Our Dollar Is In Rapid Decline

03/06/2008

Paul Munnis


Our American dollar is continuing to fall in world markets inflating prices on American consumers at an alarming rate.

Elsewhere our economy is suffering from real-estate devaluation, mortgage default, and that is in turn leading to financial sector failure and large losses in underlying stock value.

For speculators this is a vacillating marketplace and it offers an opportunity to get rich but only by taking terrific risks. Since the bulk of the money at risk is leveraged money then the worst that can happen is that they go bust by losing the upfront money spent on acquiring leveraged financial products. As for the underlying losses well that’s someone else problem. Read that as the stockholders problem.

For government it is a nightmare scenario as the Bush Administration watches a depression coming on fast. All of this is the direct result of a war that was not financed except by deficit spending and abandonment of financial control and oversight by a GOP controlled Congress.

The economic stimulus package as passed by Congress will help but that help is at least 60-90 days off and in that time a lot of havoc can be done. Each day that the dollar falls in world markets the dollar amount from the stimulus package buys less in goods and services.

Congress is now forced to decide what to do about the collapse of the American economy and make no mistake it has already collapsed. Congress is left to pick up the pieces.

The two things that must be dealt with are simple enough to state but difficult to achieve.

The first is an end to deficit spending. The second is putting a lid on speculators.

As long as America continues to fight two parallel wars the deficit will climb by $14 Billion per month. As long as speculators are given free rein then the cost of oil and other commodities will continue to inflate.

Putting a lid onto speculation is the easiest to deal with. We have much experience with that and it requires that a windfall profits tax be passed. It’s simple enough, excess profits are the result of speculation and if those profits are taxed then risk rises even further and dampens that speculation. The more money you make the more taxes you pay. Pretty soon, speculators are working for the IRS and are working for free. When a wind-fall tax law is passed then speculation calms down while the threat of such a law calms markets. Nancy Pelosi has made it clear that she plans to pass a wind-fall profits tax this session and already it is having an effect of cooling speculation.

How much of what we are seeing in oil is due to such speculation?

Using $60 per barrel of oil as a baseline and a 53% devaluation of the dollar I compute that oil should be at $99.45 per barrel. Currently it is at $104 and starting to fall. Nancy’s threat is working for oil.

How about gold? Gold is nearing $1000 per ounce and it was at around $650 when the dollar devaluation occurred. By my reckoning it should be about $994.50 per ounce. So gold is rising but on an adjusted basis accounting for inflation so it’s just about right now. Speculation has calmed in gold trading too.

We can go through this commodity by commodity and item by item and we will see that wheat and corn for example must increase in value – we also see the producer cost to grow these commodities has climbed and so of course the cost of the commodities will climb too. Some say the oil companies are using the rising prices of grain to make the point that American ethanol production is taking the food out of people’s mouths but it is dollar devaluation that is the biggest assassin to the American wallet and is forcing up food costs -- just ask an American farmer.

Historically when these things happen the response is a demand by workers for higher wages. This is a necessary balancing act in an inflating economy and will soon become an organized and tangible factor in our American economy. Expect to see much labor trouble ahead.

Democrats do not have to raise taxes in these times because inflation is doing it for us. Please remember the Party (GOP) that has brought you dollar devaluation and inflation. Democrats will try to cure this GOP mess but lots of pain will be felt.

The other major factor an end of foreign wars and deficit spending is much more difficult to accomplish.

The American people have known since about 2005 and then expressed it openly in the 2006 election that we need to bring home our troops from Iraq. Congress was elected on that basis and has steadfastly refused to end the Iraq War. Without the willpower to stop deficit spending then it can’t happen. There is one exception to that statement: it can’t happen unless investors in T-Bills come to experience a cap on the interest rates that they can earn. When that happens the interest earnings cap sets a ceiling on deficit spending.

So the question for Congress is” “how high of an interest rate are you willing to pay foreign investors to purchase our debt?” The answer is being provided by the GOP in its foolish economic approach to taxation because T-Bills are backed by the full faith of taxing credit of the U.S. Government. With a commitment to “no new taxes,” then rates are thus capped. Soon we will not be able to pay foreigners the interest that they demand and so they will invest elsewhere. One morning you could wake up to find the GOP begging Democrats to please raise taxes in order to save Republican businesses. We Democrats will do it too because we need to retain American jobs.

Of course then the neo-cons will be yelling about “Tax and Spend Democrats” while forgetting that it was “Borrow and Spend Republicans” who caused this mess.

We have a generation of Americans now who were the kids that couldn’t read and write in the seventies and who now show that they know very little about economics. That results in them electing fools to public office and not knowing what is in their own enlightened self-interest; for example, voting for something like a transportation bill paid for from joint taxation.

Most just don’t get it where taxation is concerned. They will reap the rewards of ignorance as America tumbles down around their ears.

Wake up, read up, and pay attention, for your own good.