October 22, 2009
Global Imbalances to Result in Complete Economic Chaos
Brazil announced this week that they will be implementing a 2% tax on fixed-income and equity purchases by foreign investors in an attempt to curb the appreciation of the Brazilian real, which is up 32% this year against the U.S. dollar. Brazil is trying to deter foreign investors from investing into their country, in an attempt to artificially prop up the U.S. dollar.
It is completely absurd for Brazil to care so much about having the ability to export their products to Americans who can't afford them. They should be allowing the real to appreciate in value so that their citizens can enjoy an increased standard of living. The only people who will benefit from Brazil's actions are those who own exporting companies in Brazil. The overwhelming majority of the people in Brazil will suffer, as the country will likely continue adding to their $231.5 billion in U.S. dollar reserves that will eventually be completely worthless.
Federal Reserve Chairman Ben Bernanke said this week that the U.S. should cut down on its budget deficit in order to reduce global imbalances. This is hypocritical, as it's Bernanke who is allowing the U.S. to have such huge budget deficits by monetizing our government's spending. Bernanke is the only person with the power to put a stop to the madness, but in his campaign to get reappointed, he most likely promised everybody in Washington that he would continue monetizing their spending in the future.
Bernanke continues to claim that the recession is over and the financial crisis is behind us, but the global imbalances he admits we still need to correct are getting more out of control than ever. Consumer spending now accounts for 71% of the U.S. GDP, well above the long-term average of 65%. If global imbalances were to correct, we would need the consumer spending portion of GDP to overcorrect down to below 60% for an extended period of time. This would certainly put the U.S. in a very deep recession, but only then would our economy have a real chance of truly becoming healthy.
After the U.S. financial markets collapsed in late-2008/early-2009, we saw the U.S. personal savings rate triple to a high in May of 6.2%. This was a step in the right direction but it didn't last for long. The savings rate has since then fallen three months in a row back down to 3%. Any progress that was made has been lost. The imbalances are growing to new extremes that will eventually result in complete economic chaos and hyperinflation. Our only chance to rein in the imbalances before they do irreparable harm is to follow in the footsteps of the Reserve Bank of Australia and dramatically raise interest rates immediately.
Many so-called financial experts and stock analysts on CNBC have been proclaiming the rapidly declining U.S. dollar to be good for the U.S. economy, because it will boost our exports. We need to increase exports, but our country doesn't produce enough products to export. In order to increase the manufacturing of products to export, we need to increase savings. Without savings, it is impossible to build new factories. A falling U.S. dollar discourages Americans from saving and destroys the value of savings.
A declining U.S. dollar is bad for all Americans. Oil prices are now back above $80 per barrel; gas prices will inevitably rise back above $4 per gallon. Last time gas rose above $4 per gallon, Congress held countless hearings trying to figure out why oil prices were rising, when in fact they were the ones causing it. Congress's deficit spending and Bernanke's willingness to monetize it creates the inflation that drives oil prices up. Let's see if they figure it out this time, or if they once again place the blame on speculators and the free-market.
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