country, with the imbalance reflected in the federal budget due to lost tax revenues and increased domestic spending.
  3. The trade deficit’s primary cause is not the competitiveness of U.S. workers, but rather the value of the U.S. dollar. Our dollar is overvalued relative to the Chinese yuan, meaning that their goods are cheaper than they should be (to us), and our goods are more expensive than they should be (to them). The Chinese government SPENDS billions to keep that relationship sound; they intentionally devalue their currency, while the political sentiment in this country is towards keeping our dollar high.
  4. The relative value of the dollar is NOT a trigger in inflation; too much money in the system as a consequence of low interest rates is the major factor. Inflation will begin to climb as people go back to work, and The Fed will slowly raise interest rates in compensation (this is what a central bank can do for you…Ron Paul). Currently, our country’s inflation in flat, having been deflationary for most of 2009.
  5. As our debt rises and entities buy our paper, the dollar falls. This process, left unimpeded, will lower the trade deficit and by extension, the federal deficit. Foreign countries, and specifically China, have a choice; buy our debt and keep their currency weak, or take a pass and watch their exports to the United States dry up and blow away (along with their economy).
  6. The two factors in our economy that can derail this equation are explosive health care costs and energy dependancy on foreign providers. Foreign energy purchases transfer money to petroleum dictators that would be more efficiently spent on domestic resources. Specialists, insurance companies, pharmaceutical companies, and medical equipment manufacturers are soaking up a disproportionate amount of currency as health care costs rise at 2-4 times the rate of base inflation.

Again, this column will not discuss how those big two economic problems (health care costs and energy dependancy) should be dealt with; this is about pointing out the real issues with our economics. The Conservative press has pushed a narrative of government debt panic and “dollar woes” that has found its way into the rest of the media establishment. This narrative is based on political goals and a basic lack of knowledge in economics.

The RM supports any discussions of budget and finance, taxes and spending, right and left, that specifically acknowledges the economic framework that we live in. It is a fact that no one (not even Economics majors) likes ECON 101. Billions and trillions, taxes and accounts, math and…math; these topics are not always easy to follow and are often boring. It is much easier for cable commentators and bloggers to scare and anger their audience in pursuit of a political goal.

The Rational Middle is hoping for conversation…