From the September 11, 2009 Examiner
September 11, 2009
by Irwin Stelzer
Gold is up (over $1,000 per ounce), oil is up (over $70 per barrel), other commodities are up and the dollar is ... down (a lot). Which is both good news and bad news.
As the world’s economies recover, so does investors’ appetite for risk, which means that they no longer feel they have to keep their funds in the dollar — a relatively safe place.
So far so good. But there is another reason the dollar is around its lowest level in a year. The Obama administration has no policy to prevent the dollar from sinking further. In fact, the administration’s policy is a torpedo aimed at the dollar’s strength and acceptability as the world’s reserve currency.
The president is in the process of taking the nation’s debt from about 40 percent of the value of all the goods and services we produce — our GDP — to about 80 percent. We have had bailouts and a stimulus, the need for which sensible arguments exist, and are about to spend a trillion or so dollars to fix a health care system with which most Americans are more or less satisfied.
Still to come is a transformation — a favorite word of this president, who styles himself a transformative figure in American history — of the energy economy, an acceleration of spending for the war on terror (Oops! Man-made disasters) in Afghanistan and a predictable rise in spending on our aging population, increasing members of which refuse to oblige the Social Security fund by dying.
So the red ink flows, and the Treasury issues its IOUs, borrowing money to cover the deficits. Enter the newly reappointed chairman of the Federal Reserve Board, Ben Bernanke, justly proud of the innovative techniques he developed to prevent the recession from morphing into a depression. But he continues to — forgive the jargon — “monetize the debt,” or print money with which to buy up bank assets and Treasury IOUs, adding a flood of dollars to those already circulating.
That has the Chinese more than a little upset. They have been using the dollars we send them for the stuff we take off Walmart shelves to buy assets denominated in dollars. Such as Treasury IOUs.
Good for us, since that keeps the price of those bills and notes up, and conversely, interest rates down, making it cheaper for people to buy homes or refinance their mortgages. But long past the point where it is good for the Chinese, who now worry that the increased supply of dollars, unless it is reined in, will reduce the value of the trillion or so in their vaults.
Which brings us to Sept. 24 and 25, when President Barack Obama will hop to Pittsburgh to chair a meeting of the leaders of G20 nations — the world’s most important. China’s president Hu Jintao will be there, again waiting for some sign that Obama will stop borrowing and Bernanke will put into operation his “exit strategy” — call in those extra dollars. But both men seem to be disciples of St. Augustine, who prayed, “Lord, make me chaste, but not just yet.”
The Chinese are smart enough to know that the world economic recovery is still too fragile to have all the life-support systems withdrawn. That might abort the recovery, and reduce consumers’ ability to buy all those goods the Chinese manufacture, providing employment for a huge work force emerging from poverty. But they also know it is easier politically for the administration to keep spending than to confront a left-leaning Congress intent on expanding the welfare state.
So the Chinese have started buying gold as a hedge against inflation. And accepting currencies other than dollars from importing nations, most notably Brazil. And selling bonds denominated in their own currency, a step towards making it widely acceptable in international trade — like the dollar is now, and which they eventually want to see displaced as the world’s reserve currency.
This will not likely happen soon, as our stable political system and rule of law still make the dollar a relatively safe haven. But if investors get the idea that the only way we can pay off our debt is to inflate the currency — pay lenders back in dollars that can’t buy very much — they will want a higher price for their money, drive up interest rates and validate Obama’s claim to have been a transformative president — but not in the sense he has in mind.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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