King Dollar and Diplomacy

This is not a polemic on politics but rather a discussion about economics, numbers and the international relations and effects of the US currency and its perceived worth around the world.    In the Wall Street Journal and other economic news outlets there has been substantial discussion of recent days about the decline of the dollar against foreign currencies.  There has been virtually no mention so far in the so called mainstream media.  They are busy covering health care and whether Obama is loved enough.   The US dollar has lost purchasing power around the world in the last 6 months at an alarming rate.  It has declined about 20% during this period. 

Some of the reasons are very obvious but not getting much attention yet in the headlines.  Since we have what is called a fiat dollar that means essentially that the dollar only has value to the extent that others believe it is important and valuable to them to have dollars so they can buy US goods and services at the end of the day.   The dollar is not backed by anything tangible thing as it was for most of our history when it was gold based.  That dollar bill is nothing more than a promissory note from the local Federal
Reserve Bank.   If you are in Japan that dollar has not meaning or value unless it can be converted into something you want like a car, clothes or a direct investment in something in the US like real estate or the stocks of US companies.   The point is that for the dollar to ultimately be worth anything to a foreigner they have to bring the dollar to the US shores literally or at least figuratively by investing it in the US or buying US goods.  

Because of the monetary policy of the current administration we pay very low rates of interest on our government issued notes and bonds.  The Federal Funds rate is virtually at zero where it has been now for more than 6 months.    Further everyone who can do basic math sees that we are spending more than we are collecting as a nation and that our debt and the growth rate of that debt continues to climb and all estimates indicate that the pace of those items will only accelerate in the future.  Next week the Congress will pass a new limit on the national debt which is already over 11 trillion.   Even Moody’s made a statement this week that there was no guarantee that the US bond rating would always be AAA.    From a historical perspective that is earth shattering.  We have always honored our debts and other around the world believed that we would and could do that.  That goes back to the founding of our nation and the Constitution when we acknowledged and agreed to pay all outstanding debts of the Confederation of States before the Constitution.   With the proposals on tap for cap and tax and the huge new expenses for health care, however it ends up, plus the new taxes to come which will diminish economic growth many of the smart folks around the world are starting to question seriously our ability to pay our debts.  At least that is pay our debts in money that has some sembalance of value.  The threat of inflation is real if the present course is continued.

Our current policies and the projected policies only enhance the power of foreign entities to enforce their will on our activities here and abroad.  It won’t start off with a headline.  But on the back pages you will note some day that China for example did not buy 20 billion worth of our bonds but only 15 billion and they invested the rest in gold, oil, copper or even in other countries bonds like maybe Brazil or how about Iran.   China is a our largest creditor and we are they biggest customer for their goods and services so they will be careful and not percipitate anything rashly.  But they will start hedging their economic bets.   To make us really pay attention they could not by any of our bonds at a weekly or monthly auction.  They could simply say they were deferring the purchase not stopping with their buying of our bonds.  Behind the scenes however they could play hardball with us.  They could start making long term agreements even more aggressively with those that are not our pals around the world or our pals in name only.  They could start taking their extra cash and rather than buy US bonds they could invest directly in Iran, Indonesia and throughout the Middle East.   We would be needing their money.  Too quick a stop in supporting our debt would wreak havoc with our economy. 

Is it too hard to imagine that the Chinese would tell us they want us to take a particular position with Iran vis a vis Israel for example, or that they should be allowed hegemony throughtout the Indonesian islands with it rich natural resources in oil, gold, silver and copper for their own industrial growth for the future.  They also are clearly not committed to any “green” initiatives whatsoever.   They intend to us oil and coal for decades to come so they can continue their own economic expansion.  Thus they might well seek to replace us as the dominate influence in the Middle East.  It could happen especially if the Middle East states also percieve the US dollar as not “being worth a dollar”.   Why would they want to sell oil to us when the dollars they get in exchange are declining in worth every day.

The really smart people know this is a problem and there are ways to fix it and reverse the trend line in our debt and deficits.  We need to focus on growing jobs and our economy for a while and drop the other issues.  Otherwise we might end up with the benevolent welfare state but one that is so destitute that it can’t afford do all those “do gooder” actions it has promised.   The Nanny state will see that it doesn’t have the coins in its purse to buy the kiddies anymore ice cream and candies.

I am not shocked often at my age. But I was shocked at that lady in the current administration talking about Mao being her favorite philosopher.  Philosopher?   He was a butcher.  She either doesn’t know her history very well at all or if she does then that is even a more frightening thought.  He killed millions.  I can’ remember clearly the scenes on the news during the Cultural Revolution he fomented of those children holding up their little Red Book of thoughts of Chairman Mao and singing his praises literally singing.  Same as those German kids in the ’30’s singing the praises of Hitler.  The world will never know how many teachers, small business owners, scholars, doctors, military leaders and others he slaughered like Stalin to impose his view of the world.  Go visit Taiwan and ask around.  They remember.   www.olcranky.wordpress.com

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