The Declining Dollar: Is There a Government Solution? 36 comments
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More headlines Friday morning about the dollar strategy of the Obama administration. First, the main headline in the Wall Street Journal contains the blast: "U. S. Stands By as Dollar Falls," followed by a lead editorial titled "The Dollar Adrift."
We also learn that the administration was worried enough about this type of thinking to send out Chairman Bernanke and presidential adviser Larry Summers to indicate how serious the Obama Administration is about maintaining a strong dollar.
Again the phrase, “watch the hips and not the lips” comes to mind. There is very little the Administration can do right now to introduce fiscal responsibility into what they are proposing. The die has already been cast and no one sees a quick reversal of the administration’s mindset.
And, this is the problem. Time after time in the last half of the 20th century countries got themselves into predicaments like the one the United States faces due to uncontrolled government budgets with the promise of growing amounts of debt outstanding. Connected with this fiscal irresponsibility was the concern that central banks were really not independent of the national government.
There were a number of books that came out in the late 1980s and early 1990s that basically asked the question: “Is national economic policy in the hands of unknown bankers and financial interests around the world?” The general scenario depicted was that of a national government that proposed large and growing budget deficits that seemed unsustainable without the support of a captive central bank that would monetize the debt as pressure on local interest rates grew. The reaction of these “unknown bankers and financial interests” was to sell the currency of that nation and force the national government to reverse direction and introduce fiscally responsible budgets.
The primary example of such a historical event was that which occurred during the presidency of François Mitterrand in France. The French Franc came under such pressure that Mitterrand backed off his budget proposals and became fiscally quite conservative and supported the independence of the French central bank.
The issue here is not so much the size of the deficits, although that can be important, or the ratio of the deficits to GDP, or the ratio of government debt to GDP. The question is whether or not the government is acting in a fiscally responsible way and whether it will continue to do so in the future. The side question to this relates to the independence of the central bank.
Absolute numbers are fine, but it is the direction those numbers are going that are the crucial concern.
The facts to me are as follows: since the 1960s, the United States government has erred on the side of fiscal ease in terms of the budgeting process. This has not been a Republican or a Democratic fault. The leadership in both parties has contributed to the stance of fiscal leniency that has existed within the federal government over this time period. During this time the value of the dollar has trended downward, with one or two side-trips.
During the Bush (43) administration, fiscal irresponsibility got way out-of-hand. The fiscal irresponsibility was supported by monetary irresponsibility. Thus, we get to the current situation.
Nothing has changed.
Financial markets are seeing the same behavior in the current administration that they observed in the previous administration. O’Neill, Snow, Paulson, and Geithner are all of one package. Greenspan and Bernanke are linked at the hip. And, the words coming out of the mouths of our leaders seem to be pre-recorded.
I have been trying to call attention to this issue for four or five years now. Very little attention has been paid to the issue even though at one time in the Bush (43) administration the value of the dollar had declined by about 40%.
The problem is that there are no good solutions to the situation once its been allow to go on for this long. The obvious picture is that of a binge drinker that has been an alcoholic for a lengthy period of time. More and more people are going to get hurt and this will just add to the many that are feeling pain at the present time. But, that is what happens when people lose their discipline and become addicted.
The event we see over and over again in economics is that ultimately the system has to correct, either on its own or with the help of those that are a part of the system. The correction can take place sooner or later, but it eventually has to take place. Unfortunately along the way, as with alcoholics, some of the best attempts of “friends” to cure the patient only end up exacerbating the situation.
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Gold standard is not the solution. There is no solution. It's natural economic and social cycle we must endure, just like death is unavoidable. The only hope we have is a phoenix raising from the ashes.
Gold standard does not solve the problem. The world can not keep lending the US government $1.75T a year to cover the deficit. The world is even LESS capable of lending the US government 1.75 billion ounces of gold per year (at $1000 per ounce gold). The bottom line is no government or any entity has the power to borrow unlimited amount of money. The end result of borrowing is that it pushes down the value of the money borrowed, so even the number looks like a big number, the effective borrowing, in real purchase power term, is limited, or even ZERO (when the world no longer wants to lend us any more).
The invention of fiat currency means such cycles of boom and burst of fiat currencies must occur repeatedly throughout human history. The temptation of printing money at no cost is too strong to resist. Government leaders, and the voters themselves are only human. They have the human desire of greed and fear.
