Is the U.S. Trustworthy? What the World Thinks

It is difficult for an individual or an organization to earn the trust of the market. Although market participants may want to give an individual or an organization the ‘benefit of the doubt,’ especially when a person or the leadership of an organization is new on the job, trust has to be earned, and trust is not gained overnight. However, trust can be lost quickly and once it is lost, it becomes even harder to earn it back.

There seems to be very little trust in the Bush administration these days and to hear members of “the team,” including President Bush, out in public talking up a strong dollar seems a little bit absurd and surreal. From time-to-time, the Bush administration has spoken about a strong dollar, but has never seemed to do anything about it. In addition, this charade has gone on for seven years or so.

Now, when this administration is in its waning days, when it can do little or nothing in the way of implementing appropriate policies, when it is subject to internal questioning of what it has done, “talking the good talk” just highlights how incompetent and how out-of-touch the Bush administration really is. The President has never really had much of an interest in economic policy making and has failed to appoint or listen to quality advisors. The results that have been achieved only point up these failures.

The internal questioning is another issue. Individuals that have been members of the Bush administration have given us their impressions about economic policymaking after they have left the administration, but now we have people within the monetary wing of the team expressing doubts and concerns in the public square. (See my post here.) Fed Chairman Ben Bernanke has spoken out three times over the past week to argue for a strong dollar and to waylay worries about the jump in the unemployment rate. Yet, one worries about the leadership within the Federal Reserve System with so many governors and district bank presidents speaking out. This is coupled with the fact that the Board of Governors only has three confirmed governors plus one who resigned a week ago. Where is the source of any confidence here?

However, let’s look to the future, to the presidential candidates. Polls inform us that the state of the economy is, by far, the most important issue on the menu of voters concerns. The two candidates are contending that economics is the big issue that they will fight over in the upcoming election and that they stand miles apart in terms of what they would do.

Yet, what do the participants in international markets hear? They hear discussions about tax cuts: tax cuts for middle-income families and retirees, and tax cuts for corporations and upper-income families. They also hear about expanded unemployment aid and subsidies for state relief programs, expanded health care coverage, and help for families facing foreclosure on their homes, and the list goes on.

How will we pay for these incentives? By letting the Bush tax cuts expire; by cutting back on other programs; by the reduction of support for the military through redirecting the use of resources; by taxing corporations like those in the oil industry; by better management of programs; by efficiencies; just to name a few ways.

The markets are interpreting this debate as promising more and more government debt. They have heard these arguments before. More benefits for the electorate…paid for through reductions in government or better management of programs. International markets are just hearing “more of the same”. In addition, when they look at the advisors to these candidates they see one candidate who admits that he doesn’t know much about economics and has two old friends, Phil Gramm and Jack Kemp, as his primary advisors. (“Back to the Future” Part VII or VIII.) The other candidate - well, that remains to be seen, since we are told that the overall plans will be forthcoming this fall. This is not much of a confidence builder.

Now, what about monetary policy? The bet is still on that United States monetary policy will help to underwrite the government debt. The first concern is with the leadership of the Federal Reserve System. Disarray within the body is not a good sign. The absence of so many principals it also not a good sign. In addition, the monetary authority is still strapped with the assignment to pursue both economic growth and low inflation, which is something that is very, very difficult to do. Furthermore, with a credit crisis still at hand, the Lehman earnings report did not help calm any nerves. Coupled with the possibility of a recession - unemployment is up, car sales and retail sales are down, and the housing market still in the tank and so forth, along with high oil and food prices - the best bet is that the Fed will support policy actions to lower unemployment and spur on economic growth. It is currently the American way to inflate oneself out of problems.

Not only is this the way of the government, it is also the way of the people. A timely article on this point is the David Brooks piece in the June 10, 2008 New York Times. (See my post, “Economic and Financial Power and Leverage.” for previous comments on the subject.) Discipline does not seem to be a word to be found in the American vocabulary these days.

One of the problems is that we have to get rid of the Keynesian idea that monetary policy has a responsibility for high levels of economic employment. For one, statistical research has shown that monetary policy has very little, if any, influence over the unemployment rate over time. Therefore, empirically, the relationship between monetary policy and employment is a weak one. Secondly, the Keynesian model was developed to provide a foundation for government spending policies at a time when greater national autonomy in economic policymaking was desired to achieve higher levels of employment to avoid social revolution. (See Donald Markwell, John Maynard Keynes and International Relations, Oxford University Press, 2006.) These times have passed, yet, as Keynes himself argued, the ideas of economist long dead still influence the making of economic policy. The monetary authority needs to focus on inflation as its primary responsibility and not some dream about achieving high employment.

Other institutions within the world that are earning the trust of international financial markets exacerbate the difficulty that the United States is facing. The European Central Bank [ECB] is one such institution and the Bank of England is another. The ECB has, as its main function, the goal of low inflation. It is determined to crush inflation. (The Financial Times article can be found here.) The Bank of England is also taking a strong stance against the rising tide of inflation. Nations within the world community cannot ignore what is going on in the rest of the world and conduct economic policy independently of everyone else. History seems to side with the nations and institutions that establish and maintain the trust of others within the world community. To this end, participants in international financial markets are leery about placing any trust in the current leadership of the United States and are not comfortable with what they are hearing from the potential future leadership.

