The dollar is falling even with strong jobs numbers. That makes sense. Jobs = consumption = trade deficits, especially since bush = no tax cuts and rising spending (spending on the war and homeland security counts in the budget, if not with parts of the right that oppose big government) = deficits. Falling national savings = larger external deficits. Yet unless Japan resumes reserve accumulation, the financing for the external deficit currently is not there. Private markets will only step in and buy dollar assets at current interest rates after the dollar falls. With current interest rates, foreigners only should buy dollars if there is an expectation of future dollar appreciation. The dollar has to fall today to create an expectation that it will rise in the future — and to cut US spending on foreign goods.

Make no mistake, Bush’s deficit increasing initiatives will all have to pass a global test. We need the central banks of Japan and China to fund the US deficit at current interest rates, and we would need them even more if Bush is serious about partially privatizing social security. The biggest buyer of treasuries this year has probably been the Bank of Japan; Japanese investors have bought about $170 billion in treasuries so far this year, and the Bank of Japan has been the biggest buyer. The second biggest purchaser almost certainly has been the Social Security trust fund — for all the (somewhat overblown) talk of Social Security’s long-term financial troubles, it is the only major part of the government that currently has a big cash flow surplus. It is also reinvesting the interest income on its existing assets. Combined, that provides the rest of the government with around $150 billion in financing. Take away that revenue stream in a “privatization” proposal that diverts some funds into private investment accounts, and the rest of the government has to borrow more. The Treasury has to hope that a big sell off is unlikely. If Japan, China, or any other major holder of Treasuries does not like the rising deficits, and either stops buying new Treasuries or starts selling some of its existing stock, interest rates would rise sharply to induce private investors to buy Treasuries. That is a global test that Bush can not avoid. Sorry.