Here’s a Problem That We Won’t Hear About Again

by J. Christoph Amberger

The Democrats’ sweep of both House and Senate (and the happy, happy resonance it found in Europe) may be bullish for the dollar. Not because something fundamental has changed overnight. But because something is likely to disappear -- the “budget deficit.”

Mind you, I have no expectations at all that the actual deficit will disappear. While the Clinton administration did indeed produce a notable statistical aberration in squeezing a nominal surplus out of the Internet boom of the 1990s, that surplus was more an indication of the strength of that boom than of Democrat frugality.

To the contrary, I expect government spending to go up considerably. The Democratic groundswell may have brought a new generation of more conservative representatives. But they pushed the incorrigible bunch of socialists to the top: the Pelosis, the Kennedys, the Kerrys -- people who have been in office for so long their right hand not only is unaware of what the left is doing, they have forgotten they have a left hand.

And that hand is solidly lodged in your pocket.

But a reinflating U.S. budget deficit won’t matter anymore. It actually never has. The dollar is roughly at the same exchange rate against the yen and euro at 2006’s 1.9% of GDP budget deficit than it was at 3.6% in 2004.

If a Democratic Congress is in charge of running up that deficit, it won’t matter. The media, now back in lockstep with politics, will see to that. And if the media provides a politically acceptable rationalization for growing deficits, traders and investors -- whose institutional memories last from 12 to noon -- will find other explanations to justify moves.

-- Higher taxes and the gradual crippling of U.S. take-home pay through new levies may also have a “beneficial” effect on the U.S. current account deficit. After all, if people have less money to spend, they buy less. And if they buy less, the Chinese sell less.

Today’s numbers for the September current account deficit indicate that the deficit is already shrinking, thanks to lower energy import prices.

The U.S. trade deficit fell 6.8% to $64.3 billion in September from a record the prior month, the biggest drop in almost two years. That gap occurred despite a new record trade deficit with China.U.S. exports set a new record on increased foreign demand business equipment such as industrial engines, telecommunications gear and aircraft.

Throw in the potential of trade sanctions against China, a stronger dollar (buying more abroad for the same money) and a potential cinch in U.S. consumer demand, and we might see the U.S. account deficit plummet by 2008.

If you’re better off then is another question.