America’s banana republic economy

October 20, 2009

Is the decline in the dollar merely a “return to normalcy” story, as many bulls contend, and not a harbinger of a coming currency crisis?

Short version: The 2008 financial crisis and ensuing collapse in confidence drove investors to dollars and dollar-based instruments. And as the crisis has ebbed, investors are rebalancing back toward riskier assets.

Thus the falling dollar should rightly be interpreted as a sign of “new economic optimism,” argues JPMorgan Chase economist Jim Glassman.

Then again, perhaps future economic historians will look back at this stage of the dollar’s decline as the currency calm before the storm. Because at some point, investors may suddenly realize that America’s already somewhat devalued currency should not be trusted.

As Senator Judd Gregg, a New Hampshire Republican and noted budget hawk, said recently, “We’re basically on the path to a banana-republic type of financial situation in this country … You can’t keep throwing debt on top of debt.”

Indeed, the evidence points to a nation fairly far along that path. Healthcare reform is supposed to be deficit neutral — everything paid for via spending cuts or tax increases — while also helping bring government’s overall long-term budget into balance.

But to keep the 10-year price tag under $900 billion, Democrats have quietly shunted $247 billion in spending for Medicare physician payments into a separate bill. And no effort is being made to pay for it.

Just as egregious, though less expensive, is the Obama administration’s $14 billion plan to send a $250 “stimulus” check to 57 million American Social Security recipients in lieu of an annual cost-of-living increase.

See, a 5.8 percent COLA increase was paid last January to compensate for a 5.8 percent jump in consumer inflation driven by surging oil prices in 2008. Then oil prices and inflation collapsed.

“In effect, a COLA was paid on inflation that no longer existed,” notes Andrew Biggs of the American Enterprise Institute.

So even though none of this makes seniors essentially any worse off, Uncle Sucker is still going to cut them a check.

Two examples — one ridiculously expensive, one just ridiculous. But both reveal a nation completely unwilling to deal with current trillion-dollar deficits or long-term shortfalls many multiples of that number.

What confidence should dollar investors have that America will really cut entitlement spending? Very little. Instead, we are more likely to see huge tax increases that could cripple productivity, or further dollar neglect, or a central bank that turns dovish on inflation. Or perhaps all three.

If Washington doesn’t care to support the dollar, why should investors?

31 comments

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Very good article. Keep up the good work.

Posted by Frank | Report as abusive

President Obama is behaving in just the way any adversary of the US would wish in their wildest dreams. He is giving real power over our span of influence by going deeper in debt to China, Russia and the world. It is a fact now that US domestic economic policy is partially being set in Beijing, Tokyo and Moscow and communicated to the FED. Their influence will grow with each passing month.

Second his economic policy of printing money to spend domestically, while fighting two wars, means we have no ability to take on foreign crisis’s as we are fully committed at home with never ending stimulus’s and electoral bribery. American leadership is being lost to others that have no good will to America or share our national values. Perhaps Obama shares their values?

Posted by richardb | Report as abusive

Scott Burns and Lawrence Kotlikoff made the same point in “The Coming Generational Storm” about entitlement cuts years ago: When you realize that a sizable majority of Comgress cares for nothing more than getting re-elected, you realize that cutting entitlements is impossible.

Although it would be difficult and painful for the US to survive a default on our debt, it is easier FOR THE POLITICIANS to do that than to cut Aunt Tillie’s entitlements. If you want proof, look at the amount of farm subsidies and the number of farmers…then think of the number of old people.

Posted by John Galt | Report as abusive

[...] continues to burn and the cauldron bubbles with all the poisoned entrails our politicians can find, James Pethokoukis expresses unease about America’s future. Two key [...]

Give the writhing masses their bread and circuses, buy their votes and keep them disempowered. Continue to dig in even further to the “mixed economy” charade. Print endless funny money. Drive the productive away from the traditional developed areas, and eventually, offshore. Appease the domestic Boomers, and, foreign makers of things that make really big booms. If these things were to be reviewed some thousand years in the future, those reviewing them would deem them the work of madmen. Maybe that’s actually the case.

Posted by SteveSadlov | Report as abusive

Is there any stimulus for the manufacturing economy,
something which would result in an increase in the
real wealth produced by the US ?
Does anyone else think it would be a good idea
to produce things our creditors want to buy,
preferably things they cannot buy anywhere else ?

Posted by M. Report | Report as abusive

M. Report–

Sounds good, what do you have in mind that we can be competitive at, given that this administration will stand behind any union effort to organize those new factories and extract economic rents—thereby forcing up prices. And will NEVER broadly reduce taxes to encourage investment, except narrowly targeted things where it can get political payoffs?

