The United States' Dollar, as measured in terms of buying power for unique items such as gold, durable housing, top athletic salaries, etc., has fallen by over 97% in the past 75 years. One need not look very far for a cause. The value of any currency in real terms depends as much upon the laws of supply and demand, as does that of every other factor in an economy; and the supply of dollars has increased exponentially because of the enormous deficits that the Federal Government has incurred during that period.
There are a number of widely held errors that tend to undermine analysis of the dynamics involved. The most common of these is a confusion between actual inflation and the level of prices. While the aggregate price level will, over a period of time, reflect the actual inflation, there are many pressures that tend to dam up the rise in prices--some of these are discussed in Chapter 14 of our Conservative Debate Handbook (Economics). But the increase in the supply of dollars, resulting from those deficits, is itself masked by an all too common lack of perception as to the extent to which the value of the dollar is related to an explosion in the volume and nominal value of dollar denominated money substitutes, both domestic and foreign.
The fact is that only a very very small proportion of U. S. dollars--including circulating dollars--are in the form of printed legal tender or coinage. Most are in accounting book entries. To understand what deficits do to the value of a people's money, one must factor in not only what circulates in people's pockets, what is held in domestic bank accounts, what is held as bonded indebtedness in bank reserves (enabling banks to lend money that exists only as a reflection of debt); but, also, what is held in reserve by foreign financial institutions. If Chinese Central Bankers hold a trillion dollars in their reserves, these may not immediately effect a change in the price structure; yet they must be taken into account in any realistic evaluation of our currency. There may come a breaking point, when foreign nations no longer dare hold their reserves in such a form--because of too many dollars and dollar substitutes in existence;--when they, and other holders, rush to cash in those dollars for whatever they will buy, and Americans experience a form of monetary chaos that they have not known since prior to the adoption of our written Constitution; a Constitution intended as a safeguard against this very situation.
While most politicians seem blissfully ignorant of monetary reality; there are, of course, some who understand very well; those who dare not protect the dollar by balancing budgets and trimming expenses, because they realize that only by allowing a certain depreciation in the dollar can they even afford to pay the interest on the public debt without curtailing programs, seen as necessary to buy the support of susceptible segments of the population; support necessary to their own retention of offices, seen not as a sacred trust, but as an opportunity for personal aggrandizement. It might make a stimulating subject for an essay contest, which species is more dangerous to the public weal, the stupid or the culpable office holder. Yet it would perhaps be to better advantage, if College economics departments were to stop teaching the fairy tale economics of Lord Keynes, and, rather, steer their students towards the monetary clarity of a Ludwig von Mises.
Although the inevitable results of folly, already in place, make it virtually certain that we will have increasing monetary instability over the next decade, how imbalances will finally sort out, or exactly when, is not predictable. Speculators would do well to avoid looking for windfall opportunities in other people's misery; to recognize that while chaos may loom, no one can really forecast what might follow. Who in 5th Century Rome knew that the coming fall would be followed by a 900 year Depression in the lands that had been Roman? Who in the France of Louis XV, observing "after us the deluge," knew that that "deluge" would include the blood flowing from the severed necks of their butchered granddaughters? To understand what happens when a monetary system collapses, one might look to Germany and Hungary in 1922. Yet Hitler and World War II--while clearly consequences--were not the only possible ones. But to understand the possibilities for a recurrence in America in the decade of 2011, one need only consider the huge stashes of dollars, already held by various Central Banks in Asia.
The immediate symptomatology is relatively benign--even welcomed in some financial markets. It is seen in huge cash infusions in listed American enterprises; "bailouts" for financially strapped companies, which support the stock price at the expense of an increasing foreign ownership. But the reckless spending continues, the increase in dollars and dollar substitutes, if anything, accelerates. Unless stopped now, there will come that moment, when no one wants to be the last holder--the holder who finds its stash of dollars unusable, or nearly unusable. At some point the run starts, the dam breaks, the rush to save what each can, is on. Then what happens? Not only do we see the price level of almost everything catch up to the actual level of inflation; in doing so, it triggers massive "cost of living" adjustments, already provided in many programs. These, in turn, trigger a dramatic increase in the dollar denominated totals for all sorts of entitlements. But now the lag in "catch up" works against the Federal would be "managers" of our money supply. Coping with instability, business profits will not inflate as fast as business costs; tax revenues will fall still further behind the accelerating outflow. In short order, we may learn what the German and Hungarian middle classes experienced in 1922. The threat is real. Daily, it grows more imminent.
