The dollar’s collapse — it is now down some 77 percent against the euro in the past seven years — is a good thing, we are told.
Good for whom? Not for America and not for you.
The traditional strength of the greenback has been a source of pride for Americans. More importantly, it has been a very real sign of our economic and superpower status.
Today, our dollar is under brutal attack because so much has gone wrong by our policy leaders in Washington and business leaders on Wall Street.
It has become in vogue to wring hands over the dollar’s fall — it’s nearly impossible to find a financial institution or media source that is not discussing the dollar’s decline. But Newsmax has been talking about the troubles facing the dollar for many years.
In fact, back in May 2006 the dollar was featured on the cover of Newsmax magazine. Our cover story — “Attack on the Dollar" — discussed the factors leading to the dollar’s decline.
Having missed the story, the political and media pros today largely have been spinning the dollar’s collapse as something good for you.
They argue that cheap dollars are good for U.S. exports. “. . . a weaker dollar is a big help to the U.S. economy, making exports more attractive at a time when consumer spending at home is slowing down,” The Wall Street Journal recently reported.
It is true that as the dollars devalues, our exports improve. But this is only because foreigners are buying our goods at dramatically cheaper values.
Imagine if you had your home on the market, but had no buyers. So you suddenly drop your price by 40 percent. Soon, you would find a queue of buyers outside your home.
If you sold your house at such a depreciated value, would you really be happier? Better off?
We have a similar phenomenon with the dollar.
Let’s examine some facts and myths about the dollar.
Myth: Oil prices are causing the dollar to decline.
Fact: High oil prices are largely the result of the dramatic drop of the dollar, not the other way around. For example, in euros, Europeans are only paying about $64 a barrel for oil, whereas Americans are paying around $94 for the same barrel of oil. Not bad for the Europeans!
Indeed, all commodities are up in the past 10 years. The reason is simple: The rest of the world is saying if America wants our commodities, we’ll sell them — but your dollars are worth less and we want more of them.
Myth: Inflation is under control.
Fact: Inflation has been out of control for over a decade. The Bureau of Labor Statistics have been using smoke and mirrors to give the politicians and the Federal Reserve cover.
For example, over the past several years, they tell us “core” inflation has been under 3 percent, on average.
This figure is so divorced from reality I’ll let you and your check book argue the case for me.
Interestingly, many folks have been pointing this out: Lou Dobbs, investor Jim Rogers, money manager Riad Younes, and others have questioned the official inflation statistics.
Myth: The Federal Reserve is fighting inflation.
Fact: Another reason there is a flight from the dollar is our incredible debt. Consider that the national debt is already $9 trillion. It was under Reagan the debt first hit $1 trillion. Under President Bush, the national debt has risen some $4 trillion alone — close to 45 percent of the current staggering load.
And remember, that’s just the national debt and does not include the state, local and consumer debt.
No doubt, our debt is frightening to global investors. A Dutch professor of economics put it bluntly to me recently: “America is heading for bankruptcy.” Interesting, a popular television dramatization in the Netherlands has been airing based on the dollar: “The Day the Dollar Collapsed.”
Of course, the U.S. government won’t actually go bankrupt. It will pay its bills. But these dollars will be grossly inflated and devalued. The government usually reverts to the easiest political solution, which, in this case, is to print more money. Inflation ensues. The dollar weakens.
This is good for debtors who will see the real value of their debts shrink. But it is terrible for creditors.
Since global investors like the Chinese have acted as America’s creditors, buying our debt instruments, they are clearly realizing how dangerous it is to continually underwrite U.S. debt in dollars.
China has $1.4 trillion in foreign reserves; 70 percent of this is in dollars. While recently affirming that the dollar will remain China’s reserve currency, its central bank has also indicated it will diversify out of the dollar.
As long as Washington ignores the underlying causes — significantly stealth inflation — the U.S. dollar will continue to weaken, imperiling our economic standing.
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