Mrs. Watanabe trusts her government. How far does she trust Uncle Sam? How far, indeed, does Hu Jintao?
From Martin Wolf, Financial Times, "Why Obama's plan is still inadequate and incomplete".
Yesterday, the season of miracles began.
In his June 2008 acceptance speech for the Democratic nomination, President Obama said the following:
Generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs to the jobless... this was the moment when the rise of the oceans began to slow and our planet began to heal... this was the moment when we ended a war, and secured our nation, and restored our image as the last, best hope on Earth.
Heady words... along with the rest of the world, we wish the man luck as he takes center stage. But whatever feats of daring and strength our new President will (or will not) be able to pull off these next four years, one thing is certain.
He will not save the U.S. dollar from its fate.
"Be the change," the Obama leadership team urges the crowds. (On hearing that slogan, your humble author can't help but recall the classic advice from Ty Webb in Caddyshack: "Be the ball.")
"Anything is possible in America," Obama tells the masses. And the masses believe.
Noted money manager Marc Faber, for one, believes something rather different.
"I believe that in the U.S.," Faber writes in a recent letter, "the stimulus package and the various bailouts engineered by the Fed and the Treasury will make matters far worse [emphasis mine] than if the free markets had been left alone to make the necessary adjustments."
Martin Wolf of the Financial Times is also skeptical – though he takes a slightly different tack. While Faber thinks the U.S. would have been better off with no stimulus at all, Wolf points out that the amount of stimulus planned will not be enough to make a dent.
It's a subtle point. With U.S. GDP at roughly $14 trillion, a 5% stimulus package over two years comes to $700 billion. The trouble is, a combination of forced saving in the private sector and below-trend future growth could easily wipe out 10% of GDP (or more).
In other words, the shot in the arm will not be big enough... it will prove devilishly tricky getting the medicine to the right place (something government is very bad at)... and much of the dough thrown at companies, consumers and banks will simply be squirreled away or used to pay down debt.
"The bigger point," Wolf writes, "is not that the package needs to be larger... It is that escaping from huge and prolonged deficits will be very hard."
"Running huge fiscal deficits for years," Wolf goes on to add, "is indeed possible. But the U.S. could get away with this only if default were out of the question."
Unfortunately it isn't.
Change Not Always a Friend
I agree with The Economist that President Obama is "a respectful and thoughtful man." But he is no superman. On the fiscal front, he will not succeed in his effort to transcend mathematics or repeal the laws of gravity.
And while "change" was a great slogan to embrace in the waning twilight of the Bush years, America will soon learn the hard way that change is not always a friend.
One hard change in particular we are headed for is the end of the dollar's reign as a unilateral reserve currency. Just as we no longer have a "unipolar world" in which one superpower stands alone, we will soon say goodbye to the unipolar currency regime in which one particular brand of paper stands alone. And that is change you can bank on.
The transition away from dollar hegemony will be painful, messy and drawn out. In many ways it has already begun. And it will probably be accelerated by Obama's domestic economy plans... which only makes sense, given the troubles that printing the world's reserve currency brought to America in the first place.
You know that old saying, "expenditures rise to meet income"? It is as true of great nations as it is of the teenager with daddy's MasterCard.
Just consider: It is hard enough for a single, honest politician to resist a dip into the honey pot. With hundreds of them all scheming together, resistance is futile.
In an odd way, then, it was almost guaranteed that events would one day come to this.
If some other nation had been given the privilege of printing the world's reserve currency in the latter half of the 20th century – issuing debt in its own scrip, enjoying seemingly infinite privileges of credit, and so on – they might well have gotten into exactly the same mess America did.
In other words, we borrowed our way into this because we could. And now there is no way out.
It's All About the Debt
Defenders of the greenback point out the lack of alternatives. There is no place else to go, they say. Why, look at Europe – it's on the verge of cracking up! (In a number of ways this is true, but that's a subject for another day.)
To my mind, though, it's all about the debt.
In the spirit of Texas and Alaska, whose denizens like to brag about size – did you hear the one about the mosquito being Alaska's state bird? – America simply does it bigger.
Nobody borrows like us... nobody spends like us... and nobody prints like us.
Don't get me wrong – there are plenty of details worth close consideration. Take China's mountain of dollar reserves, for example. What happens if the "hot money" that flooded into China seeking currency appreciation decides to flood out again? What happens if the PBoC (People's Bank of China) elects to sell dollars en masse to defend the Yuan against a spec-driven collapse? What if, what if, what if? Your editor spends ample time noodling over this kind of thing.
But it still ultimately goes back to the debt – or rather, to the question of who is deeply in debt and who is not. Because America is swimming in the stuff, stimulus efforts are far more likely to come up a day late and a dollar short.
Remember the horrible calculus of bailing out General Motors (GM)? Cool heads observed that throwing more money at GM would be the equivalent of knocking down a couple of interest payments to creditors. Such efforts would not address the real problem, or make a real long-run difference.
Trying to sort out America's situation with a lousy trillion bucks is sort of like that. You don't wipe out decades of profligacy with the stroke of a pen. Unless, of course, you are willing to print so hot and so heavy that the rest of the world gets white knuckles.
Only countries deeply in debt are willing to do this. Those countries with actual savings in the bank are far less inclined to print like mad, for the same reason a homeowner with positive net worth is far less likely to flirt with bankruptcy.
Remember John Connally
Here is my suspicion. I strongly suspect the conventional wisdom, which argues that the U.S. dollar will "hold up" in 2009, is wrong.
I further suspect that the world, now rejoicing in the winds of change, will soon get an Obama wake-up call.
After all, while it certainly feels like Mr. Obama is President of the World – and perhaps he really is, in a spiritual sense – in plain old pragmatic terms he is still President of the United States.
And that means it is President Obama's job not to cradle the world's hopes and dreams, but to safeguard America's interests first and foremost.
In looking to America's domestic economy interests, then, I suspect President Obama will soon see the wisdom of "letting her rip." Like a martingale progression gambler at the roulette table, he will double down – and then double down again.
In so doing, the Obama brain trust will echo to the world, in elegant but no less blunt terms, what Treasury Secretary John Connally said decades ago: "The dollar is our currency but your problem."
Finally, I suspect that when the central bankers of the world recognize the dollar is well and truly "their problem" – and when they see the writing on the wall as dollar hegemony passes into history – all hell will break loose.