WHAT’S IN YOUR POCKET?
The United States has been a spendthrift nation at least since Lyndon Johnson’s “Guns & Butter” policy following Jack Kennedy’s assassination. Since then, our federal government has continuously spent more at home and abroad than it collects from you and me in taxes. Washington has financed much of this deficit by borrowing Dollars from your Social Security payments and selling bonds to foreign countries. Since the Dollar has become the currency for settlement of international transactions, governments like Saudi Arabia, and more recently China, have huge surpluses of Dollars and, until recently at least, were happy to lend them back to our government at interest. You weren’t asked to lend your Social Security funds . . . Congress just took those Dollars, and now can’t afford to pay them back either, without borrowing more.
Today’s relatively weak Dollar is partly a result of world supply (too many Dollars) and demand (no one wants so many). The problem feeds on itself . . . the lower the value the less demand and less demand the lower the value. Ironically, when times get really scary foreign currency flows momentarily into gold and the Dollar, but the long-term health of our currency depends upon government being fiscally responsible, and Congress to stop spending Dollars they don’t have in their pocket (which by the way is really your pocket).
Unfortunately, cheap currency is also a definition of inflation, and the government’s measures of inflation tend to mask its reality. No one needs to tell you the things you really need are more expensive. Inflation spirals are vicious when they set in, and take drastic measures to stop and reverse. Rampant inflation in Germany helped bring Hitler to power in the 1930’s. I recall in the 1980’s seeing farmers waiting outside restaurants in Brazil to get paid for the food they’d delivered that afternoon, because the value of Brazilian currency was going down by the minute. This seemed well on the way to happening here in the late 1970’s, with 21% prime interest rates aimed at stemming inflation and unemployment at rates higher than today.
Looking now toward 2011 and beyond, where will our government get the trillions of Dollars it plans to spend on increased entitlements, nationalized healthcare, and social security benefits, along with the massive stimulus spending already in the works? The answer of course is to borrow it or print it. But who’s going to lend it to us, on what terms, and under what conditions? If we can’t borrow the money, the Treasury will have to print more Greenbacks like the Banana Republics do. It’s a no-win situation once it gets into gear.
Those countries with critical commodities in the ground or which they have bought up (China, Russia, Saudi Arabia, etc.) are already lobbying to abolish the Dollar’s status as the world’s reserve currency, used to pay for products bought and sold in international trade. The Dollar has become too unstable and this has the propensity to suck the profits from a deal for one side while giving the other side a windfall. It’s no accident that China has spent the last ten years in Africa and South America making long term Dollar denominated deals for commodities they know they will need down the road. Their Dollars are better spent there than financing our deficits. Measured against our own need for these same commodities the Dollar needs to be strong or we Americans will do without. And we won’t get there without a Congress that’s fiscally responsible. What do you think are the chances of that?
It appears, though neither Congress nor the Administration has actually said as much, that they plan to spend our way out of this recession, and when that has been accomplished, raise taxes through the roof to stem inflation and get the budget back in balance. But to pay back all the Dollars we owe and continue to borrow to finance entitlements will take a very long time and more money than anything but a robust US economy can afford in taxes. And we know that high taxes don’t tend to produce robust economies. It almost appears an impossible task given Congress’ announced priorities.
Unless I’m missing something, this all means that long term the Dollars in your pocket are going to buy less and less of almost everything. To experience this will be as painful for Americans as it will be if and when Congress finally decides to stop spending money it doesn’t have.
