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MONDAY, MAY 12, 2008

INVESTORS.COM

ISSUES & INSIGHTS Get Over The Gap Trade Deficit: We have long been told that when the dollar “corrects,” making our goods cheaper abroad, the trade deficit will begin to fall sharply. Well, it’s finally happening. Now that it is, do you feel any better?

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ou shouldn’t. Because even though the trade gap narrowed by $3.5 billion, or 5.7%, to $58.2 billion in March from February, it was a sign of weakness rather than strength. Compared with a year earlier, March exports rose 15.5% — a good thing, we suppose. But imports increased just 7.9%, a gain that would have been a lot lower if not for oil. True enough, the deficit appears to be declining — after hitting repeated records in recent years. Exports are booming while import growth has slowed noticeably, due mainly to the slumping dollar. On the surface, this looks like a good thing. After all, don’t we want to buy less from abroad and more from our own country? The answer is no if it means that the U.S. economy has slowed and is no longer pulling its weight in the world. Journalists and pundits call the smaller deficit an “improvement,” or “good news.” It isn’t. We run a trade deficit not because we’re uncompetitive or others protect their markets, two great economic myths; we run deficits because we’re such an attractive place for investors from around the world to park their money. The deficit, in other words, is a sign of strength. As any economist can tell you, the flip side of our trade deficit is our capital surplus, which measures foreign investment flows into and out of the U.S. When we run a trade deficit, by definition we must run a capital surplus — and vice versa. Last year, for instance, we rang up a record $708.5 billion deficit for both goods and services. But we imported the equivalent of $738.6 billion in investment capital to offset that. This was used to buy Treasury notes, bonds and stocks, and to fund real estate, plants, equipment and worker training. That foreign capital created jobs and added to our ability to consume. It may even have helped keep us out of recession. So what does it say that our deficit is now shrinking? On the whole, it means foreign investors find the U.S. economy a less inviting place to be, maybe because of the housing meltdown and concern over the upcoming election. But if the trend continues, it means we’re all going to have to consume less and save more to make up for the decline in foreign capital. That might not be a bad thing, but don’t let anyone tell you it will be painless. In the short run, a falling trade deficit will boost GDP. Indeed, based on Friday’s data, it’s likely first-quarter GDP growth will be revised up from the first estimate of 0.6% to roughly 1.2%. But in the long term, having less foreign investment means our economy will grow more slowly. That’s the downside. Don’t believe it? Just look at Germany and Japan. They’ve run huge trade surpluses for years, yet their economies have grown slowly at best since at least 1990. They export lots of their capital, as all trade surplus nations do, so they have less to grow on. We import it — and grow faster. As such, should we root for a smaller deficit? Well, a smaller trade deficit doesn’t have to be a negative. If it got smaller because Congress wised up and created private investment accounts for Social Security — which would raise the U.S. private savings rate — that might be a good thing. But making the deficit smaller isn’t necessarily a laudable goal, since doing so often covers for other bad policies such as raising taxes, devaluing the dollar and reverting to protectionism. All these things, by the way, have been proposed as “remedies” for the trade deficit, mostly by wrongheaded Democratic candidates and talk-show hosts. What they’d do, in fact, is shrink the deficit by shrinking the U.S. economy. We’d rather keep the deficits.

Only CEOs Need Fear Taxes: Welcome to Obama Wonderland, where Democrats hike taxes only on evil corporate executives and fulfill pledges of tax cuts for the “middle class.” It’s the same baloney Bill Clinton promised in 1992.

