Dollars and Deficits

by Dr. James Glenn | April 26, 2010. Originally published: February 4, 2003.

George Bush in his recent “State Of The Union” address provided few surprises to his base, or his detractors. Predictably, he promised to expand government largess in the areas of education {vouchers for faith based schools….lordy, lordy…no one can teach like a nun!}, social security {privatization..oops, I mean “partial privatization plans” as the Republicans and Wall Street Philistines now like to call them}, healthcare {a new plan to force seniors into more “managed” care {not exactly what he said}, and yes ladies and gentleman…..of course……more tax cuts for the very, very wealthy, repeal of double dividend taxation, and elimination of the “estate tax”, that oh so onerous, and oh so egregious impediment to the rich getting filthy rich. This tax {estate tax} now affects less than 2% of Americans. {hardly as Draconian as Rush Limbaugh and The Heritage Foundation would have you believe} And….. of course, another two trillion in tax cuts to the people that need it the least, the wealthiest 2% of taxpayers.

Remember that taxes are the freight we pay to live in pluralistic Democracy. No one likes them but as responsible citizens, we pay, knowing that we have very serious overhead, like a bloated Defense Department/Pentagon, corporate welfare, now a Department of “faith based initiatives” {anyone ever tell these Bushies about separation of church and state and why it exists in the Constitution?”}, unneeded wars in Iraq etc……..

So, before chortling with glee at your whopping $595. {average tax savings for those between 50-75M/yr} tax savings please understand that deficits destroy economic growth and vitality, raise long term interest rates, discourage foreign direct investment, destroy the value of the dollar, increase inflation, and leave your children and grandchildren with a much lower standard of living {remember when you were growing up one wage earner could support a middle class lifestyle?}.

This is not supposition folks, it is not speculation. It is economic FACT, time tested, and it is happening before our very eyes in the last 18 months. With the return to red ink thanks to the prior Bush tax cuts, foreign investors have been fleeing our stock and bond markets in droves since July when the Dow bottomed {hopefully} at 7200. This was not due primarily to corporate scandals {though they weren’t a real confidence booster}, as the CNBC morons would have you believe. It was/is because foreign investors, who own a quarter to a third of financial assets in this country, do not like what they see {return to deficits and poor growth prospects}, and have absolutely no faith in this administrations economic policies {because it has none-except cutting taxes}……and have voted with their feet…..by selling US assets en masse. As you may have noticed, with the selling has come a rapidly depreciating dollar {now down 25% vis a vis the major currencies {three year low}, and rising gold prices {six year high}. This is hardly coincidental folks. Investors worldwide are losing their faith in paper assets {particularly ours}, and central banks….hence..selling paper assets, and buying hard assets, like gold and real estate.

A falling dollar means loss of purchasing power for US citizens buying imports and allows domestic producers therefore to RAISE their prices by the percentage fall in the dollar {equalize prices}. This raises domestic prices leading to that old bugaboo inflation. Concomitant with this, interest rates begin to rise to support the dollar {attract foreign capital}, and the supply of funds available for borrowing shrinks because of increased demands from the government {deficit spending} leading to what economists refer to as the “crowding out” effect. That is, government has to compete with the private sector for capital, “crowding out” potential borrowers in the private sector. This inexorably pushes interest rates higher………stifling investment and dragging the economy down in a vicious, not so virtuous spiral.

Indeed, one could reasonably argue that a return to deficit spending is responsible for much of the eight trillion in stock market losses over the last two years. In addition, when you calculate the hidden “tax” imposed on US consumers by a falling dollar {30%}, inflation, and rising real interest rates {this will happen folks so buckle in}, a $595. tax refund seems a little ludicrous. Doesn’t it? Hardly enough for the damage done, and the real price paid longer term.

Finally, we still have a SIX TRILLION dollar debt rung up in the eighties under Reagan/Bush which we were just starting to make a dent in, until Bush Lite got elected {?} Now we are back to a 395 BILLION dollar budget shortfall projected for this year, a 400 BILLION trade deficit………ohh, and RED INK in perpetuity. And guess what ladies and gentleman? You can be sure that the very, very wealthy, and corporations {many of whom pay no taxes} responsible for this {demanding yet more tax breaks and perks} will pay none of it………. Oh yes, and that King George will be happily retired in Kennebunkport/Crawford along with his oil, inurance, and banking buddies. It is you, your children, and their children who will pay for this senseless greed, and disgusting display of avarice. The Great Gatzby is back………………

As usual, I welcome any and all responses…….in the spirit of open debate and enlightened discourse.

Originally published: February 4, 2003.

Dr. Glenn lives in the Washington DC area and currently is a Professor of Finance and Management at several local universities. He also runs an investment, and business consulting service called Piper’s Consulting. He has thirty years broad based experience in business development, investment advising/brokerage, retail banking, commercial lending/underwriting, credit analysis, management, public relations, relationship selling, asset valuation and investment consulting, and teaching.

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