The Profile of a Third World Country

Seven years of the Bush Administration has seen the federal debt increase by two-thirds while US household debt doubled.

This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28% of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and a half million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.

This is the profile of a Third World economy.

The "new economy" has been running a trade deficit in advanced technology products since 2002. The The US does not earn enough to pay its import bill, and it doesn't save enough to finance the government's budget deficit. To finance its deficits, America looks to the kindness of foreigners to continue to accept the outpouring of dollars and dollar-denominated debt.

At the meeting of the World Economic Forum at Davos, Switzerland, this week, billionaire currency trader George Soros warned that the dollar's reserve currency role was drawing to an end. If the world is unwilling to continue to accumulate dollars, the US will not be able to finance its trade deficit or its budget deficit. As both are seriously out of balance, the implication is for yet more decline in the dollar's exchange value and a sharp rise in prices. As the dollar sheds value and loses its privileged position as reserve currency, US living standards will take a serious knock.

If the US government cannot balance its budget by cutting its spending or by raising taxes, the day when it can no longer borrow will see the government paying its bills by printing money like a Third World banana republic. Inflation and more exchange rate depreciation will be the order of the day.

[Excerpt of an article by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review]