The Bush era is a strange amalgam of conservative beliefs that have their roots in Latin American juntas rather than British toryism. One of the beliefs that is sadly lacking is the belief in a free market. If the Bush people actually believed that currencies are subject to market pressure, they would be trembling in their beds. Why? Reading the NYT story, today, about the Japanese and Chinese position in American dollars explains why.
“As Americans embark on another season of debt-supported holiday spending, they might want to give thanks that Masatsugu Asakawa is still buying in America, too.
Mr. Asakawa, 46, is the top official at the Finance Ministry here responsible for managing the largest portfolio of United States government securities in the world, worth a staggering $720 billion. As the dollar has slumped this fall, many investors have started to worry that Mr. Asakawa and his counterparts elsewhere in Asia will be tempted to pare their holdings, perhaps causing the currency to plunge much further and setting off a round of interest rate increases in the United States that could send the global economy into a tailspin.”
Basically, America has been playing a con game with Japan. There’s a tradition here. Supposedly, in the early nineties, when an investment bank wanted to make a quick killing, it would devise some truly gross financial instrument – some derivative Frankenstein compounded of options on a peso-baht ratio or other equally mad bets – and stuff them down the throats of Japanese bankers. What did Japanese bankers get out of it? They were able to disguise their enormous losses, the result of the collapse of the Japanese bubble, through shifting the figures, by way of options, so that they didn’t appear on the accounting ledgers as such. However, you can only disguise reality for so long.
Con game might not actually capture the flavor of this. I'm reminded of the scene in Goodfellas where the owner of a restaurant goes to see a capo about receiving protection for his place. The owner's idea is that the capo should get a piece of the restaurant -- a tribute, out of respect. The owner takes it -- his men start ripping off the restaurant big time -- the owner can't pay his legitimate bills -- and the wiseguys end up torching the place for the insurance.
That, in abbreviated form, is Bush's fiscal policy.
Perhaps, as we watch the other legacies of WWII being destroyed under Bush – social security, education loans, the whole system of entitlements that have made life better in America for three generations – the irony is that we can afford to do it because of the most lasting WWII legacy – Japan’s semi-colonized status. Even Italy, at the end of the Cold War, experienced a profound shift in its governing structure. But Japan is still ruled by the same old oligarchy that the Americans vetted during the occupation, and that oligarchy has the same principles it did in 1950: please the Americans in order to stay in power.
Supporting the Americans is one thing, but markets are another. There is no way that this is going to continue:
“For all the interest in the other players, currency markets remain focused on Japan, which has aggressively bought dollars, doubling its investment in Treasuries over the last two years. During a 15-month period that ended in March, the Japanese government bought $340 billion of dollar-denominated securities with its yen. The buying spree so stunned speculators that Japan has not had to intervene in the markets since.
But now with Japan's huge stake in the dollar losing value, the question is, What will Tokyo do next?
The problem for Japan is that it is in so deep that to a large degree it is chained to its American debtor.
"Imagine that tomorrow people hear, 'Hey, Japan has decided to divert from U.S. dollars to euros,' " Mr. Asakawa said. "That would create a hugely undesirable impact on the U.S. Treasury market, and we have no intention at all to make an unfortunate impact on the U.S. Treasury market."
This is the kind of situation set up for currency traders to bet against. As the dollar falls and the Bush people pay no attention (military adventurism gets you attention in D.C., not dealing with the government’s debt), the horde of the Nibelungen storesd in Japanese banks will be turning so obviously into fool’s gold that no hocus pocus or chorus of Valkyrie will disguise it.
In this climate, the Bushies want to privatize social security, which could cost, in terms of borrowing to pay out current obligations, as much as the ill fated pill bill – 500 billion?
We’ll see. At least the Bush foreign policy is coherent on both the military and economic front: unmitigated piracy. LI’s suggestion: a truth in flags law that would replace the stars and bars with the skull and crossbones.
PS -- For those interested in things Derridian, LI posted this response to Leiter's attack on Derrida at Butterflies and Wheels.