11/19/03
US ECONOMIC REALITY
By J. Parnell McCarter
Cambridge
Mercantile Corp. concisely summarized the current US economic reality in these
words:
“Conventional thinking in Washington is that China's
currency peg to the dollar is the source of US ills. Recall that the trade gap
with China reached a record $12.7 billion as the deficit widened in September
to $41.3 billion. The total deficit with China this year alone may reach $130
billion, which would be the most with any country in U.S. history. Yet China's
growing imports are set to bring its total surplus into balance, highlighting
that this is a US-centric problem.
The truth is that US manufacturing has been in a decline since the 1970s when
the US abandoned its policy of settling trade balances in gold and instead
embarked on a dollar IOU policy of epic proportions. This made it possible to
finance a growing trade imbalance, which other countries took advantage of and
foreigners now hold over $1 trillion in dollar assets. Prior to closing the
dollar for gold window in 1971 this vast amount of dollar reserves held
overseas would have seemed unfathomable.
Therefore, under a system that actively encourages more consumption via cheap
credit creation and deficit spending, achieving a textbook type of trade
balance may not come without first cutting off the cheap credit tap. Meanwhile,
a simultaneous policy of currency debasement and protectionism is eerily
reminiscent of previous deflationary cycles and will only add to emerging
tensions in global trade.”