The US dollar is done.
This is only part of what needs to be done, an important part, but not the whole thing. Zimbabwe does not have a privately owned Federal Reserve Bank, the Zimbabwe money is printed by the government. Return to constitutional money is only the first step. It forces the government to become frugal, but it is still up to the US government to become frugal and fiscally responsible. I don't see how that can be done, because it's going to be unpopular if the US government implement deep spending cut and jack up tax.
It's like some one suffering a fatal stabbing wound. It makes no sense to leave the stagger in the wound, or even stab it in deeper. On the other hand, if you suddenly remove the dagger, the patient will bleed to death even faster.
The point is, if the wound is already fatal, whether you stab the dagger deeper, leave it in place, and or pull it out, there is no good choice you can make.
The dagger in this case is the US national debts. The fatal wound is to the US dollar. I see no good solution to the dilemma. Borrow more and spend more, getting deeper into debt, is equivalent to stabbing the dagger in even deeper, it may slow down the bleeding a bit but the wound is deeper. Cut spending drastically and hike tax at the same time, is equivalent to pulling the dagger out abruptly.
On Oct 09 07:27 PM The Geoffster wrote:
> There is no solution under the current system that has hijacked the
> constitution. The banking system must be allowed to go bankrupt and
> the Federal Reserve must be eliminated. This may happen organically
> when the systemic faults can no longer be papered over.
On Oct 09 04:19 PM Mark Anthony wrote:
> Kevin:
>
> Gold standard is not the solution. There is no solution. It's natural
> economic and social cycle we must endure, just like death is unavoidable.
> The only hope we have is a phoenix raising from the ashes.
>
> Gold standard does not solve the problem. The world can not keep
> lending the US government $1.75T a year to cover the deficit. The
> world is even LESS capable of lending the US government 1.75 billion
> ounces of gold per year (at $1000 per ounce gold). The bottom line
> is no government or any entity has the power to borrow unlimited
> amount of money. The end result of borrowing is that it pushes down
> the value of the money borrowed, so even the number looks like a
> big number, the effective borrowing, in real purchase power term,
> is limited, or even ZERO (when the world no longer wants to lend
> us any more).
>
> The invention of fiat currency means such cycles of boom and burst
> of fiat currencies must occur repeatedly throughout human history.
> The temptation of printing money at no cost is too strong to resist.
> Government leaders, and the voters themselves are only human. They
> have the human desire of greed and fear.
>
> The US dollar is done.
Ohhh how I remember the 70's when Chairman Paul Volker gave us the bad tasting medicine with those high interest rates. But you know what, it worked!
On Oct 10 11:46 AM Thomas J. Gordon wrote:
> Michael, Volcker is too old. We all deserve to retire in peace
> and tranquility. Going back into the fed job with all the problems
> there are now would surely destroy his health. I'm sure Mr. Volcker
> could recommend someone who would do mostly the same things he would
> do. One of the great strengths of America is that we are not dependent
> on one person for anything. George Washington stepped aside when
> it was time, if only Putin and Ahminenijad would do the same.
On Oct 10 09:53 AM Pauly B wrote:
> Your right everyone is drinking the same cool aide in Washington
> on monetary policy.
>
> Ohhh how I remember the 70's when Chairman Paul Volker gave us the
> bad tasting medicine with those high interest rates. But you know
> what, it worked!
I'd save Harvard out of a sense of historical sentimentalism -- but dynamiting Harvard's influence is a step we do need to take.
On Oct 10 02:59 AM Dave Wrixon wrote:
> The most useful and symbolic thing anyone could do at the moment
> is close Harvard and bulldoze it to the ground. The whole economic
> ethos of the US economy has to be reworked.
No matter how many universities we bulldoze, no matter how many bankers are thrown into dungeons, no matter how much stimulus or tax cuts we steal from our children, we will not cure our own lack of conscience. It's a curious state of affairs where every single good thing is the result of our individual wisdom, hard work, and courage. And every problem is the consequence of: the banks, the government, the poor, the rich, the corporations, the unions, the Left, the Right, the RINOs, the Blue Dogs, the teachers, the military, the Chinese, OPEC, etc. Simply choose the group (or better still the groups) from the above list, circle the ones you don't belong to, and the exercise is complete. Extra credit is given for choosing groups that are widely despised. Rinse, repeat.
