Bush-Bernanke model lacks teeth

The dollar is trading at all-time lows against the euro and gold for good reasons. Continuous US administrations have flooded the world with greenbacks, and global investors by now have little confidence in the management of the US economy.

During the Bush years alone, the US trade deficit has doubled. The deficit has exceeded $700 billion each of the last three years - and is more than five per cent of GDP.

The Bush Administration's energy policy - which emphasises incentives for domestic oil production and letting rising prices instigate conservation - has failed. Domestic crude oil production is falling, the price of gas has risen from $1.51 to $3.21, automakers have populated US roads with fuel-guzzling SUVs, and petroleum now accounts for about $380 billion of the US trade deficit.

As US purchases from the Middle Kingdom exceed sales there by nearly five to one, the trade deficit with China is about $250 billion.

Asian market

The Bush Administration has sought changes in China's currency policies through diplomacy - and has failed.

The remainder of the trade deficit is largely autos and parts from Japan and Korea, which through various means have kept the yen and won cheap too.

The huge trade deficit must be financed either by attracting foreign investment in new productive assets in the United States - or by printing IOUs. Investment has only provided about 10 per cent of necessary cash, so each year the United States sells currency, bank deposits, Treasury securities, bonds and the like to foreigners. Those claims on the US economy now total about $6.5 trillion.

That floods world financial markets with dollars and paper assets that function much like dollars - what economists call liquidity. And it evokes an iron law of the universe. If you print too much money, it won't have any value. Until recently, most of that borrowed purchasing power was put into the hands of US consumers by the large Wall Street banks. Essentially, through mortgage brokers and regional banks, those Wall Street banks loaned Americans money to buy homes and refinance their mortgages. In turn, the banks got the cash needed by bundling mortgages, as well as auto loans and credit card debt, into collateralised-debt-obligations - bonds backed by consumer promises to pay - for sale to fixed-income investors, hedge funds and others.

The bankers could get reasonably rich on this scheme - but got greedy. In the summer of 2007, we learned that the banks were not creating legitimate bonds. Instead they sliced, diced and pureed loans into incomprehensibly arcane securities - and then sold, bought, resold and insured those contraptions to generated fat fees, big profits and generous bonuses for bank executives.

Credit crunch

Now investors ranging from US insurance companies to the Saudi businessmen are not much interested in buying bonds created by large US banks - and the banks can no longer make loans to many credit-worthy consumers and businesses. Without credit, the US economy cannot grow and prosper.

The Federal Reserve has direct regulatory responsibility for the large US banks - and it is Ben Bernanke's job to require them to fix their business practices and resurrect the market for bonds backed by bank loans.

Yet, Federal Reserve chairman Bernanke has offered no plan to address these problems, or even acknowledged the urgency of the situation. And without a well-functioning banking system, the US economy heads into recession of uncertain depth and duration.

International investors, recognising the US economy lacks competent helmsmen at Treasury and the Federal Reserve, are fleeing the dollar for the best available substitute - the euro and gold. When George W. Bush was inaugurated, the euro was trading at 94 cents, and gold cost $266 an ounce. Now they are trading at $1.52 and $985 an ounce. That is a plain vote of no confidence by global models in the Bush-Bernanke economic model.

- The Globalist

During the Bush years alone, the US trade deficit has doubled. The deficit has exceeded $700 billion each of the last three years.