Thursday, October 07, 2004


Answer to "Why aren't fiscally conservative Republicans (and Democrats) up in arms over [the enormous federal deficit]?"

Continuation of a conversation at Tim's blog.
Why aren't fiscally conservative Republicans (and Democrats) up in arms over this?
Some of them are.

I think much of the outcry has been muted because fighting a bad tax cut is so subtly good that in an election year it's viewed as political suicide; Joe Sixpack doesn't understand that having more pocket money which is devalued because the currency has weakened is worse than bringing home less money. Joe'll vote against somebody who wouldn't cut his taxes.

While we're talking about deficits, how's this for a marvelously misleading headline? The following article's headline is "Congress analysts see smaller 2004 U.S. budget gap." However, the smaller deficit that the headline refers to is merely a less than 2% reduction of the projection. The article goes on to say that the real deficit is the largest in history.

If we now live in a global economy where we vie against every other nation for economic gain, isn't having a strong currency essential for attracting foreign investment? For example, imagine you're a German gazillionaire and you need to stick your money somewhere. You could put your euros into the US market which you expect to have a 10% annual growth rate or into the EU market which you expect to have a 8% growth rate. Normally, you'd pick the US market, of course. Now figure in that the EU currency has wildly outperformed the US currency over GWB's presidency, gaining 15% value relative to the USD in that time.

Supposing you had put your deutschmarks come euros come dollars into the US market and had experienced 4 years of 10% compounded growth (which, of course, you wouldn't have over the last 4 years), you'd have gained roughly 46.5%. By contrast in the EU market supposing you got that 8% for 4 years, you'd show a 36% gain. However, when you transfer your money from dollars back to euros, it loses 15% of the value it would've had had it remained euros for that time. Consequently, what was a 46.5% gain, becomes a 27% gain, which was obviously easily outdistanced by the Euro gain. See to verify my 15% currency drop figure.

Now if I remember correctly, the EU requires member states have a balanced budget. Maybe that's not such a bad idea to require of our federal government. It's something that many states impose on themselves.

Comments: Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?