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Revive The Dollar While Time Remains!
Dated July 27, 2007

      The purchasing power of the US dollar, and therefore the economy, is in severe jeapordy. The US Dollar Index, which measures our currency in relation to several other major currencies, including the euro, pound, and yen, has come down to what investors call long-term 'support,' that is, to a very, very dangerous position right above $80. Since 1971--since that other day of infamy when the United States quit the international gold standard--the US Dollar Index has always remained at or above approximately $80. Often it has soared far above $80. But now it is hovering right above long-term support. Investors will tell you that if a commodity or stock falls below long term support, the results are usually devestating. Often half the value of the commodity or stock can be lost in short order before new support obtains. If the dollar falls below approximately $80, the consequences for our economy would surely be terrible to an astonishing degree. We could be talking about a slashing of our purchasing power by one-half or more! A depression is the ultimate danger.

       The US Dollar Index is an important measurement of world-wide faith in the dollar. (The value of gold is another sign. Generally speaking, a rising value of gold is a sign of a falling value of the dollar.) The severe decline in the dollar index is a quantified sign of unease with the dollar. It is a grim truth that foreigners are thinking more and more about abandoning the dollar altogether. If the dollar index should fall below approximately $80, it would be a sign that large scale dumping of the dollar has begone.

        I shall be told that the dollar index has always revived in the past two generations. But there is the supreme difference this time: the fundamentals of the economy are abysmal. Indeed the debt--the government and private sector debt--is of unprecedented, gigantic proportions. The next chart shows that this total debt, as a share of gross domestic product, is far, far bigger than even the total debt that triggered the Great Depression!

 

About This Chart:--
Vertical Axis represents Total Debt (Government + Private)
as percentage of GDP. Horizontal Axis represents years
beginning with 1915. (This chart does not include derivates.)

 

        Can we stave off financial ruin? Yes. But we must act swiftly and comprehensively. This requires a sophisticated, synchronized approach to the economy. It is hardly enough to stand for no increased taxes and to take a vague position for fiscal responsibility. A detailed recommendation can be found in my forthcoming book The Decline And Fall Of The American Way, which is expected be available by mid-August.

Here is the essence of what, I think, is required. 

1) Inform the public that an emergency exists but also reassure them that there is a good remedy. The kernel of the remedy are broad changes in government policy that will reorientate the economy, substituting earned income in place of borrowing. It is my belief that faith in the dollar around the world can be revived quickly even before the entire remedy, which may stretch over a number of years, is completed. The mere announcement of a reasonable schedule of emergency measures will go a long way toward restoring faith in the dollar. Every step of rehabilitation that we actually take will cheer the world financial community all the more.

2) Implement relentless austerity measures. Mandate a ten year (or somewhat shorter) schedule of stricter and stricter borrowing limits for the government and the private sector. In other words, the terms for acquiring loans by government, corporations and individuals alike, should be made progressively more and more stringent. Perhaps the only latitude in the acquiring of loans would be enjoyed by industry but even industry would find the acquiring of loans more difficult than before.

3) Approximate the gold standard. That is, rein in by law the increase in the money supply. (It is the money supply that determines how much borrowing can occur.) The growth in the money supply should be a matter of inflation targeting, whereby the money supply can only be increased (or decreased) within a band of values determined by the actual market price of gold. Furthermore, the band of values will become progressively tighter, in step with measure number 2.

4) Reduce federal domestic expenditures by several percentage points of gross domestic product--it now consumes about 20% of GDP--over the next ten years or so.

5)  Revive industry. Resume those earlier, triumphant government practices that enabled American industry to be preeminent on earth. This would of course include the end of the so-called free trade era. Let us return to fair trade, which includes high tariffs applied against low-wage countries, such as Communist China. Let us withdraw from NAFTA and CAFTA. And we should have nothing to do with the FTAA (Free Trade Area of the Americas). Trade reforms and other reforms intended to revive industry should be phased in, consistent with the pace pertaining to measures 1, 2 and 3 and 4.