Economic "slow suicide" pounds U.S. buck

The head of a U.S. economic think tank has described Canada as the world's next superpower. However, he worries that his fellow citizens are suffering a steady erosion of their standard of living while their country commits an economic "slow suicide".

Clyde Prestowitz, president and founder of the Washington, D.C.–based Economic Strategy Institute, told the Georgia Straight in a phone interview that he is surprised the Canadian dollar didn't reach par with the U.S. greenback much earlier than this month. (On September 20, the Canadian dollar surpassed the U.S. dollar for the first time since 1976.)

"Obviously, Canada is in a very strong position with oil and natural resources, with prices rising all over the world," Prestowitz said. "It has all the oil. It has all the water. It will control the shipping across the Northwest Passage. The Gulf of Mexico will become uninhabitable because of hurricanes. The southwest U.S. is going to dry up. The plains will become a dust bowl. Canada will be nice and moderate and warm, and everybody will move to Canada. You guys will be the next superpower."

Prestowitz, author of the 2005 book Three Billion New Capitalists: The Great Shift of Wealth and Power to the East (Basic Books), said he felt that the U.S. dollar has been "way overvalued for a long time". His book chronicled the decline of the U.S. economy, describing how the country lost manufacturing jobs to China, service jobs to India, and high-tech predominance to competitors in Asia and Europe, partly because of the underperforming U.S. education system.

Prestowitz included a chapter called "The End of the Dollar", which forecast a big decline in the value of the U.S. currency. In the book, he described the U.S. economy as "a bit of a Potemkin village", reliant on borrowed money, trade deficits, and budget deficits to maintain the illusion of prosperity.

"We're like a very rich family which is living beyond its means," Prestowitz said. "And we're financing that by selling off parts of the farm. It's a really big farm, and, you know, we can sell for a long time. But what it means is we, as a country, are going increasingly into debt."

The Bush administration forecast a budget deficit of $354 billion in 2007. In a speech last December in Israel predicting the fall of the U.S. dollar, Prestowitz said that the U.S. balance-of-payments deficit is approximately seven to eight percent of gross domestic product, and the U.S. is becoming the world's largest debtor.

In his interview with the Straight, Prestowitz claimed that China, Japan, Taiwan, and South Korea have all tried to keep the U.S. dollar overvalued to stimulate their exports. Prestowitz, a former counsellor to the commerce secretary in the Ronald Reagan administration, said that this has led to the world being flooded with U.S. dollars.

"What's happening is all the freely traded currencies–the euro, the Canadian dollar, the kiwi [New Zealand dollar], the Aussie dollar, the Swiss franc, even the Israeli shekel–any freely traded currency has gone off the charts, because people with too many [U.S.] dollars are trying to diversify," Prestowitz said. "Those are the only currencies to which they can go. I think this is going to keep happening for a while."

Prestowitz made his comments a day before Bank of Canada governor David Dodge spoke to the Vancouver Board of Trade about the Canadian dollar. During his September 25 presentation, Dodge claimed that this past summer's "turbulence" in financial markets was linked to the trend of financial institutions to bundle loans into securities. These financial instruments are backed by the cash flows generated by loan repayments.

"The originators of these loans had fewer incentives to carefully assess the credit-worthiness of borrowers," Dodge said, "because once the loan was securitized and sold, the originator no longer faced the consequence if the borrower defaulted."

Weakness in the U.S. subprime mortgage market has been blamed by many analysts for the recent decline in the U.S. dollar. The Federal Reserve cut interest rates from 5.25 percent to 4.75 percent on September 18 to try to restore confidence in U.S. financial and housing markets.

During a news conference following his speech, Dodge noted that last April, the Bank of Canada forecast that the U.S. dollar would depreciate by about seven percent "over the subsequent couple of years".

"It has depreciated about four percent on a trade-weighted basis since the summer," he said. "So the general movement of the U.S. dollar is not totally surprising."

Dodge said that it is now important to determine the "root causes" and if this is a temporary movement or if it will be sustained.

Prestowitz said that because the U.S. dollar is overvalued, "tradable production"–including manufactured goods and the provision of services that can be traded–are moving out of the U.S. and over to Asia and elsewhere. The U.S. economy is, in his opinion, becoming more of "a purely domestically oriented economic machine", with consumers financing many purchases through home-equity loans.

As a result, U.S. government and personal debt levels are rising, and Prestowitz said that the country is not investing in the making and selling of products. "That implies a huge kind of reverse [movement], and a much lower relative standard of living," he predicted. "And, obviously, a lesser role in the world. So I think we're committing slow suicide."

He said this is exacerbated by Americans' collective ignorance. "This war is a disaster in Iraq, and we're in denial and we're just so bloody ignorant," he claimed. "We just don't have a clue about what's happening in the rest of the world. So I think we have a lot of hard lessons to learn."

Prestowitz said he has big concerns about the U.S. tendency to turn every problem into a military matter, which could result in his country ending up in more wars as economic problems intensify. He also said he worries about U.S. residents looking for scapegoats to blame for their country's problems.

When asked for policy solutions, he said there should be incentives for U.S. companies not to invest in overseas plans. He added that a value-added tax, similar to Canada's Goods and Services Tax, could also help curb excessive consumption.

"We need to save more and consume less," Prestowitz said. "There's a whole bunch of things: infrastructure is a disaster, education is a disaster. I could go on and on."

He said he also thinks the U.S. president should lead an international effort to change the role of the U.S. dollar in the world. Instead of oil being priced in U.S. dollars, Prestowitz said it should be priced in a combination of currencies, such as the Japanese yen, the Chinese renminbi (yuan), the euro, and the U.S. dollar.

The Bank of Canada's Dodge, however, said he didn't see a great deal of significance in changing how oil is priced. "The [U.S.] dollar is a unit of account, and whether you use the U.S. dollar as the unit of account or the euro as the unit of account or the Saudi riyal as the unit of account doesn't matter very much," Dodge maintained at the news conference. "The real issue is if, indeed, the U.S. dollar has depreciated significantly against other currencies, the real returns to those producers have gone down. And when the real price falls, that engenders a market reaction. But the unit of account, per se, is not all that important."