Friday, November 09, 2007

The Truth of the Dollar

The American government is holding out on us. It is not telling us the truth about the state of our currency and what that means. It does not want us to know that truth, because the truth is an indictment of those who we have elected to lead us, and also an indictment of ourselves.

In 2001, the EURO was worth $0.84; now it's worth $1.36. What a great investment it would have been to just buy EURO's and bury them in the ground. But buying and burying dollars in 2001 would have been a disastrous investment. What has caused this dramatic fall in what our currency is worth around the world? It's us, and our government, both of whom have been irresponsible from a financial standpoint.

Why us? Because we don't save. In fact, we live on credit, owing money we've yet to earn. And we spend that money on imported goods. The truth is that our national credit is only as good as the sum of our personal credit. If we have a serious recession, most of us have nothing to fall back on and our economy will tank. Why should anyone want our currency when it is so subject to devaluation due to our own failure to protect it?

Why our government? Simply because it owes far more than the sum of its current reserves and its expected future revenues. When you combine our current debt with the unfunded entitlements for Social Security and Medicare, and then add the current deficits that the Bush administration and congress are allowing, our credit deteriorates every day. Any rational observer of our government's spending habits should be racing away from our currency, since it will likely be worth even less each year.

What is the result of all this? Everything we import is going to cost more - oil, toys, electronics, flowers, you name it - if it comes from overseas, the price will go up because we are paying in increasingly cheaper dollars. Our standard of living will go down because we get less for each of our dollars.

Some say that the devalued dollar is a U.S. government strategy to pay back our huge foreign debt with cheaper dollars. That may work for a short time, but we will still need to borrow from foreigners since we don't save enough ourselves. This will force interest rates up to compensate for our deteriorating currency. These higher interest rates will affect all of us by increasing our government's interest costs and by raising the rates at which we can borrow on credit. There is no free lunch.

What can we do about this? The answer is painful. We need to save more and borrow less. We need to cut back on growth in government entitlements - smaller increases in Social Security outlays and higher prices for Medicare coverage. Our government needs to balance its current budget, or even generate a surplus. All of this will reduce the growth rate of our economy and force wages down. People will have to work for less and spend less if our nation is going to survive over the long run. At the same time, we'll need to rely less on migrant labor that sends much of its earnings across the border - Americans need to do the work currently performed by these people, even if the work is unpleasant. And lastly, we will need to improve educational performance across the board so that we can compete more effectively in the world economy down the road. The answers are multifaced and not easy, but we have no choice.

Will our politicians ever start telling the truth about our dollar? Its deterioration is a direct reflection of the confidence others have in our country. Are they right? Absolutely. If America - that's all of us - doesn't get serious about controlling our economic future, then it will be a bleak one. It's time to get started!

1 comment:

Dave said...

LF, you just aren't cheering me up lately. But, I won't shot the messenger.