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lquadland10 (< 20)

THE REST part 2



March 20, 2008 – Comments (0)

Is there a corresponding source of tax money to pump the currency and Treasury
markets? There is an official one for currency, the Exchange Stabilization
Fund. It was established in 1934 to prop up the dollar in foreign exchange
markets. But it can be used for any purpose determined by the Secretary of the
Treasury. In mid-1995, the fund contained $42 billion.[iii] The actual amount
varies depending on how well the Treasury does on its currency transactions. The
money originally came from the sale of U.S. government gold, but the Treasury
kept the money as a private fund, not under Congressional control. Since it is a
finite amount of money, not appropriated by Congress, it probably is not often
used to pump the stock market or even the market for Treasuries.

The markets for Treasuries, and also currency, are being pumped using the tax
code and pension fund laws. But to understand this we have to first look at why
pumping might be necessary.

Treasuries Exchanged for Jobs

The U.S. Treasury holdings of Japan and China are essentially a consequence of a
trade imbalance between the U.S. and these two countries, with the balance
heavily tilted to the latter. To maintain the imbalance, which they both clearly
want to do, both countries must keep their currency pegged against the dollar at
a lower rate than it might otherwise be. If they did not do that, the Toshiba
computers, Toyota cars and other quality items made in Japan would be more
expensive, and so Japan wouldn’t sell as many of them in the U.S. A similar case
holds for vast numbers of Chinese manufactured items sold pretty much
everywhere, but notoriously at Wal-Mart. To keep the items relatively cheap,
the central banks of those countries keep their currencies cheap by buying a
corresponding amount of dollars, thus supporting the dollar against their
currencies. The dollar may essentially collapse against the euro, but not
against the yen and the yuan.

With the dollars the Japanese and Chinese central banks have bought, they can
buy something denominated in U.S. dollars; the item of choice is U.S. Treasuries
since it is like holding dollars that pay interest. So this has the effect of
pumping the price of Treasuries too. Because the items made in China and Japan
are cheaper than those of corresponding quality made in the U.S. (in the case of
many Japanese items, there may not be U.S. items of similar quality), the effect
is to create manufacturing jobs in those countries while simultaneously losing
them in the U.S. In effect the jobs are exported and foreign currency is
imported to buy dollars and then Treasuries.

This has an advantage for the Bush administration, which has the ruinously
ridiculous policies of simultaneously cutting taxes and waging wars or building
up for them. In effect, the basic racket is: the Bush administration exports
jobs to these countries, and in turn they finance Bush’s fiscal deficit so he
can continue his wars and cut taxes for his friends. The deficit for 2005 will
be at least $400 billion, according to the Congressional Budget Office.[7] The
Pentagon budget for 2005 was about $400 billion. Add in two supplemental
requests for the costs of his Iraq war and the Pentagon figure is roughly $500
billion. “It is interesting to note that the military budget is about the same
order of magnitude as the fiscal deficit,” said veteran Pentagon waste fighter
Ernest Fitzgerald.

The tax cuts were at least in part intended to stimulate spending—the purchase
of all those Toshibas, Toyotas and Chinese whatnots. So the fiscal deficit is
intimately linked to the current account deficit. If the money had been taxed
away to pay for Bush’s current war and arms build-up for future ones, it would
not be in people’s pockets to pay even for the down payments on the Toyotas.

But won’t the Japanese and Chinese central banks ultimately get burned by
holding vast quantities of dollar denominated assets? Sure, if the dollar ever
collapses against their currencies too. The dollar having fallen roughly 30%
against the euro since the beginning of the war in Iraq, the same fate or worse
could await these Asian currencies. With currently issued Treasuries paying a
coupon rate of no more than 4%, they would be materially shafted on their
investments in U.S. Treasuries. Then why don’t they bail out?
The Emperors’ Revenge

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