It didn’t just happen that our manufacturing sector has taken it on the chin, and global competition is only half the story…

Posted by Marty | Report as abusive

Great analysis. Once again, you are the voice of reason. I hope members of the political class are paying careful attention to your insights.

Posted by Central VA | Report as abusive

The Dollar has become the Pelosi Peso

Posted by J | Report as abusive

[...] Pethokoukis shares my misgivings about the economy: America’s banana republic economy Because at some point, investors may suddenly realize that America’s already somewhat devalued [...]

It is starting to finally become obvious

Such structural problem are embedded; and no one with courage to fix them because it would lose votes.

A rogue central bank who repeats the same solutions each 4-5 years … just causing bubbles.

http://www.fundmymutualfund.com/2009/10/ wsj-slump-prods-firms-to-seek-new.html

The faster they bankrupt the system, the better. Then we can burn DC to the ground, drag our elected representatives to the street and give them that which they so richly deserve.

Posted by John | Report as abusive

[...] Jimmy Pethokoukis spells out the potential trouble which could result from irresponsible government spending: Indeed, the evidence points to a nation fairly far along that path. Healthcare reform is supposed to be deficit neutral — everything paid for via spending cuts or tax increases — while also helping bring government’s overall long-term budget into balance. [...]

Yiasou, Jimmy! But you didn’t mention one of the most pervasive problems in the system: The government, both federal and state, as “employer.”
Michigan’s unemployment rate right now is 15.3%.
Michigan has 500,000 manufacturing jobs.
Michigan has 637,000 government jobs.

Also, did you know that the state-run health system in Britain employs over 1.1 million Brits, making that organization the third largest employer in the WORLD. We’re headed in the same direction. This is madness.

Posted by Geechee | Report as abusive

You missed the very good reason for the $250 ‘non-COLA’ check however.

Even if inflation is down, medicare premiums are set to rise. The payment will help seniors pay for the increase in medicare which they will experience whether the statistics say there is inflation or not.

If you want a future geechee you will have to pay for it one way or another. I’d rather have social democracy to the point of socialism than starve and lets be clear, without that social democracy,people, roughly 10% of the US population would starve. You may not care but they do and they and many of their friends and family have guns and/or or in the military — pay or play and trust me you won’t like the new rules

I suspect in the long run automation will wipe out most remianing jobs anyway

take the humble DVD for example. Back in the early 90′s if say you wanted to rent a movie you’d need to go to a store to do it and there was a long chain of jobs created ranging from part time jobs (video clerk) to decent ones (say a store owner)

In a year or so more than 500,000 half a million jobs (50k Blockbusters + the production chain) will be replaced by maybe 5k running some server farm somewhere streaming movies — thats assuming anyone is actually paying for a movie and isn’t just pirating it off the web.

thats not a sustainable model — worse thanks to the wonders of GPS (self driving cars are near) self check out (like a Lowe’s and Home Depot) and sooner than later robotics every other industry will be following suit.

here is the rub, the fact that whiny conservatives can’t or won’t get — your workers are your market– outsource their jobs, replace them with machines — well you go with them in a few years

pay good wages or cease to exist –

you can make all the moral arguments you like — it won’t matter — people vote with their stomach and right now they are getting hungry

My public high school was built during the 1930s depression using “stimulus”, i.e., “printed” money. Constructed to last and still in service, it, along with the state’s public university — much of that also built in the 30s — has educated thousands of scientists, engineers, nurses, teachers, technicians, — and businessmen. I am one of those businessmen, now successfully retired. I built a solid company that provided 80 good jobs with full benefits. Call this “socialism” if you wish. I call it the “American Way”.

So what do we have now after 30 years of lessaiz-faire? Foreclosed McMansions, aging SUVs, and billion-dollar bonuses for reckless bankers.

There are few ways to place a larger burden on our own futures, our children’s, or our grandchildren’s, than to sit on stumps waiting for the “free market” to put 20 million unemployed or under-employed people back to work. They CAN do something useful (remember the Interstate Highway System?) if we have the guts to put our minds to work setting them to it. Or we can let a discredited ideology lock us into cowardly apathy.

Posted by Ken Lawson | Report as abusive

Ken Lawson, I highly doubt you were a successful “businessman.” If you were, you’d know firsthand that the onerous burden of govt, via inept regulation/oversight and via taxes, is sinking this country. The last 40 years are not marked by “laissez-faire”, but by the vile creep of the federal govt., courtesy of LBJ and your ilk in congress. If there were any truth to the efficiency in govt argument, I wouldn’t be witnessing the (still incomplete) 8 year renovation of the 59th street subway station here in NYC, part of an entire system that was built in 4 years in the 1900s!? That is the truth about govt, unions, “work” and “stimulus.” Go get a clue, and try again….

