Tuesday, July 15, 2008

What to do about the dollar

July 15 (Bloomberg) -- The dollar declined to a record low against the euro on speculation Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson will say credit- market losses are hurting U.S. economic growth.

The currency also weakened to the lowest level in more than a month against the Japanese yen and to a 25-year low versus the Australian dollar on concern confidence in the debt of Fannie Mae and Freddie Mac will diminish even after the U.S. government pledged support for the two-largest buyers of home loans. The pound surpassed $2 for the first time since July 1 after U.K. inflation quickened to the fastest pace in at least 11 years.

Put simply the reason that the dollar is dropping like a stone is that the US dollar is not tied to any commodity - like gold, for example - and so it is backed only by confidence in the US economy. Add to this the fact that the US has spent the past few decades printing money as fast as it can, thus devaluing the currency, and you can see why each dollar is worth less and less. But there's more.

Confidence in the US economy is being seriously damaged now by several factors. One is the credit crunch and all of its consequences. Another is the extreme reluctance of the US to exploit its own energy resources (drilling, oil shale, coal and nuclear). This means that the US will remain dependent upon foreign nations (many of them hostile to us) for it's economy's most important commodity.

The high oil prices themselves are causing damage to the American economy and therefore harming confidence in that economy. Built into ever barrel of oil's price is an "uncertainty premium" of at least 20%. The uncertainty I speak of is over the future of the Middle East. The US attempt to bring some stability to the region is going well but could still be torpedoed by a too-soon withdrawal from Iraq. If this were to happen and the Iraqi government found itself unable to stand on its own (an increasingly less likely prospect, but still a realistic one) the entire region could become a great deal more dangerous. This fear cannot help but to drive up the price of oil.

There is also the fear in financial circles of the prospect of an Obama presidency. B. Hussein Obama has tended to surround himself with the most extreme radicals the left can produce. He had the most anti-capitalist voting record in the Illinois state legislature and in the US Senate his voting record is to the left of Bernie Sanders, the US legislature's only self-identified socialist. There is simply too much prospect that an Obama presidency would turn a recession into a full-blown depression, just as the socialist FDR did in the 1930's.

The particular steps needed to bring back the US economy, and confidence in the US economy, are simple to identify, but difficult to implement.

First George W Bush along with John McCain, Barack Obama and the leadership of both parties from both houses of congress need to hold a joint press conference and issue a joint statement saying the following:

1. The United States is unalterably committed to the cause of stability and democracy in the Middle East and to that end we will keep combat troops in Iraq for as long as it takes to get the job done regardless of the cost.

2. The United States is determined that Iran will not become a nuclear power and absolutely no option is "off the table" in achieving that goal, up to and including nuclear strikes or a full scale invasion.

3. The United States is committed to restoring confidence in the American dollar by once again tying the dollar to precious metal reserves. America should commit to having a fully backed currency by 2050.

4. The government of the United States admits that the current crisis in the lending industry is the fault of the government of the United States. The seeds of the mortgage crisis were planted by congress distorting the market by establishing mechanisms whereby persons unqualified to obtain a mortgage could nevertheless get one.

From this grew Fannie Mae and Freddie Mac, two giant very poorly run lenders which were "private corporations" that were nevertheless owned by the federal government. They were immune from taxation and regulatory oversight. They spent vast sums of money lobbying congress in order to ensure that they would continue to be able to operate outside of any meaningful kind of accountability. Now the chickens have come home to roost.

The political leaders of this nation must articulate that they have learned the lesson that government must always strive to create as little distortion in the market as possible because everything the government does in or to the market will have unforeseen negative consequences which will, as certainly as the rising and setting of the sun, overwhelm and cancel out any possible positive results of that interference.

5. The United States commits to ending its dependence upon foreign oil through the implementation of proven energy technology. This means that we will drill for every drop of oil on US soil or off the shores of the US. We will commit to replacing every oil or natural gas fired power plant in the nation with a nuclear power plant and will perfect the technology to extract oil from shale and for liquefying coal so that it can be used as a motor fuel.

As I said these steps are easy to identify but they will be difficult to implement because they would mean that the politicians would have to admit their guilt and because the left would have to tell both the environmentalist and the deadbeats whining for more handouts that the gravy train was over.