Obviously, since none of us are responsible for the problems, we as individuals should not make a single sacrifice toward any solutions. We are apparently passive bystanders, utterly powerless to influence government, let alone change it. In terms of our abilities to evade responsibility, every American seems perfectly qualified to run a Wall Street bank.
These are the only true choices. Everything the gub'mint is doing is simply an effort to postpone the day of reckoning, not eliminate it.
Fiscal responsibility is the solution, the only problem is how do we get there - gold standard is perhaps not the solution. Gold puts artificial limitations on the monetary base, and also no one strictly follows the gold standard. Even during the hey days of gold standard central banks printed a lot more money than was back by gold reserves.
In the current environment, last 20+ years, the developing world - China, India, Korea etc have been exporting deflation. So no matter how much the Fed prints inflation is kept under check. But now we almost are reaching the tipping point, but not quite there yet.
America has to get back to ECON101 - Save- Invest -Produce -Consume. Rather than the current strategy of print/borrow - consume. Abolish the Fed we will have happier days ahead.
The party is over. That's the message our policy-makers are unwilling to face. The party is over. Take away the punchbowl. Raise interest rates. Let's begin the part of the story where we get to suffer from our hangover and we get to learn that the party was not such a great idea.
On Oct 10 05:47 PM sethmcs wrote:
> Save the dollar? Easy raise interest rates 2 points above anyone
> else.
Raise rates, protect the dollar, face our own insolvency. This party cannot go on.
On Oct 10 03:40 PM rosey99 wrote:
> It's not to late to at least act like responsible adults. . .I hope.
> Or we could continue to talk about the problems we face like drunk
> teenagers, we'll blow up Harvard, we'll move the capitol, or solve
> our problems with targeted tax cuts. It's the Left. . .Er, no it's
> the Right that is the problem. Puhlease.
>
> No matter how many universities we bulldoze, no matter how many bankers
> are thrown into dungeons, no matter how much stimulus or tax cuts
> we steal from our children, we will not cure our own lack of conscience.
> It's a curious state of affairs where every single good thing is
> the result of our individual wisdom, hard work, and courage. And
> every problem is the consequence of: the banks, the government, the
> poor, the rich, the corporations, the unions, the Left, the Right,
> the RINOs, the Blue Dogs, the teachers, the military, the Chinese,
> OPEC, etc. Simply choose the group (or better still the groups) from
> the above list, circle the ones you don't belong to, and the exercise
> is complete. Extra credit is given for choosing groups that are widely
> despised. Rinse, repeat.
>
> Obviously, since none of us are responsible for the problems, we
> as individuals should not make a single sacrifice toward any solutions.
> We are apparently passive bystanders, utterly powerless to influence
> government, let alone change it. In terms of our abilities to evade
> responsibility, every American seems perfectly qualified to run a
> Wall Street bank.
--From a grade school teacher in the Nashville area--
The most eye-opening civics lesson I ever had was while teaching third grade this year. The presidential election was heating up and some of the children showed an interest. I decided we would have an election for a class president. We would choose our nominees. They would make a campaign speech and the class would vote. To simplify the process, candidates were nominated by other class members. We discussed what kinds of characteristics these students should have. We got many nominations and from those, Jamie and Olivia were picked to run for the top spot. The class had done a great job in their selections. Both candidates were good kids. I thought Jamie might have an advantage because he got lots of parental support. I had never seen Olivia's mother. The day arrived when they were to make their speeches. Jamie went first. He had specific ideas about how to make our class a better place. He ended by promising to do his very best. Everyone applauded and he sat down. Now is was Olivia's turn to speak. Her speech was concise. She said, "If you will vote for me, I will give you ice cream." She sat down. The class went wild. "Yes! Yes! We want ice cream." She surely would say more. She did not have to. A discussion followed. How did she plan to pay for the ice cream? She wasn't sure. Would her parents buy it or would the class pay for it. She didn't know. The class really didn't care. All they were thinking about was ice cream. Jamie was forgotten. Olivia won by a landslide.
Every time Barack Obama opened his mouth he offered ice cream and 52 percent of the people reacted like nine year olds. They want ice cream. The other 48 percent know they're going to have to feed the cow and clean up the mess." This is the ice cream Obama promised us!
Remember, the government cannot give anything to anyone that they have not first taken away from someone else.