September 19, 2004
By Gwynne Dyer
As the opinion polls move steadily in favour of President George W.
Bush and the likelihood of a John Kerry presidency recedes, Democrats in
the United States can take solace in two facts. If their man is not in the
White House for the next four years, then they will not end up carrying the
blame for the almost inevitable US defeat in Iraq -- and they will not have
to preside over the biggest financial crisis to hit the United States since
the Great Depression.
"The US dollar is going the way that [the British pound] went as it
lost its place as the world's reserve currency," said Jim Rogers, the Wall
Street wizard who in 1973 co-founded the Quantum Fund, one of the first and
most successful hedge funds, in a recent interview. "I suspect there will
be exchange controls in the US in the foreseeable future....Whoever is
elected president is going to have serious problems in 2005-06. We
Americans are going to suffer." Why?
If Mr Kerry won, this would be the third time in a row that an
incoming Democratic president inherited a gigantic budget deficit from his
Republican predecessor. Jimmy Carter took over a budget deficit of almost
four percent of Gross Domestic Product in 1976 and halved it in four years.
Bill Clinton was handed a budget deficit amounting to six percent of GDP
in 1992 and turned it into a 1.5 percent surplus in eight years. Mr Kerry
would inherit a five percent deficit from Mr Bush, about par for the course
-- but for the first time he would also be burdened with a huge current
account (trade) deficit.
When Jimmy Carter was president, US trade with the rest of the
world was more or less in balance, which made it relatively easy for him to
address the budget deficit. America's trade balance went deep into the red
during the Reagan years, but by the time Bill Clinton came into office it
had recovered dramatically and so he, too, could fix the budget deficit
without having to worry about a big trade deficit. But in the last Clinton
years the current account plunged into deep deficit, and it's now even
worse.
It's the combination of the two deficits that is potentially
lethal. The United States got away with running a big trade deficit for
most of the past twenty years because foreigners, mostly in Asia and
Europe, kept on investing in the US, and that huge inflow of foreign
capital largely covered the deficit. They invested in the US not because
it was the world's fastest-growing economy (it wasn't), but mainly because
the US dollar was seen as the safest currency, the world's "reserve
currency" in which other countries settle their debts even with each other.
That was then; this is now. The inflow of foreign capital is
dwindling, the current account deficit is up to half a trillion dollars a
year -- and the budget deficit, thanks to the Bush tax cuts and the Iraq
war, is also up to half a trillion dollars a year. Neither Mr Bush nor Mr
Kerry even discusses the issue, and the value of the US dollar has been
drifting steadily down for a year and a half now.
Foreigners have seen the value of their US investments effectively
cut by 20 percent because of that fall in the dollar, and they are getting
nervous. Foreigner investors hold about $8 trillion in US securities, and
everybody realises that a concerted move to bail out of them would trigger
a collapse of the dollar and the destruction of their investments. On the
other hand, everybody also knows that the first investors to get out will
save most of their money, and the laggards will lose most of theirs. It is
a highly unstable situation.
A far-sighted Democratic strategist might therefore conclude that
this is the wrong year to win the presidency. Democrats don't want the
blame for an impending economic crisis that is mostly due to the Bush tax
cuts -- and since their chosen candidate has no strategy for pulling out of
Iraq, why not let the Republicans collect the blame for that debacle, too?
There is going to be a smash; it's too late to avoid it; let the
other lot stay in the driver's seat for now. We'll win next time, and stay
in power for a generation. But there is no sign that anybody in the
Democratic Party is making such a calculation: they are genuinely committed
to fighting Bush.
At the least, that will lend authenticity to their defeat, and win
them credit for next time. And if John Kerry should win, thanks to some
wild card we have not yet seen, it may be rough on the Democratic party but
it wouldn't necessarily be bad for the United States or the world.
Though Mr Kerry now vows to "stay the course" in Iraq, he is
likelier than the crew around Mr Bush to accept reality and pull American
troops out before too much damage is done. And if economic disaster
strikes the United States in the next four years, as it well may, he is
less likely than Mr Bush to devote all his energy to shifting the blame for
it onto foreigners.
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