Posted by sub | Report as abusive

The world is delivering its verdict on the tyrant Obama’s rule, and on the Dimmocrat party as well. Obama, as Caligula, is doing grave and irreparable damage to the US at home and abroad. As a vile traitor, Obama is unequaled. As a racist and psychopath, he has few historical challengers. Besides the cult of personality, though, his puppetmaster Rahm Emanuel has little to offer in the way of substantive patches for the sinking ship.The dollar is becoming worthless because there is no one producing any value in a nation where nanny-staters rule.

Well, golly gee-whiz. When will the economist’s come to America’s rescue? Well, never! Just like the politician, economist’s are evidently part of the compromise problem. Entitlements are NOT the problem, every dime goes directly back into the economy. The problem is sin; and (lack) of vision, courage and leadership. We have allowed government and our SCOTUS
to AUTHORIZE the murder of 51,000,000 unborn citizens + the invasion of our country by illegals. If a farmer kills his seed corn he goes broke; our future hinged on a genuine respect for life—our seed corn. Add in the corruption of our every institution and one can see why our financial house is viewed as untennable.

Posted by D. Grant Chee | Report as abusive

[...] James Pethokoukis (Reuters) cites two examples of why America is well down the road of a banana republic economy. Our record debt levels and deficits, combined the fiscal fantasy land the White House and Congress work and live in are writ large in both examples. [...]

[...] Reuters | America’s Banana Republic Economy [...]

Remeber, the way Russia fell in the 90s was we made them spend their way to default.

Hmmm, seems like we are doing it to ourselves.

I was watching CNN (I don’t do it very often) and the pro-health care reform person was saying, people want x, people want y, this poll proves it.

Yeah, I’ll bet if I took a poll of how many people wanted to win the lottery it would be 100%. People WANT everything and they don’t want to pay for it. Our politicians happily agree because it isn’t their money.

But America will survive. Maybe not the US Government, but America will survive.

Posted by Scott | Report as abusive

Bush was horrible… Obama is 4 times worse!

Pelosi Peso? I agree!

Posted by Ster | Report as abusive

There is an old saying that goes like this: When your outgo exceeds your income your upkeep becomes your downfall. That applies especially to individauals, businesses and other organizations. It applies to a lesser degree to the federal government. The difference is the feds can print money and delay the consequences of overspending a little longer than individuals, etc. Also, what is sometimes not readily apparent is that printing money causes inflation and inflation is simply a tax on savings. In other words the $1,000 you have in savings drawing 3% interest will contain less buying power at the end of the year if the inflation rate is 3% or more because Uncle Sap will come along and tax your interest income. Over time your money will lose its value. For example, remember when 3 cents would by a postage stamp to mail your taxes in to Uncle Sap?

Posted by Eglin | Report as abusive

Hold on, wait! How can we have a banana republic economy when genius, Nobel prize winning economists like Paul Krugman are advising the White House? Don’t you know, he’s so brilliant the NY Times let’s him share his keen insight with us regularly? Give me a break! This is a White House that’s been taken over by the most vile and destructive collection of leftists the world has ever seen. Marxists, Maoists, racists, miscreants of every kind. All brought to you with the smiling, friendly face and tone of Barak Hussein Obama. Mmm, mmm,mmm.

Posted by John LaPorte | Report as abusive

Ken Lawson –
You created a business that provided 80 good jobs with full benefits. Republicans call that “entrepreneurial”, Democrats call that “greedy capitalism”. Both call it “the American Way”. No one calls it socialism. What do you mean?
You went to a school built by with stimulus money during the 30s – great. That was a good way to get people working and stimulate the economy at the same time. We could use some thinking like that now. Instead we wrote a stimulus package that literally doesn’t differentiate between building schools and buying condoms. The Speaker of the House defending why buying condoms is as good as building things would be funny if it wasn’t so sad. In fact, building schools was denounced since building jobs are too gender specific.

Posted by mnemos | Report as abusive

Where were you when Bush was selling his tax cuts and wars? Don’t you see that caused the deficit and the decline of our country more than any democrats efforts to dig us out of his hole? Republicans only care about deficits when democrats are in office.

Posted by MaryAnne | Report as abusive

[...] America’s banana republic economy By James Pethokoukis, Reuters Is the decline in the dollar merely a “return to normalcy” story, as many bulls contend, and not a harbinger of a coming currency crisis? [...]

Remember when liberals criticized Bush, and the Repubs called them traitors, terrorists, etc?

