January 10, 2006

Bad News on the Economic Front

Today, the main economic news is touting how the market is happy with the Bush economy because the Dow is finally back to where it was 4.5 years ago. Yet, it seems like the main linchpin of Bush's economy is coming undone: the Chinese have finally decided that they are no longer interested in having all their money tied up in US Reserves. As this Dkos story says, the Washington Post is reporting the Chinese have decided to move part of their holdings into Euros.

China has resolved to shift some of its foreign exchange reserves -- now in excess of $800 billion -- away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday.

As China's manufacturing industries flood the world with cheap goods, the Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb.

Of course, Bush's Treasury Secretary, John Snow, doesn't believe this will affect the US economy.

Chinese diversification won't impact foreign investment in the United States because its capital markets are the deepest and most liquid in the world, Snow said.

An anonymous senior Chinese economist was quoted in the Washington Post on Tuesday as saying that China has resolved to shift some of its foreign-exchange reserves away from the U.S. dollar into other currencies. See full story.

"People invest in the United States because our risk-adjusted returns are better," Snow said in a meeting with reporters. Confidence in the United States' legal system and markets remains very high.

"As long as we can sustain this sort of environment, and I believe we will, the United States will be able to attract the capital it needs, for both the public and private sector," Snow said.

Snow sees a bright future for the U.S. economy, growing above trend. He put volatile energy prices at the top of his list of risks. He dismissed talk about a bursting housing bubble as "overheated rhetoric."

Snow promised "very stringent" spending proposals in the federal budget to be submitted next month. "It will call for sacrifices."

He said the Bush administration remains committed to cutting the federal deficit in half. "This is not a president who makes commitments lightly."

Snow continued to press Congress to extend investment-related tax cuts. "It's important that we not turn our back on the thing that made this [recovery] possible."

Snow shows why he is part of the Bush administration: he still believes in the trickle-down fantasy. His ideas for fixing the economy are increasing tax breaks for investments (especially for ethical companies like Halliburton and HCA) and cutting services that affect the general public. Truly, that will compensate for the pressure on the greenback when the Chinese stop buying our treasury notes. Never mind that it was just last week our government had to raise the debt ceiling because we were close to bankruptcy. Do you think Mr. Snow can talk our our friendly wealthy corporations into picking up the Chinese slack? What magical friends does he believe will step in to fund Bush's spending spree now?

As John Campanelli says, we are well and truly screwed now.

Posted by Mary at January 10, 2006 07:30 AM | Economy | Technorati links |