Debasing the Dollar - We All Pay for It!

By David Whitehead
Business Insider Magazine
April 7, 2007

As the financial crisis ignited by the sub-prime mortgage blowout sinks the economy into what promises to be a pronounced recession of undeterminable depths, the Federal Reserve has responded with massive expansions of the money supply. Recent highlights include a 75 basis point cut in the Federal Funds Rate in March and to what amounts to a $270 Billion commitment to back the Bear Sterns bailout.

As inflation fears mount, the one bright light is a reduction of the trade deficit and a boost for U.S. exports dovetailing on enhanced global demand for U.S. labor. In fact, BMW is launching an ambitious $750 million plant expansion in South Carolina that will create 500 new U.S. jobs as they are cutting even more positions in Germany. However, this dearth of good news hardly compensates for the thousands of U.S. factories that have been permanently shut down over the last three decades. I wouldn’t count on this turning into a reversal of the long-term de-industrial process unless things get so bad our position is degraded to “developing nation” status.
In fact, the good news for exporters and a limited number of American workers who will benefit from the new opportunities created by the dollar’s devaluation alludes to what on balance is bad news for all who depend on the U.S. dollar. You see, everyone who uses dollars, including American consumers and global entities that must hold dollars because it is still the international reserve currency, are rapidly losing an enormous amount of purchasing power.

In fact, international critics have sardonically called this phenomenon the “backhanded imperial tribute.” They are forced to hold dollar reserves to purchase petroleum through the OPEC system, they export goods that are later paid for in devalued dollars that buy less and they can’t help but notice we are most interested in spreading “freedom and democracy” and combating “evil” in nations that hold enough petroleum reserves in their ground to blow out the dollar on their own if they go renegade from the system.

So what does this mean for American consumers? These aggressive actions aimed at reviving the economy that are generally lauded in the financial press are really getting funded in a backhanded way most people don’t pay attention to. When the Fed arrives like Santa Claus to give us more “currency” to pay our bills, they are really stealing buying power from all who depend on the dollar. The Fed’s actions are shorting creditors abroad to the point that the only thing standing between the United States and nations that want the Euro to be the next reserve currency is our ability as a superpower to intimidate them. That’s what it has really come down to.

Yes, America is an incredible market to sell consumer goods produced everywhere. But this is not because we can really afford them. There reaches a point when you’re investing so much more in a nation than you will never get back just to keep the system going that you are going to have to scale back at some point and develop other markets with consumers who can actually pay you properly without running up enormous trade deficits.

I find it ironic that nations many would consider to be America’s enemies, probably with the exception of Iran, aren’t that anxious to topple the American empire because global financial networks are so intertwined that it is hard to say how the rippling affect would damage economies around the world. Globalization has already created a one-world society in that sense. The question is: with so many entities committed to global financial processes centered on an unsustainable dollar-spending U.S. consumer market, how will the cause and effect play out as the mess unravels? That’s the question no one really wants to see answered in real time.

But is it time the general public wakes up, gets beyond the political pabulum and learns how the game is really played. There are so many things we acquiesce to simply because we don’t fully understand how it affects us. The great deception is how the limited amount of information presented to us about monetary policy both here and abroad distorts our viewpoints about how our wealth streams really work.

We once lived in a world where nations primarily imported essentials they didn’t have and produced most things they used domestically. The economy of every sovereign nation was balanced on its own merits and backed by bullion it mined or purchased itself and protected as steadfastly as its armies protected its borders. These days they allow global investors to speculate with it!

Globalization has brought us developing nations that do most of the producing, consumer nations that do most of the consuming and inter-connected central banks that issue the currency we spend through a mostly for-profit privatized system. But the most nefarious caveat is the fact our political leaders need to take all of these things into consideration in their decision-making, which compromises powers entrusted to them by their constituents and their national sovereignty in ever-increasing ways. This has not just increased the power of the private sector in ways that even most conservatives would consider inappropriate. It has blurred the lines between public and private power globally in addition to the relevance of national boundaries. And by concentrating the processes that have historically created wealth in the producer nations, we have seen enormous levels of public and private sector debt mounting in the consumer nations, which has been most prolific in the United States.

So the devaluing of the dollar will reduce some of that debt. But it shortchanges everyone who holds dollars at the same time. Some of the lost wealth will be made up though increased exports and newly created job opportunities. But we have a massive hole to climb out of and I wouldn’t anticipate a smooth repositioning of the economy despite any aggressive action by regulators. By staving off the inevitable with shortsighted gimmicks, they will make final reckoning that much worse.

David Whitehead is the Publisher of Business Insider Magazine