Pethokoukis: America’s Banana Republic Economy

by Dan Perrin 

James Pethokoukis (Reuters) cites two examples of why America is well down the road of a banana republic economy. Our record debt levels and deficits, combined the fiscal fantasy land the White House and Congress work and live in are writ large in both examples.

First, the White House announces a $250 payment to every senior for inflation that didn’t exist. “In effect, a COLA was paid on inflation that no longer existed,” notes Andrew Biggs of the American Enterprise Institute.

Second, the White House in its desperate attempts to get its health reform passed, has tasked the all-too-willing Majority Leader Reid to walk the plank by convincing him to push a $247 billion portion of health reform as an off-budget item, in a separate bill, to be on the Senate floor this week before moving to the merged ObamaCare bill. Even the Washington Post editorial board said “Mr. Reid proposes not to pay for any of it, not even $11 billion, but simply to write a $247 billion IOU.”

Pethokoukis correctly notes the considerable spin associated with JPMorgan Chase economist Jim Glassman’s attempt to convince the world that the falling dollar should rightly be interpreted as a sign of “new economic optimism” because dollar flight means the world economy is getting better and the world is pulling its money out of a safe investment. Really?

Pethokoukis writes the dollar flight is likely exactly the opposite — the world is pulling its money out of a highly unsafe investment — examples one and two above show a White House and Congress which cannot help spending more and more, and piling up more and more debt — all the while insisting with passion and a strained voice that they really do care about the deficit and America’s debt and are for a strong dollar.

But the world is not fooled. America keeps spending and spending. When Speaker Pelosi announces that her ObamaCare bill is only $900 billion it feeds the perception that America’s Congress and White House are continuing to live off the Chinese and Japanese credit card — especially when the White House and the U.S. Senate Majority Leader tell the world that they will not increase the deficit under ObamaCare, but then want to spend $247 billion on health reform off-budget, so it does not count towards the deficit.

The credibility of the U.S. dollar is tied to the credibility of the fiscal discipline of the White House and the U.S. Congress. The world does not think either are credible is evidenced by the decline in the U.S. dollar. And as Pethokoukis says:

Two examples [the $247 billion off budget health spending and the $250 per senior check] — one ridiculously expensive, one just ridiculous. But both reveal a nation completely unwilling to deal with current trillion-dollar deficits or long-term shortfalls many multiples of that number.

What confidence should dollar investors have that America will really cut entitlement spending? Very little. Instead, we are more likely to see huge tax increases that could cripple productivity, or further dollar neglect, or a central bank that turns dovish on inflation. Or perhaps all three.

If Washington doesn’t care to support the dollar, why should investors?

And on the front page of the Drudge Report you will find this little item, titled “We are ‘worried’ about weak dollar: Eurogroup chief” — after all, if you are Senator Reid, you can spend a quarter of a trillion dollars without counting it in the budget. Neat trick, huh?

Senator Gregg warned a few days ago that the U.S. could be headed towards a “banana republic situation” and Pethokoukis is simply pointing out two examples — the most expensive of which is happening now right now — of why we are well down that road.