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nterviewed Thursday by CNN’s Wolf Blitzer, Sen. Barack Obama, the Democrats’ likely nominee for president, provided a disturbing preview of the kind of economic incompetence we can expect if he is elected president and has a Democratic Congress to do his bidding. Asked about his plans on taxes, Obama made his intentions clear: “I want to eliminate the Bush tax cuts. And what I have said is, I will institute a middle-class tax cut.” Asked by Blitzer to “define middle class,” the much-admired orator conceded that “the definitions are always a little bit rough,” mentioned a possible $100,000 threshold, but also threw out numbers from $50,000 to $75,000 to $200,000 and $250,000. So who should worry about having their taxes hiked by a President Obama? “I will raise CEO taxes. There is no doubt about it,” the senator told CNN. We have heard all this before. Debating his fellow Democratic presidential hopefuls in early 1992, Bill Clinton said: “I want to make it very clear that this middle-class tax cut, in my view, is central to any attempt we’re going to make to have a shortterm economic strategy and a long-term fairness strategy, which is part of getting this country going again.” At a presidential debate less than a month before the election that fall, Clinton said: “Now, I can tell you this: I will not raise taxes on the middle class to pay for these programs.” But as former Atlantic Monthly and New Yorker correspondent Elizabeth Drew recounted in her 1994 book “On the Edge: the Clinton Presidency,” a key purpose of Clinton’s February 1993 TV address less than a month after taking office was “to get out of the way of the news . . . that not only would there be no tax cut for the middle class, but there would be an energy tax (the Btu tax) that would hit the middle class as well as the wealthy.” Obama’s spending agenda — exceeding $307 billion a year — dwarfs that of Bill Clinton a decade and a half ago. And he would be sure to run into the same immovable mathematical obstacle faced by the last Democratic president. Taxing the handful of CEOs and other fat cats won’t be enough. The big money Obama wants will have to come from the many millions of middle-class taxpayers.

Oily Chavez Oozes Beyond Venezuela The Hemisphere: Oil spiked $4 Friday on new evidence of Venezuela’s deep involvement in terrorism. There’s no glossing over such news: Hugo Chavez intends to destabilize the region. The U.S. will need to take action.

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fter poring over some of the 10,000 documents captured from the computer of dead FARC terrorist Raul Reyes, killed in a raid on March 1, U.S. intelligence officials are convinced that Chavez’s involvement is deeper than anyone realized, according to a front-page story by the Wall Street Journal. “There is complete agreement in the intelligence community that these documents are what they purport to be,” a U.S. official told the Journal. The oil market understood the implications of this: The U.S. probably would be forced to declare Venezuela a state sponsor of terror and then end Venezuela’s role as a top oil supplier, as required for other rogue states such as Iran. With global oil supplies scarce, and Venezuela accounting for 12% of U.S. oil imports, the U.S. economy would feel the effects. Yet the alternative of doing nothing probably is worse. The new documents show Venezuelan complicity in the FARC’s war on Colombia well beyond any past estimates. Chavez offered the drug-dealing Marxist terrorists rocket-propelled grenades and ground-to-air missiles to shoot down U.S. and Colombian aircraft. Such rockets, remember, enabled ragtag Afghan tribesmen to chase out invading Soviet troops in 1989. Chavez also offered port access for Russian arms shipments in Maracaibo to FARC’s jungle bases. He offered FARC rest and recreational bases, along with state medical care. To cap it, he offered the terrorists a $250 million “loan,” payable upon the overthrow of Colombia’s government. This is astonishing support for some of the worst terrorists on Earth. FARC is reviled by average Colombians. It should be dead or disarmed at this point because President Alvaro Uribe’s courageous efforts to confront FARC have been relentless. Yet he hasn’t won yet, thanks to FARC’s clandestine support from Venezuela. It’s hard enough to win an asymmetrical war like this, harder still if the insurgents are stoked from other states. Chavez not only sup-

ports these jungle thugs, he’s urging the West to take these killers off international terror lists, so they can openly raise more funds. So long as America buys Venezuelan oil, Chavez will have the money to help FARC eventually destroy Colombia. He won’t stop on his own, and the clandestine nature of his aid suggests he’ll seek new ways to do it on the sly. It’s part of Chavez’s strategy to use his petrodollars to take over the hemisphere — or at least become its main power broker. Thus far, the open side of Chavez’s quest is clear. Using democratic elections, Chavez seeks to get Latin leaders elected who will be his vassals. He does so by secretly buying off leftist political parties, and manipulating elections and the minds of poor voters. He has helped put socialist cronies in power in Ecuador, Bolivia and Nicaragua. Now, he has his eyes on his next prize: U.S. ally El Salvador. Bad as that is, the new FARC computer documents show an even darker side: Any nation that resists his charms, anti-U.S. rhetoric and oil cash, gets destabilized. Colombia may be the scariest example of Chavez’s destabilization efforts, but others are threatened, too — including Mexico and Peru, two stalwarts who have no interest in being Chavez’s puppet states. It’s significant that Mexico’s and Peru’s ambassadors were recently seen with President Bush at the Council of the Americas Wednesday pleading to Congress for free trade for their neighbor Colombia, whose economic success is as vital to them as their own. All three nations are under fire from Chavez, and need vibrant economies to withstand him. Peru is fighting Chavista infiltration through the dictator’s newly formed “Houses of Alba” and has seen a resurgence of the Shining Path Marxist guerrillas it stomped out a decade ago. Mexico’s fighting a terrible war against drug-dealing criminals whose prime support from abroad is FARC terrorists. Last Thursday the chief of Mexico’s national police was gunned down by these thugs in Mexico City, striking into the heart of the Mexican state. Meanwhile, the raid that killed Reyes also revealed the presence of Mexican operatives in Colombia believed to be in training to destroy Mexico’s oil pipelines, which supply much of America’s oil. It’s an ugly picture for the U.S. We must either de-fang Chavez soon, or watch democratic neighbors collapse to his vast dictatorship. If that happens, oil prices will rise as high as his ambition.

