We're probably fucked, fucked, totally fucked, given Iraq and our mega-debt ($27,000 per American), and there ain't nothing we can do about it

1. Why The Public Can’t Do Anything About The Two Biggest Public Issues -- by Robert B. Reich

Democrats won control of Congress on two big issues – the war in Iraq and the economy. Yet both issues will remain almost completely out of their control, at least for the next two years.

The President remains commander-in-chief until January 2009. And in that role, according to the Constitution, he has the authority to decide defense policy and military strategy. Unlike Lyndon Johnson, who felt the pressure in 1967 when public opinion turned against the Vietnam War, President Bush is not up for reelection, so public opinion won’t sway him. The President said recently he’ll stay the course in Iraq – even though the administration’s own intelligence review says our presence there is causing more terrorism, not less.

The economy is also out of the hands of Democrats or the American electorate, notwithstanding that most Americans say they don’t like the way it’s being handled. Because of the huge budget deficits, fiscal policy can’t be used to fine tune the economy. The only lever that counts any more is monetary policy, which means Ben Bernanke and the Federal Reserve Board’s Open Market Committee are the only game in town.

Bernanke said last week that outside of the automobile and housing sectors, economic growth remains solid, and a tight labor market could spur inflation. Translated, this means the Fed won’t lower interest rates. It may even raise them.

Bernanke is wrong. Most peoples’ wages are going nowhere, and the auto and housing slumps could turn into a recession, especially if the Fed raises rates and chokes off demand. But there’s nothing anybody can do about Bernanke’s wrong-headedness.

Like the decisions of George Bush as commander-in-chief of the military, the decisions of Ben Bernanke and his Open Market Committee – the commanders-in-chief of the economy – are beyond democratic control.

That’s democratic with a small "d."

(Robert Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written ten books, including The Work of Nations , which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet , and his most recent book, Reason . His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine)


2. When the Dollar Talks Back – NY Times Editorial

Talking up the dollar is a tradition among government officials, who always want to prevent an exchange-rate swing from accelerating into a dollar plunge — an economic nightmare that would be marked by spikes in prices and interest rates. As the dollar fell over the past two weeks, Treasury Secretary Henry Paulson Jr. played his role, saying that “a strong dollar is clearly in our nation’s best interest.” And Ben Bernanke, the Federal Reserve chairman, gave a speech in which he was cautiously optimistic about economic growth and signaled that he would not cut interest rates anytime soon.

Growth and relatively high rates — if they came to pass — would be a good combination for the dollar. But as of yesterday, the dollar hadn’t moved up much from its recent lows against other major currencies. Investors remain largely focused on economic weakness in the United States and gathering strength in Europe — which portend a weaker dollar, no matter what anyone says.

A weaker currency is inevitable for a country as indebted as the United States is. During the Bush years, deficits have mushroomed — in the federal budget and in trade. Anything that affects foreign investors’ willingness to finance enormous deficits pushes the dollar down — including better investment opportunities elsewhere, as there are now.

The great unknowables are the timing and steepness of a sustained dollar decline. Over the past few years, investors who bet on a weakening dollar have lost money. But the current swoon is a reminder that no nation, even the United States, can borrow forever without facing up to economic consequences.

The government has been assuming — correctly, so far — that the United States is too big to fail. Administration officials seem confident that the Chinese, in particular, will continue to finance the nation’s deficits, because doing so helps their exports. They also assume that China and other countries won’t sell off chunks of their huge dollar holdings, lest they drive the dollar down, and with it, the value of their remaining dollar-based assets.

That’s more like a standoff than stability, and it puts way too much of the nation’s well being in the hands of foreign central bankers. But it’s the best the Bush crowd has had to offer, because true stability in global finance is grounded in fiscal responsibility at home, something the administration lacks.

Global balance requires cooperation. When Mr. Paulson travels to China this month, he will no doubt seek ways to adjust American and Chinese currencies in an orderly fashion. But there is no substitute for getting one’s own financial house in order.


