Wednesday, October 06, 2004

U.S. Dollar Heading For Collapse, Says Adviser

U.S. Dollar Heading For Collapse - Robert Reich
By James Baxter

BANFF, Alta. - The US dollar is fast reaching a point at which foreign investors will abandon it and send it into a freefall, says Bill Clinton's former economic adviser.

Robert Reich told the Global Business Forum in Banff that record high budget and trade deficits, personal debt and a foreign policy that is alienating traditional allies, has the already slumping US dollar headed for collapse. The US already requires a daily infusion of $1.2 billion in foreign investment just to keep the greenback's decline under control, he said.

"The mainstream view is that the budget deficit (currently $422 billion).. is going to get larger,: said Reich, who is an "informal adviser" to presidential hopeful John Kerry. "Simultaneously, the mainstream view is that there is no reason to believe that the trade deficit (approximately $600 billion) is going to shrink anytime soon.

In fact, I see the dollar continuing to decline and I see at some point a tipping point where East Asian banks that have been trying to prop up the dollar, maintaining their exports (to the US), because at some point it becomes a lousy investment."

Reich said global investors are already conducting significant amounts of business in Euros, not US dollars.

The reason for Reich's speech to the audience of approximately 200 business leaders, mostly Canadians, was to explain why free trade has suddenly been revived as a great economic evil in the US.

In painting a black outlook for the US economy, Reich suggested the worst is yet to come, especially if President George W. Bush and the Republican party's agenda of tax less and spend more is re-elected in November.

"My upbeat message is that we don't have to have it like we have it," said Reich, who insisted Bush is not entirely to blame, but bears considerable responsibility for the economic straits facing the US.

"Deficits matter," he said.

"If you embark on a unilateral foreign policy and the rest of the world is upset with you, that has a boomerang effect on your global businesses. It can't help but (have an effect). So not only does fiscal policy matter, but your foreign policy cannot be completely divorced from your national economic policy.

Reich said regardless of who is the next leader, significant measures are going to be needed to control the budget deficit and to begin rebuilding the economy so that real manufacturing wages, which have been largely stagnant in the US since the Reagan era in the 1980s, begin to grow.

He also said that while the US is unlikely to retreat from global trade, it is also unlikely to aggressively pursue more open trade for the time being. That's because US workers are suffering and are looking for something to blame, like outsourcing, he said, and politicians are being forced to play along.

"A lot of people are very, very willing to blame other countries for the loss of American jobs or the stresses on American wages," said Reich. "This blame is ill-founded.

"Nevertheless, in political terms, people talk about jobs being lost in the United States to China... or to India... or elsewhere."

Reich also tried to quiet fears among Canadians that Kerry is anti-free trade, saying only that Kerry wants to remove certain tax incentives that encourage companies to move a portion of their manufacturing offshore so that they can legally shelter money from income taxes. He said Kerry believes strongly in the value of trade and that Canadians shouldn't fear his policies.

Note - This article was originally published in the Edmonton Journal and the Vancouver Sun, September 25, 2004.