Lebanon’s War Against Terror Mideast: Long before it meddled in Iraq, Iran and its puppet Hezbollah set its sights on Lebanon. Beirut is once again under assault, and if we care about fighting terrorism with democracy, we’d better pay attention.

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ew would consider Lebanon an ally in the war on terror. But its people and elected government are fending off an assault on its multicultural democracy by a terrorist group that would take it away and turn it into an Islamofascist base camp for Iran and Syria’s war on the West. At least a dozen were killed as gunmen loyal to Hezbollah and other Syrian- and Iranian-backed groups took the streets last week against the pro-Western government of Prime Minister Fouad Saniora. Saniora was holed up at his office in downtown Beirut. A rocket-propelled grenade slammed into the fence surrounding the heavily guarded residence of Lebanese leader Saad Hariri, son of the late former Lebanese prime minister Rafik Hariri. The elder Hariri was assassinated in February 2005 in a massive car-bomb explosion that a U.N. commission has determined was planned and supported by operatives of the Syrian government of Bashar Assad. The latest Hezbollah-inspired clash was triggered by an announcement by Lebanon’s telecommunications minister that Iran was helping Hezbollah set up an illegal telecom network capable of listening in on any phone made in the beleaguered country. The government branded the network, which includes spy cameras to monitor flights and cargo areas at Beirut International airport, “an attack on the sovereignty of the state” and threatened to shut it down. Brig. Gen. Wafiq Shuqeir was earlier removed as commander of security at the Beirut airport for reportedly permitting the Hezbollah spy cameras to be set up at the airport, which also were said to be used to monitor the movement of anti-Syrian Lebanese politicians and foreign dignitaries. Eight members of the anti-Syrian March 14 coalition have been assassinated since 2005.

Hezbollah has kept its weapons in violation of U.N. Resolution 1559. Its leader, Hassan Nasrallah, said the network was “the most important part of the weapons of the resistance” and added Hezbollah had a duty to defend those weapons. “The decision (by the Saniora government) is tantamount to a declaration of war . . . on the resistance and its weapons in the interest of America and Israel,” he said. It is Hezbollah that long ago declared war. Hezbollah and its sponsors have long sought the overthrow of Lebanon’s democracy and have indeed created a state within a state. They have sought to destabilize Lebanon demanding a veto power in Lebanon’s cabinet. Its members and allies in parliament have blocked the selection of a new Lebanese president since the Syrian-backed Emile Lahoud finally stepped down last November. The Lebanese parliament is set to make a 19th attempt to elect a new president on May 13. The origins of Hezbollah date back to June 1982, when Syria decided to permit the Islamofascist government in Iran to dispatch about 1,000 members of Iran’s Revolutionary Guards to the Syrian-occupied Bekaa Valley in eastern Lebanon. Iran had a toehold, one that quickly grew like cancer in the Lebanese body politic. Hezbollah is the group that before 9/11 was responsible for killing more Americans than any other group, including 243 American soldiers in their Beirut barracks in 1983. It is the stalking horse of Iran’s loony leader, Mahmoud Ahmadinejad. House Speaker Nancy Pelosi recently made a pilgrimage to Damascus, as have other key Democrats. They are carrying out the plan of their party’s presumptive nominee, Barack Obama, who agrees that the problems in Iraq are all our fault and we just stirred things up. All we have to do is get out and talk. Let them look to Lebanon. Tehran and Damascus want an end to Lebanese democracy, replaced with an Islamofascist puppet state with which to keep the Middle East cauldron boiling. It would compensate for their failure to prevent democracy from taking root in Iraq and Afghanistan. And they are willing to fight to the last Lebanese.

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