WHISTLING PAST THE GRAVEYARD
The runaway spending of our government puts the dollar at grave risk. Despite this fact it’s highly unlikely that this excessive spending will be voluntarily curbed. Our government will stop spending when the markets of the world force it to quit. Nothing could be more unpleasant for America. It will start with dollar weakness. Make no mistake, the dollar could ultimately become worthless.
The worst thing about our government’s reckless spending is that it threatens the dollar’s role as the world’s reserve currency. As it stands now the dollar is in great demand in many parts of the world. In some countries it rivals or substitutes for the national currency. However, the constant printing and monetary expansion of the dollar to fund trade deficits and budget deficits is taking a toll. The Chinese news agency Kinhua reported, “The U.S. has long been facing the same problem: living beyond its means. At present, the country has debts as high as 55 trillion U.S. dollars, including more than 14 trillion U.S. dollars of treasury bonds.”
Chinese concerns may be the principal reason the Federal Reserve has been reluctant to launch QE3. The Chinese have the financial power to bring us to our knees simply by selling the treasury bonds they own. It’s amazing how oblivious Wall Street is to our indebtedness. Stock buyers refuse to see what they don’t want to have happen. Kinhua noted, “Economists agree that the United States’ largest foreign creditor, China should contemplate ways to pull itself out of the ‘dollar trap,’ as the U.S. economy is faltering with its debt piling up and its currency on the brink to depreciate.”
I was in Canada in early July. Several friends invited my wife and I to have dinner with them at the race track. After the races started I pulled out a U.S. twenty dollar bill because I didn’t have much Canadian money. Can I use this I asked? All three couples gave me the horse laugh. Their money which was always at a deep discount to ours is now worth a little more than ours. It was disconcerting to have them show less respect for the dollar.
Currently the demand for the dollar is strong because of the European crisis. If Europe suffers a contagion that spreads a distrust of fiat money it could eventually come here. A panic out of dollars could ensue. Another possible outcome would be dollar weakness after Europe calms down. This would find China and other Asian countries along with mid-eastern and South American nations using other currencies. Any lessening of demand for dollars means less bond buying. That would require the U.S. to raise interest rates. Such an increase would be a dagger in the heart of the economy.
Wall Street and Washington put all their trust in a few people to run our economic and monetary affairs. Chief among them is Mr. Bernanke who said in January 2008, “The Federal Reserve is not currently forecasting a recession.” In 2006 he said, “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.” And in 2007 said, “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”