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Bankrupting America


Fri, Sep 28th, 2007
Posted in Commentary

It used to be that the U.S. Dollar (USD) carried some weight overseas. Working and travelling in Asia several years ago, I knew that there was always two prices for a product - one in local currency and one in U.S. Dollars.

"Dong or Dollar?" a Vietnamese vendor once asked me.

"Dollar," I said.

And we negotiated a price on whatever he was selling using Dollars.

The vendor knew that he could leverage that stable Dollar on the Black Market and increase his profits compared to the official exchange rate. He was happy to make more money on the transaction and I was happy for paying a better price for the product I wanted.

But that love affair with the Dollar may be changing as the value of the greenback hit new lows against several currencies recently.

Last Wednesday, the USD was worth £.4961 against the British Pound Sterling - meaning it would take about $2 USD for the equivalent of £ 1 of purchasing power. For a traveler to the U.K., a £ 3 pint of ale was suddenly a $6 USD beverage.

The Canadian dollar, a long time second cousin to the Dollar, traded this past Wednesday at 99¢. On March 19, 2003, when the Iraq War started, the Canadian dollar was worth 51¢, meaning that you could double your purchasing power by buying Canadian products. Today, it is nearly at parity.

Canada is America's biggest trading partner. In 2006, we bought more than $303 billion dollars worth of products, from oil and gas to plywood and paper. The cost of those products will be higher this year.

And those items we buy from China at our Box Stores might be higher as well. In 2006, China exported more than $287 billion in products, from toys to clothes to electronic products. We exported a mere $52 billion back to China leaving a trade imbalance of more than $235 billion. To complicate matters, China pegs the Chinese currency, the Yuan, at an artificially low value against the dollar to make their products attractive for importing.

The U.S. Senate is thinking about imposing trade sanctions against China unless they allow the Yuan to float openly on the currency market. The problem with this is that the United States borrows $3 billion each business day to keep the economy growing and one of our biggest lenders is China.

The fall of the US currency is not so much the cause of our financial malaise, but symptomatic of the nation's economic fundamentals being askew.

• The Iraq war has cost us $454 billion to date; Defense Secretary Robert Gates wants $190 billion more. The deficit is hurting us and the major cause of the deficit is the cost of the Iraq war.

• The housing mortgage bubble has created unease in overseas financial markets. The risk of a recession is making investments in the Dollar a riskier proposition. In February, former Fed Chairman Alan Greenspan estimated the chances of a U.S. recession at 30 percent; last week he changed his prediction to 50 percent.

• Seventy two percent of the U.S. Gross Domestic Product is made up by domestic consumption - the consumer buying the things they need and want. With the low value of the dollar, the cost of consumer items will be increasing. The Bush tax cuts for the top 10 percent did little to increase middle class buying power and, if consumer confidence declines, some economists predict that a recession is inevitable.

The days of Republican fiscal conservatism are long gone. George Bush's magical spending ways, turning a nearly trillion dollar surplus into billions of dollars in deficits, defies the most basic economic principles that every Main Street business person knows - be careful about spending money you don't have.

There was a time when the Dollar was valued, as the Southeast Asian merchant at the beginning of this story knew.

America is borrowing too much money to fund a war that we can't afford, and everyone of us will be paying the price with our pocket books.

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