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Friday, April 29, 2005

What Bush Didn't Say - and Why

The one most amazing thing to me about last night’s Presidential press conference is that the President didn’t push for more tax cuts. Instead, he said that we have to keep taxes low because things look bright on the horizon. I don’t know what horizon he and his advisors are looking at, but it isn’t the one I see.

It does, however, stick to the Bush Administration’s historical tactic of denying reality. Just the day before, this article showed the economy was actually doing worse, not better, than it has in the last two years. Slowed consumer spending means slowed job creation and lower stock prices. Better take those shades off, Mr. President. Your future isn’t so bright after all.

Part of the problem is the weak dollar. The value of the dollar and the price of international goods have an exact inverse relationship. If the value of the dollar drops; then the price of goods rise the exact same amount. That means that if the dollar drops 5%; then international prices must rise 5% to get the same value. Want to know why oil prices are so high? Part of the problem is the weak dollar.

Why, then is the dollar weak? Part of the reason is the ongoing inability of the Bush Administration to balance its budget. Even Alan Greenspan is admitting that the new record deficits every year is “unsustainable”. Interestingly, Greenspan says Congress should cut spending, but lays the blame on “reasonable projections” at “current tax rates”. I think Greenspan’s Objectivism is getting the best of him, but I’ll not go into that right now.

There are many things the President can’t control about the economy and that shouldn’t be laid entirely at his feet. However, the deficit is one thing he does have some control over – because he suggests a budget to Congress every year. The deficit, in turn, impacts things that he sometimes claims credit for, but rarely accepts blame – such as this report showing that consumer confidence is dropping. While the President likes to crow about housing, the fact is that housing is more a product of interest rates – which are getting ready to explode because of (you guessed it) the deficit. Weak dollars are directly linked to falling sales, though, which the President didn’t mention at all.

That brings us back to the President. The budget he sent to the Congress this year contains another $70 billion in tax cuts. That kind of throws Mr. Greenspan’s projections in the crapper as it exacerbates the deficit. In fact, bigger deficits mean that the dollar will be even weaker and imported goods (like oil) will be more expensive. That means consumer sales drop again as you get even less for your hard-earned dollars.

This is what happens when you try to build an economy on spending rather than on working. Providing high paying jobs puts tons of money into people’s hands and they buy things with it. That makes the economy grow every single time without fail. Encouraging people to spend more, without giving them higher paying jobs, only decreases their savings rate and increases their burden of debt. In economic terms – it creates a growth bubble that hides a weak economy.

The American economy is a juggernaut. It will stumble ahead as best it can. If oil prices keep climbing – and there’s no indication they won’t – and if budget deficits keep robbing the value of the dollar – and there’s every indication they will – then we quickly set the “Way Back Machine” for the 1970s. Double digit inflation and double digit unemployment and no end in sight. It took Paul Volker (the Federal Reserve Chairman before Greenspan) raising interest rates above twenty percent to get inflation under control back then.

Whoever follows President Bush into office may want to keep Volker’s number handy.

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