Americans were alarmed last June as the price of oil raced toward $150 per barrel. Today, as the price falls toward $100, Americans feel relieved. They have forgotten that prior to the Bush regime`s wars, the price of oil was $30 per barrel.
Similarly with the dollar. Despair ruled as the dollar fell to 1.6 to 1 euro. Now with the dollar`s rise to 1.4 to 1 euro, relief bathes the markets. The fact that the dollar will never return to parity with the euro is out of sight and out of mind.
In declines, as in rises, speculation can run ahead of fundamentals. Just as speculators in oil futures markets can drive the price too high, currency speculators can drive a currency too low.
The dollar`s problems are the
trade and budget deficits and the fact that there
appears to be no way to close either. Offshoring of
manufacturing and service jobs has enlarged the
trade deficit while shrinking the domestic income tax
base. In addition to its energy imports, the
When inflation is properly
Foreigners were becoming reluctant to continue the same rate of recycling. This reluctance contributed to the dollar`s slide and to the worsening situation of Fannie Mae and Freddie Mac, which need to issue their own bonds in order to support their mortgage holdings.
The US Treasury took steps to
avert, or perhaps more accurately to push off into the
future, a crisis. Foreign central banks agreed to
purchase dollars so that low
To keep the recycling going, the US
Treasury took the mortgage giants under its wing in
order to reassure foreign investors. According to a
September 8 Reuters report from Beijing,
If the Treasury`s new relationship with Fannie and Freddie implies a guarantee of the bad mortgages as well as the bonds issued by the two companies, it is possible that the Treasury has put at risk its own ability to borrow.
The Treasury already has to borrow
$600 billion a year to finance the operations of the
The total could be greater than the US Treasury`s credibility.
It remains to be seen whether the Treasury has put troubled debt on the same footing as its own or brought trouble to Treasury bonds.
If the latter,
Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan`s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider`s Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow`s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.