It’s so wonderful that so many people say horrible things about our President now. Seriously, you’re all “patriots” of the highest caliber.

Why don’t you move to another country if you hate America so much?

Posted by nato | Report as abusive

America – a banana republic with snowplows. I suggest we all…
- Stop spending except for necessities;
- Stop paying our debts;
- Take all our money out of the stock market and banks;
In this manner, without firing a shot, we bring down this RICO economic “system”, along with the criminal, sociopathic members of the “ancien regime”, as the French called them before they chopped off their heads (hey, the French weren’t always wimps).

Posted by Dave Minnich | Report as abusive

Banana Republic indeed! …and without any missle defense to boot..

Posted by Kevin Martin | Report as abusive

Dear Sub and Mnemos,

Sub: Under the Bill of Rights, you are welcome to doubt that I was a “successful businessman”; I am less personally forgiving of the implication that I am stretching the truth (or lying) about this, or that I am “ilk”.

I am not going to post our financials to prove otherwise. However, in 25 years we never failed to make a profit, and, from company money, paid 15% of each employee’s yearly pay into a SEP-IRA account that was entirely under in the possession of, and under the control of, each employee. We never laid-off an employee. We put 10% of revenue into R&D. I and three partners earned very substantial incomes, as did many others in the company. The lowest pay rate was about $15/hour but the median was closer to $60K. Most people would consider this “successful”. Government sponsored infrastructure (highways, airports and air control, legal protections including patent protection, the tax-payer supported military, the generally stable price levels engineered by the Fed, the sponsorship of basic research that helped to make our engineering efforts successful — all of these mattered a lot. I paid the maximum possible income tax rate each of the last 20 years and have no regrets about that. I got a lot from the “American Way” — a community of people working toward the common goal of “a more perfect union” — and gave my fair share back.

Mnemos: I have no fundamental disagreement with your comments, but lots of people do consider “stimulus” and the jobs it creates “non-sustaining” and, yes, label it “socialism”. And they conflate socialism with “promoting the common welfare” (note the preamble to the US Constitution). Every organization, including my small business, has its share of bureaucratic waste and misguided effort. Today’s Federal program is no exception. But it’s better to do SOMETHING useful, even if part of the effort is wasted, than to throw away many man-years not getting ANYTHING useful done. This amounts to what economists would call the ultimate mis-allocation of resources — an unrecoverable loss.

Ken Lawson

Posted by Ken Lawson | Report as abusive

abprosper- Your argurant relies on false assumptions. I suppose all those blacksmiths just decided to start a revolution, storm the gates of FORD, and eliminate all who stood in their way. You assume that no new inovation will take place and that people have no ability to learn a new trade (well if the current socialist trend continues you may be right on both counts).

Posted by Johnny B | Report as abusive

[...] James Pethokoukis (Reuters) cites two examples of why America is well down the road of a banana republic economy. Our record debt levels and deficits, combined the fiscal fantasy land the White House and Congress work and live in are writ large in both examples. [...]

Though I agree with the writer, I am often amazed at the complete “doom and gloom” analysis regarding America’s economy. Don’t get me wrong, at 10% UE, and flat/0% growth other than inflation right now it’s bad! But I always like to consider America in light of the real economies of Europe over the last 50 years and remind myself that even though this is a vary bad time for America, most of Socialist Europe would have looked for 10% UE flat growth years as a positive target in their best years. We need to get off the current Marxist leaning path of the administration to fix it long term, but we are still America and capable of great things when we get tough with obfiscatory government bullies and put our enterprising minds to correcting it.

Posted by LouisD | Report as abusive

Dear Sir:

This is to inform you that you have been reported to the White House for publishing negative information regarding policies promoted by the Obama Administration. Any opinion not approved by the Administration is unacceptable. Reuters News service is hereby put on notice that it will be considered a “Non News Service” should it persist in this manner. Should you desire precedent for this notice, please review “Obama versus Fox News”. Appeal from this notification may be made in person to Rahm Emmanuel. Do not however expect a decision for at least six months.

Yours for Hope and Change,

Posted by Mike N | Report as abusive

[...] James Pethokoukis » Blog Archive » America’s banana republic economy | Blogs | google.load(“elements”, “1″, {packages: “transliteration”}); [...]

[...] James Pethokoukis (Reuters) cites two examples of why America is well down the road of a banana republic economy. Our record debt levels and deficits, combined the fiscal fantasy land the White House and Congress work and live in are writ large in both examples. [...]

[...] else we leave a crippled nation to our [...]

how can i contact banana republic company

Posted by ahmed farnawany | Report as abusive