Sinking Dollar Fair Warning to Obama
Liz Peek | 10/09 at 11:44 AM
The New York Times ran a story this week about the art that the Obamas have chosen for the walls of the White House. Featured in the piece was a painting by Ed Ruscha. The chosen canvas has a red background with the words “wait a minute,” “maybe yes” and “maybe no” floating across the space. What an appropriate choice for our young president, who is suddenly irresolute about Afghanistan. Having once pronounced Kabul as central to the war on terror (oops! make that the Overseas Contingency Operation), the president is now angling for a Goldilocks position: not too little, not too much, responding to polls that show waning support for our activities in that desperate country.
President Obama is uncertain not only about our military options, but also – dangerously – about economic choices. He recently affirmed while addressing a Wall Street crowd that “I’ve always been a strong believer in the power of the free market.” That was good to hear, because almost none of his proposed programs suggest a love affair with capitalism. Instead, he has offered up one measure after another that substitutes government fiat for market economics – most notably in autos, health care and energy. The newest entry is the proposed Consumer Financial Protection Agency whose czar will be empowered to decide on “the manner, settings and circumstances for the provision of any consumer financial products or services.” Moreover, he has revved up his antitrust department, sanctioned pro-labor policies burdensome to American employers and started a trade war.
This litany of business-unfriendly stances is taking a toll, not only on the president’s popularity, but on the dollar. The dollar took a sizeable hit this week (and gold soared) when the Australians boosted their key interest rate, signaling a recovery in that country. While earlier this year global investors drove the dollar briefly higher in their quest for safety, they have since had second thoughts. The euro, for instance, has gained 18% in value compared to the dollar since March. You don’t have to read the tea leaves to find reasons to sell the dollar – you can simply delve into the budget projections.
To put things in perspective, note that budget deficits in the U.K. are about to sink the Labour Government. The IMF puts the U.K. budget deficit this year at 11.6% of GDP and at 13.2% next year. The net public debt of Great Britain is expected to amount to 92% of GDP in 2014, up from 58% today and 38%in 2007. (The Obamacare folks should note that the IMF has called for the U.K. to rein in their health-care program, a leading budget-breaker.) The Brits are alarmed about this state of affairs, which is why they are about to junk their existing government. David Cameron, the Tory leader most likely to take over as Prime Minister, has warned that the country is in for tough times – severe cuts in social spending and higher taxes. That is not the usual campaign rhetoric, but the country is looking the future square on, and does not like what it sees.
Here’s the sobering news for the U.S.: we’re not that far behind the U.K. Our budget deficit will total 12.5% of GDP this year according to the IMF, and our national debt will soar to 85% of GDP by 2014. These figures are spurring talk that the dollar will no longer be the world’s reserve currency and that oil producers may move to price their product eventually in a basket of currencies.