Commentary

Gathering Clouds Set to Deluge Soggy Economy

The clouds forming over the McMansion-filled American landscape are getting darker by the moment. I’m not even talking about the dismal consumer confidence readings, plummeting retail sales and mounting job loses – these clouds have been with us for a while now. The new, darker vapor formations are emanating from Washington D.C. and the international bond markets, and they’re starting to make me want to put a deposit down on a well-equipped bunker that will provide adequate shelter from the vicious downpour that is sure to come.

The first ingredients of extreme foul weather came from Tim Geithner, the tax-dodging Treasury secretary, when he accused the Chinese of currency manipulation during his confirmation hearing last week – not once, but twice. Geithner explained to eager representatives that President Obama vowed to act aggressively – through diplomatic means, of course – in order to persuade the Chinese to change their currency manipulating ways.

As the world’s largest debtor nation, it seems absurd that the U.S. would consider bullying China, the biggest creditor nation – and the largest owner of our national debt. We would be totally screwed If China chose to engage in a buyer’s strike at the U.S. Treasury’s next bond auction, left unable to fund basic government activities and helpless to resuscitate our ailing economy. Maybe we ought to use a softer, more nuanced approach, given the exceedingly weak hand we currently maintain.

I will now discuss the dark, billowy cloud of buffoonery that is passing for legislative activity in the halls of Congress these days. Representative Peter Visclosky, Democrat of Indiana, strengthened the “Buy America” provisions with regard to the federal government’s purchase of steel in the $819 billion economic stimulus package. This will give preferential treatment to domestic steel companies at the expense of foreign concerns when the government builds bridges, tunnels and roads in the months ahead.

The Buy America law was passed by a protectionist-leaning Congress way back in 1933 in order to give American manufacturers an advantage over foreign rivals when bidding for government projects. It was a failure. International commerce plummeted as America’s trading partners enacted similar legislation in a disastrous tit for tat that brought the global economy to its knees. Unfortunately, this law never died, and the descendants of the myopic politicians who sowed the seeds of economic chaos during the 1930s are sharpening its claws once again.

Yes, and all of the wonderful new additions to this nation’s infrastructure, built with American steel, will cost billions. And where will the money for these projects, the bailout of the banks, the auto industry, and struggling homeowners, and new tax cuts come from? The answer is: U.S. Treasury bond auctions. (We have no cash, so we borrow by selling bills, notes and bonds to our foreign investors, and many of them are trading partners.)

The Treasury announced it would sell a record $67 billion in new securities in its quarterly refunding next week. According to both government and private sector estimates, Uncle Sam may need to borrow up to $2.5 trillion in the 2009 fiscal year. This sad prediction is a result of increased spending on entitlements, declining tax receipts and the $800 billion economic stimulus plan.

U.S. bond investors – most of them foreign – are getting nervous about the massive amount of debt the U.S. is piling on to its already creaky balance sheet. (Foreign investors hold more than half of U.S. government debt.) U.S. 10-year note yields have been rising this week because buyers are demanding higher compensation for the risks involved with holding American debt.

This is important because the 10-year note acts as a benchmark for the rates charged on mortgage, consumer and business loans. The current rise in bond yields is causing mortgage rates to creep upward, at a time when the housing market is still very sick. It will also raise interest costs for businesses and consumers, creating additional headwinds for a faltering U.S. economy.

The combination of growing protectionism from the halls of Congress, the verbal brow-beating of China, our largest creditor, by the Obama administration, and the explosion in federal debt poses severe threats to both the domestic and global economy. Instead of acting to clear the skies so the economy can obtain a healthy dose of sunshine, politicians are seeding new storm clouds for personal gain. It’s time to halt the flow of harmful trade legislation and rein in the acerbic rhetoric to avoid crippling trade wars. In addition, president Obama and Congress have to make sure that all the money we’re about to borrow will be spent wisely so that our foreign creditors can sleep peacefully at night.

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Source Articles:

“Governments Going for Broke?” – Randall W. Forsyth

“Merchant of Debt” – Thomas G. Donlan

“’Buy American’ Rider Sparks Trade Debate” – Anthony Faiola

“U.S. May Sell $69 Billion in Refunding, Revive Seven-Year Note” – Susanne Walker

© 2009 Splendid Marbles.