3. A Losing War, a Failed President, a Weak Dollar: We've Been Here Before -- by Leon Hadar/Singapore Press

I'm not a financial speculator, and I don't play one on television. So please don't base your decision on whether or not to bet against the U.S. dollar on my thoughts about the fate of the greenback, which has fallen to a 20-month low against the euro recently. But for someone like myself who is interested in the relationship between economics and politics, especially as they affect global affairs, the current weakness that the U.S. currency seems to be experiencing hasn't come as a total shock.

Hence while economic analysts have been examining the volatility of the dollar and searching for explanations by focusing mainly on U.S. economic indicators, including the restless housing market and the weakening confidence of consumers, or the structural differences between the U.S. and European economies, it seems to me there is a need to integrate the discussion into the larger domestic and global political context. The problems of America's mighty currency need to be viewed from the perspective of the U.S. capital.

After all, it would be inconceivable to examine one of the most important economic decisions made by a U.S. president in the 20th century – Richard Nixon's "closing of the gold window" in August 1971, that is, making the U.S. dollar inconvertible to gold directly (and basically abolishing the Bretton Woods System) – without considering the geopolitical environment in which it was made and which exposed an erosion of U.S. hegemony in the Western alliance.

Specifically, the Vietnam War and the increasing military expenditures to finance it resulted in an increased dollar outflow and accelerated inflation by the 1970s, leading to rising balance-of-payment and trade deficits. The dollar was overvalued while the Deutschemark and yen were undervalued, and the attempt to defend the dollar at a fixed peg was becoming increasingly untenable. Ripping the dollar loose from gold was designed to boost U.S. exports and cut the country's worsening deficits.

In a way, Nixon's decision to delink the dollar to gold followed by his 1972 visit to China reflected the relative decline in U.S. global political and economic power – brought about by the devastating geopolitical and economic impact of the Vietnam war – and Washington's adjustment to these changes (the two decisions together are appropriately known as the Nixon Shocks) in American political history.

So you recall one failed war (Vietnam), U.S. presidents fighting for their political survival (Lyndon B. Johnson and Nixon), and a weakening U.S. dollar, and suddenly it seems that someone has produced a remake of that old horror movie. Once again there is a failing war (Iraq), a beleaguered U.S. president (George W. Bush), and erosion in the value of the U.S. dollar. As in the case of the U.S. quagmire in Southeast Asia (which spread from Vietnam into Laos and Cambodia), the current military quagmire in the Middle East (which is producing shock waves also in Iran, Lebanon, and Israel/Palestine) has led to a major increase in military spending (and not unlike in that period, no effort has been made to cut domestic spending), resulting in rising budget and trade deficits.

If in the 1960s and early 1970s the Germans and the Japanese were helping finance the U.S. military intervention in Vietnam, China and other East Asian central banks are playing a similar role today. Hence the need to reevaluate the dollar can be seen now like then as a recognition that American geopolitical and economic power is declining and that some kind of readjustment is necessary. From that perspective, the erosion in the U.S. currency was inevitable under these conditions – although the slowdown in the U.S. economy and the attractive economic conditions in the euro zone may have been the direct trigger for the dumping of U.S. dollars and the buying of the euros.

Things can get even worse if the rising populist and protectionist wing of the Democratic Party that has taken over Capitol Hill adopts policies to punish China for its "unfair" trade practices, which are supposedly responsible for the giant American trade deficit with the Chinese. The Chinese, who until now have continued to invest in the U.S. economy, thus preventing an even more dramatic and painful drop in the value of the U.S. dollar, might then have no choice but to change course.

One of the main reasons why U.S. Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke are traveling to Beijing this month is to work together with the Chinese to prevent the kind of worst-case scenario that could result from the political pressure by the Democratic trade warriors on Capitol Hill. That makes a lot of economic sense, but it doesn't deal with the geopolitical sources of the problem: the bloody and costly war in Iraq and the potential for wars with Iran and other parts of the Middle East that are going to drive U.S. military spending and the deficits into the stratosphere and put even more pressure on the dollar.

Only a readjustment of the United States to the new global political and economic realities could relieve that pressure. Who knows? Perhaps the implementation of the recommendations of the Baker-Hamilton Commission could help not only stabilize the U.S. position in the Middle East but also have a similar effect on the U.S. dollar. The Baker Shock?