No, we are not talking about the colors of a new flag for Iraq. But here's a hint: black is way up, green, after a long dip has turned up and yellow has taken a nosedive. Do you need more clues?
Readers of this Blowback column of the Dymaxion Web are familiar with our fascination with the color of money. Last year we began to voice our concern over a number of trends that seemed to indicate nothing less than trouble ahead for the mighty greenback. For one thing, we noted with more than a small degree of repetition, the US trade deficit was growing to historically record levels. What concerned us most was what we perceived, and still view to be something that is structural in nature, or irreversible. US manufacturers have been closing up shop and moving their technology and assembly lines to the Far East and, more particularly, to China. And so, we reasoned, those generally good paying factory jobs would be lost, probably forever. It became ever harder to imagine that Wal-Marts and the other national retail chains would somehow shake their addiction to this now well trodden supply chain of cheap goods.
The other major problem for the US was its huge domestic government debt. Government deficits are, after all, purchases made on borrowed dough. To cover these debts, the government issues treasury bonds that compete with other financial instruments for the attention of investors. In recent years, a system has developed in which the US buys more from abroad than it sells (the trade deficit) and the exporting countries that benefit from the trade imbalance recirculate the dollars they receive back into the US through the purchase of T-bills. This "good deal" allows Americans to live above their means simply by being able to print new money to cover their bottomless appetite for tchotchkes.
What, we wondered, would happen if things started to spin our of control, as they are wont to do. To stimulate the economy, the administration would begin to pull out all the stops. They would, with the help of Mr. Greenspan, force down interest rates and keep them low as long as possible. Greenspan's six year term runs out in the summer of 2004, and although most men at the Chairman's age of 78, might be thinking of calling it a day, it was pretty clear that Mr. Greenspan wanted to keep going. Administration leverage, it seemed, was clearly there, which meant that we were in for a run of inflation, at all costs.
As the dollar fell in the Autumn, the price of gold moved up. At the dollar's nadir, near 1.29 per Euro, gold rose to $420 per ounce. The cheap dollar was supposed to be a tonic that would perk up a lagging world economy and perhaps, as the Americans hoped, would spur the Chinese into raising the value of their own currency, the RMB, spurring minor price rises in the US. A cheap dollar was sure to cause US imports to slow down as exports began to pick up. But, unfortunately, there was more than one fly in the ointment.
First off, there was the little matter of Iraq. Wars, at their best, are costly affairs. In a no-tax political climate, they serve to pile up on top of already high deficits. But its no secret that people get rich in wars since they also serve to stimulate the domestic economy. The military doesn't (yet) shop at Wal-Mart. Goods they order will be made in the US: Guns, tanks, ammunition, flak jackets, armored Humvees, cargo planes, caskets, you name it, all get built in America by Americans. Which leads us first to last month's employment numbers. For the second month in a row the US created nearly 300,000 jobs and for the first time since Bush took office, there was actually an increase in manufacturing jobs, some 11,000. Chalk it up to Iraq, or to an overheating economy, but the US was finally producing more than the minimum 150,000 new jobs needed every month just to meet normal population growth.
Which brings us to the color black. Petroleum is priced in dollars. One side effect of a cheap dollar was a cheap barrel of oil for those countries, representing three quarters of the world's economy, whose currencies grew in value against the dollar. The question arose: would the oil producers hold still and swallow their lost revenues or move the price of oil up against the dollar? We imagined, wrongly, that with the US next door in Iraq getting rid of their greatest state threat and for free, the Saudis might have good reason to ease off a bit.
For the gold bugs, this has been a disastrous turn of events. They were counting on a rush of inflationary pressures in the US to further push up the yellow metal. They were right in one respect, these are very fragile times, economically speaking. The slightest hint of a rise in US interest rates, like the whisper of martini over a glass of pure gin and olive, has been enough to kick the legs out from under both stock and gold markets. The prospect of a costly war without end in Iraq certainly hasn't been a psychological boost but the real downer has been a rise in prices all around.
Sure, you say, official inflation figures are still within control. But take a step outside. Housing and education prices have shot up out of control. People are paying twice as much to fill up that SUV as on the day they bought it. Prices in the supermarket are shooting up. But look, unless we can successfully absorb higher interest rates, we will have squandered all the major tools sure to stimulate: interest rate drops over time to what is now a real number close to zero, currency devaluation and a costly war; all for several months of growth and a total so far of 11,000 new manufacturing jobs after a loss of nearly 3 million.
Interest rates will go up, for sure. And you can expect that expensive oil is here for the duration even if the Saudis give Bush a break right before the election. There is just too much worldwide demand and too few new discoveries. The markets sense this, why else at this early stage in a recovery would they be so gun-shy to what would in effect be a return to more normal interest rate levels. Low interest rates are an aberration that adversely affect savings and yet the Japanese have had to live with them for years. Remember that just a few years after the Japanese crash in 1988 their stock market recovered about half of its losses before entering into a 10 year slide punctuated by ever weaker bear rallies. Everybody said then that Japan and the US are just too different to parallel.
The bulls, it seems have lost their nerve. Let's hope we're wrong and this is all just a temporary "psychological"reaction to a poorly conceived and executed war for black gold.
And now:
Dymaxion Web! A progress report
For months now, we have been talking about expanding the DymaxionWeb project by dedicating a site: www.dymaxionweb.com, naturally-- that will better tap into the wealth of firsthand information available around the web. The goal is to bring into focus the voices of writers and video reporters associated directly with and in the trenches at some of the critical frontline areas of economic development. Eventually, it is hoped that we can create a 360 degree alternative view of these developments. So far, we've made pretty good progress on the infrastructure needed to launch such a site and will keep you posted as we get closer to live day. At the same time, we plan to continue publishing Blowback at Radio Userland. One of you suggested that we build a kind of impenetrable area on the site where truly anonymous discussions can take place. We think this is necessary and are looking into the feasibility and technology needed. Once we get the newsfeed sides of the project (Reblog and Deep Throat) up and running we will look into putting up the Safe House. Other suggestions are welcome.