Vance at BTD writes that it’s a mistake for the Bush administration to call for the revaluation of the yuan because it will weaken the dollar and make it harder for the US to finance debt: For years we have been able to fund any budget deficit cheaply …

You omitted three very important issues, one touched on by a responder, and that is oil. interest (rates), and social security.

As for the first, oil is currently priced in dollars which has two effects. First, it causes a lot of countries (like China, until recently) to hold a lot of dollars so that they can use those dollars to buy oil. They get those dollars, effectively, by lending the US treasury money — i.e. taking an investment position in the dollar.

China is dumping its dollar holdings for two reasons. First, it’s losing confidence in the dollar long-term and, second, it no longer wishes to finance a nation with which it will very soon come into direct competition with for that oil.

There’s also the very real possibility that the world, in response to a whole lot of things, including a plummeting dollar and the fact that the world hates us, will switch to the Euro as the denomination by which oil is traded. If that happens, and I think it will, it will be apocalyptic.

Finally, on this point, roughly half of our foreign trade deficit comes from oil — in that we buy other people’s oil and ship it here. As the price of oil goes up, our deficit goes up.

As for the second, interest rates, they have no where to go but up. More and more of our debt is being held by foreigners (as Paul points out, we’re not buying it ourselves (save Social Security, see below). Those foreigners are losing confidence. In order to assuage the increasing risk of US treasury bills and notes (once the safest investment in the world), interest rates have to rise in order to entice people (i.e. other countries) to buy them. Debt service will soon become the dominant item in federal spending.

And the third, Social Security. The Social Security Administration currently buys about $100 billion dollars a year of US debt (because SS runs a surplus). This, at least, represents domestic investment in our debt which is preferable to foreign investment (see above).

If the administration is successful in privatizing social security, even partially, then someone else will have to be found to buy part or all of that $100 billion shortfall. If that’s going to be foreigners, or even domestic investors, that will come at a very high price.

In short, we’re priming ourselves for a collapse of the American economy one that we may not be able to dig ourselves out of.

What can we do? Invest, while we still have the time and the money, in a massive domestic energy program. This will most likely come in the form of procedures to reduce realign energy consumption, not find new sources (there are none to be found, except nuclear, which we will have to develop breakneck). This will come at the severe expense of some industries (the airlines, trucking, automotive) but will also have the upside of providing massive domestic spending and investment in new industries.

Raise taxes. Fast. On those sectors most able to take the hit, namely those sectors which have seen the greatest tax cuts — corporations and the wealthy.

Reform corporations. Specifically, close loopholes which allow corporations to move their headquarters to tax havens, such as Bermuda, while still enjoying the protections of the US taxpayer (such as intellectual property protection, etc.). You move to Bermuda, fine. Let the Bermuda Government protect your assets.

Cut spending, drastically. We’re going to have to take the axe to corporate welfare ($100-150 billion/year) as well as defense spending. We’ve also got to do something about government healthcare spending which, ironically, means we’ve got to look at nationalized healthcare along the lines of the other first-world democracies.
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