Those who have frequented this web site since the beginning of the George W. Bush presidency, may certainly have noticed our increasing opposition to the present Administration. We tried, very hard, to be sympathetic; to nudge what was supposed to be a "compassionate Conservative, Republican," administration in the right direction. Indeed, our essay during the 2000 campaign, on the subject of that campaign, was full of sound advice on how to win. It was not followed, of course; and the cliff-hanging farce followed--what with all the silly antics in Florida, originating with a Gore campaign strengthened immensely by the folly of the Bush effort. Yet by 2004, the failure of the Bush Administration to secure our Southern Border, or defend American culture, had become too much. We had no choice but to openly repudiate the President's leadership and values. Very little that he has done since--other than his Judicial appointments--has given us any reason to reconsider.
Yet that said, what can one say about the farce being acted out in 2008? In February, the President rushed once more to embrace the Keynesian "economics" by deception, usually associated in America with the extreme Leftwing of the Democratic Party, to sign the ill considered, panic driven, "stimulus" package, hurried through Congress with little debate and even less show of any understanding of economic fundamentals. It was as though both ends of Pennsylvania Avenue had accepted the wisdom of small children, who find a box full of matches, and cannot wait to start striking them in a room full of flammable items.
The "package," promising checks totaling about $165,000,000,000 for residents of the United States--both legal and illegal, both citizens and foreigners--amounted to an appropriation of dollars that do not presently exist; dollars, that are presently in no one's account, anywhere on earth. Oh, the checks will be mailed; and the checks will be cashed. And since the incoming tax revenues of the United States have already been committed to other ventures, those checks will only be honored by the creation of new dollars, by further inflation of the supply of dollars and dollar substitutes to further undermine the monetary stability of the United States and their citizens.
The President had no sooner signed this preposterous example of his lack of Conservatism, his lack of common sense, his fulsome embrace of the fairy tale fantasy economics of the British Fabian Socialist movement; than he was off to Africa to offer tens of billions more, apparently for the sole purpose of appearing to be a great benefactor to Third World peoples--not, to be sure, one of the roles delegated to his Office by the written Constitution, this pathetic poseur once claimed to believe must be "strictly" construed. And what a trip it was!
Most of the promised billions--those dollars that did not exist, for projects never authorized by the Constitution--dollars never appropriated by the Congress that has sole authority to appropriate money even for projects that are authorized--were for health care. Yet the President did not feel constrained to neglect other unconstitutional projects in his frenetic quest for personal recognition; in his pursuit of fantasy in a world of make believe. For example, in Rwanda, the President offered $100,000,000 to help the people train their security forces, to prevent further genocide--apparently unaware that it was the Hutu security forces in Rwanda that had led the genocidal slaughter of the former Tutsi rulers: Also, in charity, one must hope unaware that it was the Dean Rusk foreign policy of the 1960s--the foreign policy that the President so clearly embraced in his second inaugural address--that reduced the Tutsi to a situation, which made that slaughter possible, even probable.
A day or so later, the President posed with several very tall Masai warriors in full ceremonial dress in Tanzania: The President's black sport shirt contrasting with the bright red tribal dress of the warriors, who towered over the President. The warriors were smiling; the President merely looking confused and out of place. Our thoughts raced over the subjects addressed in this essay. Here was the supposed leader of the most successful people on earth, begging to be loved across the globe; offering billions upon billions of dollars that do not presently exist; billions not even appropriated for future use; billions that can only be created at the expense of a further erosion of the money of the people the President was sworn to serve, a further squandering of the patrimony of their forebears, a further lowering of respect for their written Constitution; the offering, itself, immediately following the mad folly of the "stimulus"!
God, grant us the strength to resist this insane rush to self-destruction! That the Office, once defined by the immortal Washington, could descend to this: Peter Pan in the Great Rift Valley!