09.30.2010 0

Dollar Decline and Paper “Prosperity”

  • On: 10/26/2010 08:42:42
  • In: Monetary Policy
  • By Bill Wilson

    The Bretton Woods monetary system, which was established after World War II and solidified the U.S. dollar’s place as the world’s reserve currency, is collapsing before our eyes. That’s too bad, because that status may be one of the last assets the American people have left in the global economy.

    For the past 65 years, that status has guaranteed a greater demand for dollars worldwide since it can be used in most transactions. This has resulted in commodities priced in dollars, generated for a larger flow of capital back to the U.S., and allowed the nation to borrow at low interest rates.

    The premise for the dollar’s special status was two-fold. The first was military supremacy and the wide protection offered by courageous U.S. forces abroad. For other nations this has meant having a strong ally against potential invaders, but also protected trade routes, and access to wide markets and first class technology. By and large, the U.S. has kept up this part of the bargain.

    The second part was that the dollar, because of the preeminent strength and stability of the U.S. economy, would keep its value. Here, U.S. monetary policy now leaves much to be desired, with markets now pricing in yet another tremendous devaluation of the dollar by the Federal Reserve, dubbed “QE2.”

    Here, the Fed will print an indeterminate amount of dollars to purchase U.S. treasuries. It already holds $832 billion worth of the $13.6 trillion national debt, about as much as Japan held in August.

    How much might it be? That’s anyone’s guess, but how about $1.89 trillion over the next three years? That’s the potential shortfall faced by the U.S. Treasury when it comes to selling the national debt.

    According to Strategas Research Partners’ Jason Desena Trennert: “$5.2 trillion of U.S debt comes due in the next three years…” On top of that, the White House Office of Management and Budget projects that in the next three fiscal years the national debt will grow by $3.6 trillion to $17.453 trillion.

    That means the Treasury will have to sell $8.8 trillion more treasuries in the next three years: $5.2 trillion to roll over the existing debt, and $3.6 trillion for new debt. That means each year it will have to sell $2.93 trillion of more debt, $630 billion more than it has ever sold in a single year.

    Added together, and it will total a $1.89 trillion shortfall. From the government’s perspective, the Fed prints the money, or we default.

    This brings all of the recent talk about the U.S. engaging in dollar devaluation by printing trillions of dollars in order to boost American exports into perspective. Conventional wisdom assumes that policymakers are even being honest about the real reason for “QE2.” It also assumes that the nation’s roughly $500 billion annual trade deficit can be even be addressed by monetary policy when nations globally are also engaged in competitive devaluation in what amounts to a race to the bottom.

    Perhaps it is not the roughly $500 billion trade deficit, which will be dwarfed by interest owed on the national debt in just a few short years. For fiscal year 2011, the U.S. is projected to pay about $251 billion in interest, but by 2020, that number will rise to an alarming $840 billion annually, according to the White House Office of Management and Budget.

    No, perhaps the reason the Fed is firing up the printing press to buy treasuries is because there is no other way for the U.S. to roll over the debt. Because the emperor has no more clothes.

    For years, Congress and other policymakers have ignored the drawbacks of papering over the debt. We have swallowed the socialist, collectivist poison of an expansive federal regime, dollar decline, and paper “prosperity.”

    In the process, we have devalued the lots of all Americans and accepted without question annual inflation that is ruining the purchasing power of American families. Everything has increased exponentially in price: housing, education, health care, transportation, basic materials, etc. The cost of living and that of doing business has soared. American life is becoming unaffordable, as foreclosures remain at record levels.

    Coupled with high rates of taxation, an encyclopedic regulatory burden unparalleled in the world, and soaring public pension and health care costs, the U.S. is no longer competitive in the global economy. Instead, we have kept taking the poison.

    The result has largely been a cheaper dollar, an unsustainable entitlement state, a debt that cannot be paid back with real capital, high unemployment, slow growth, and now, looming inflation.

    Volatile commodities markets are a direct result of this, and indicate that the once-vaunted stability of the U.S. dollar can no longer be trusted. The world, which lends us money, will not long accept a situation where U.S. monetary manipulation threatens to send the price of staples like food and oil to the moon. Why would they? Everyone needs commodities.

    And with the nation’s untenable budget situation, the cost of extending the U.S. security umbrella worldwide is growing. Potential rivals and adversaries now openly question our ability to project power throughout the world. They should. Expanding entitlements threaten to consume the entire federal budget this century.

    Therefore, the premises for the dollar being the world’s reserve currency are largely unraveling. The flight now is to commodities like gold and other precious metals that will retain value in an inflationary environment. And there is no question the U.S. is experiencing inflationary pressures. If the $1340 price for an ounce of gold is not convincing, for the first time in history, inflation protected U.S. treasuries have sold at a negative rate of return. That means investors are confident inflation will outpace the negative return on the investment.

    So, why should the dollar keep its reserve currency status? We’re deliberately devaluating it, undermining the investment the entire world has made in it.

    One thing is for certain, if the dollar does not hold its value, and the U.S. is increasingly unable to meet its obligations at home and abroad, then eventually, nations will use some other agreed-upon medium of exchange. Then, the American people will lose the benefits they once took for granted, and have only a worthless pile of paper left in its wake.

    Bill Wilson is the President of Americans for Limited Government.


    Copyright © 2008-2021 Americans for Limited Government