Christmas 1997, I ran into a former U.S. ambassador to Brazil and
predicted that country's currency, the real, would have to be devalued. He
bet me a dinner it would not -- by Jan. 1, 1999. I lost by 13 days, thanks
to a $41.5 billion International Monetary Fund bailout of Brazil.
As predicted, however, all the IMF accomplished was to put another
fortune in U.S. tax dollars at risk and kick the can up the road.
In the five trading days up to and including January 13, the Brazilian
stock market lost 25 percent of its value. That day, Brazil let its
currency fall by 9 percent. Its stock market fell 5 percent, and
Argentina's plunged 10 percent. The next day, Brazil's market plummeted
another 10 percent. Is the bear back and stalking Latin America?
U.S. markets held up best under the latest onslaught of selling.
However, our economy, banks and taxpayers will pay for the failures of
Brazil's politicians since Brazil's devaluation increases the likelihood
it will be unable to service its foreign dollar debt. If so, U.S. banks
will take a heavy hit, and Brazil will have to draw on that IMF loan.
America should not look to be paid back soon.
Devaluation also ensures a deepening recession in Brazil. That
downturn, plus a devalued currency, means U.S. exports to Brazil must
fall, and our imports must rise. The U.S. merchandise trade deficit will
be ratcheted up and U.S. manufacturing hammered again.
As Argentina is tied to Brazil in a NAFTA-type free trade zone, Brazil's
devaluation means an immediate cut of 9 percent in the price of Brazil's
goods heading south and an equivalent hike in the price of Argentina's
goods heading north. Can Argentina withstand certain domestic pressures
for its own devaluation? We shall see.
As Brazil is the Latin Goliath, its devaluation is likely to force
countries across the continent to follow suit or risk losing markets to
Brazil. Competitive devaluations across South America would put pressure
on China and Hong Kong to do likewise or lose their huge U.S. markets.
American consumers will benefit from lower import prices, but U.S.
producers will take another hit, particularly steel.
Remarkable how this Global Economy works, isn't it?
In 1997-98, the U.S. Treasury supported IMF bailouts of $170 billion for
Thailand, Indonesia, South Korea, Russia and Brazil. All five have
devalued, giving their steel a huge price advantage over steel made in the
U.S.A. But the U.S. government that committed the billions to bail out our
"trading partners" has only a cold stone face to show a U.S. industry that
is being driven to ruin.
U.S. steelworkers are today subsidizing loans to regimes that use our
money to underwrite exports that kill the factories on which those
steelworkers depend for a family wage. So that the Cardoso regime in
Brazil will not have to suffer the consequences of its incompetence, the
U.S. steel industry is being sacrificed and abandoned.
As long as the U.S. economy continues to grow, jobs are plentiful, and the
Dow defies gravity, the chickens of globalism will not come home to roost.
But should stocks come crashing to earth, the day of political reckoning
will be at hand.
To sustain the Global Economy in 1998, we allowed imports to kill U.S.
manufacturing jobs by the tens of thousands in a year that America was
creating service jobs by the millions.
Our consumers are today deeper in debt than ever. Americans are not
only borrowing to consume but drawing down savings to spend more.
Personal bankruptcies are at record levels.
Lately, we have been told that none of this matters. Current account
deficits do not matter, and trade deficits mean only that foreigners are
producing good things to give us in return for pieces of paper called
dollars. Thus, we ought to eliminate all quotas, all tariffs, all barriers
to free trade. Let the good times roll.
But all that paper is piling up abroad, and it is being returned here to
prop up the U.S. stock market, to buy up American industries, to hold U.S.
Treasury bonds and bills. More and more of the profits of our corporations
and scores of billions paid in interest on the U.S. debt are now sent
overseas -- to China and Japan.
History teaches that when great nations begin to shift from
manufacturing to finance and that when mature nations constantly
consume more than they produce, their time of greatness is past.
But that, we are told, is the wisdom of yesterday. Today, there is a new
paradigm. The Dow is headed for 10,000, then 15,000. No matter that stocks
are selling at 35 times earnings; they are bargains. The Internet has
changed the world. The old rules no longer apply.
Perhaps, but what is that animal we hear crashing around out there in the
forest but cannot see?