Let’s talk about the future of the value of the dollar. Right now, it is hard to be bullish. There will be recoveries and rebounds - there always are. However, aside from these short-term swings, what is there to be confident about in terms of the future of the economic policies of the United States. Candidates are elected, and the candidates have to tell the electorate where they stand in terms of what they would do if elected.

The policies and programs that are being proposed almost assuredly will not be enacted within the next two or three years. America must get its act together. That is the only way that the rest of the world will come to trust this country again. What needs to be done, however, will take time and patience. Moreover, in time, trust can be re-earned. Until then, I believe the value of the dollar will remain soft.

Comments

[Lex Luz:]

Yes, "America must get its act together." But how, exactly? The Republicans spew the hollow lines of fiscal conservatism while throwing money down every imaginable foreign rat-hole and creating bloated bureaucracies like the Department of Homeland Security that seem to serve no purpose other than to dole out funds to favored contractors. The Democrats, meanwhile, do... wait... what, exactly? Whine and moan in the corner, bullied by the right and battered by their seemingly incessant desire to be all things to every possible constituency without ever staking out a position of any substance. Meanwhile, the media have utterly abandoned real news-gathering in favor of the far more profitable, and frankly easier, chasing down of whichever celebrity forgot her panties today.

In the absence of leadership willing to take the risk and accept the certain pain of imposing genuine austerity measures here in the United States, it seems to me far more likely that we will have to wait for those measures to be imposed on us by the world markets.

People who think that the threat to our national security comes from some nameless terrorist in the mountains of Afghanistan have fallen for the greatest sham ever conconcted. The real threat is us and our insatiable avarice and profligacy.

2008 Jun 11 09:03 AM

[moonbat1775:]

Actually, MISTRUST is the key. Mistrust of government statistics, of the media, of pandering politicians, and most importantly the government backed banking cartel headed by the Fed.

How ironic that the Bank Of England, the original government backed central bank, should be fighting inflation. Since inflation is caused by central banks, what is the BOE doing; having an internal fight with itself?

It is not austerity we need, it is HONESTY. Those who practice it WILL be respected. Fractional reserve banking is INHERENTLY dishonest. Backing it up with a government backed banking cartel is
exactly the wrong thing to do.

A very good book explaining the roots of the mess is The Mystery of Banking by Murray N. Rothbard at: www.mises.org/Books/my...

2008 Jun 11 09:45 AM

[barnburner:]

Both post above:poetSam and Lex Luz seem to have hit on the problems the exacerbate the problems of day to day life of Americans. Government statistics are manipulated for a political agenda and the U.S. Public is hell bent on resisting economic realities that are and will continue to be forced upon them and an irresponsible Congress. Yes, Mr. Bush is a poor excuse for a leader yet our elected representatives and a derelict media enabled him. There are some investigative reporters out there like Seymour Hersh and others that were writing the truth but no one wants to listen. We seeing history evolve around us that we don't want to happen-the rise and fall of the American Empire.

2008 Jun 11 10:55 AM

[handicapbet:]

Has any of you financial people listened to Republician Candidate Ron Paul for the last year and heard what he has said about monetary policy, the falling dollar, the real estate debacle, the federal reserve.
Read his new best selling book "The Revolution" for the solutions you are seeking. Ask Jim Rogers what he thinks about Ron Paul's positions. He has supported his his positions.

2008 Jun 11 01:37 PM

[moonbat1775:]

handicapbet,

Ditto on Ron Paul. He IS great,

2008 Jun 11 01:52 PM

[winslow:]

How can anyone be postive about the direction the US is taking....just look at our leadership...the government has made virtually every incorrect decision over the last 7 years....corporate leaders line their pockets with corporate goodies awarded by the "independent" boards and drive the companies into the ground..... the country has a tremendous amount of debt and no viable plan.....with oil at $140 we have no energy policy for the future.....neither major political party can compromise for the future of the country.

2008 Jun 11 04:41 PM

[Zee4Money:]

Excellent article - What America needs now is a new Paul Volker.

2008 Jun 12 08:57 AM

[svkoho:]

Excellent article and just superb comments. This writing is way too good to be "wasted "on an obscure financial website! The US as empire was probably peaking when the most incompetent political leader the country has ever known stepped up to the plate and started a string of strikeouts that continues to this day. The damage done has been incalculable and there are no good choices going forward. If we are lucky, we might choose the least bad choice but our luck hasn't been too good so far.

2008 Jun 12 10:38 AM

[Boubou:]

Pity no one of the calibre of this writer and the commenters ever seems to end up running things.
Probably as you get closer to the centres of power, telling the truth doesn't seem to serve you immediate ambitions any more.

2008 Jun 12 12:38 PM

[the final h...:]

every one with any brains is probably on the american gestapo list...uh i mean homeland security...wink

hillary and hillary made 109 mil and payed about 25% tax...nice trick if you can play it

then, of course, caroline kennedy is supposed to pick out our new VP......hahahahaha

i think i will write in ben franklin....just because he's been dead for a couple of hundred years means nothing. he STILL has more brains then current or future candidates, and, no one in washington would notice anyway.

2008 Jun 13 05:19 AM

[tom kern:]

When the U.S. is doing well we are envied.But when we are not we are damned. Either way we are still looked down upon. All we can do is make the most of our neighbors and learn from lessons past by deveoping relationships as best we can. Some simple lessons from "IN God WE Trust " should apply.

2008 Jun 14 09:07 AM