Is That Bear Still Out There?

by Patrick J. Buchanan – January 15, 1999

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?