The Economy
More Things To Worry About
By John D. Turner

The conventional wisdom holds that, as far as the Republican nominee for President is concerned, the defining issue of our time is the War against Radical Islam. I keep hearing things like, “Rudy isn’t my man on moral issues, but when it comes to the War on Radical Islam, Rudy gets it; and that issue is paramount in my book.”

Ron Paul gets short shrift and is looked at as a bit of an odd duck; the “Howard Dean” if you will of the Republican Party due in the main to his views on the War against Radical Islam, although he makes cogent arguments on other issues.

When something starts becoming the “conventional wisdom”, to me it is time to stand back and take another look at everything else that is going on around me. Usually, by the time an issue has become conventional wisdom, it has been around long enough that it may very well be OBE (overcome by events), or about to become so.

Now don’t get me wrong. Not for a minute do I believe that the fight against Radical Islam is unimportant. It is vital to our national security. In my opinion, following Ron Paul’s strategy (or the Democrat’s strategy) in this regard would be a disaster. We might get away with it for a period of time, but ultimately, the price we will pay will be immense. However, just because we have one big problem facing our country doesn’t mean that we can’t have another. And just because that one big problem includes a global war and the possibility of facing nuclear weapons doesn’t mean that the new big problem can’t overshadow even that.

Recently, the Canadian dollar became worth more than the U.S. dollar. This event has caused me to sit up and take a bit more notice about what is going on with our economy. How can this be? For pretty much my whole life the Canadian dollar has been worth less than the U.S. dollar. Significantly less. Has Canada suddenly become an economic powerhouse while no one was looking?

No, there have been no significant changes in the Canadian economy. The change is not in Canada. The change is in the United States.

Here in the United States, we have been spending money. A lot of money. More money than we have to spend. And people in other countries are starting to notice.

Deficit spending is not new. If you look at U.S. budgets going back quite a way, you will see that the budget is unbalanced more often than not. In fact, budget surpluses are the definite exception, rather than the rule. Show a politician a pile of unspent money and they will immediately show you a new government program (usually in their district) that there is a crying need for.

Hillary Clinton recently stated that she can think of more government programs to pay for than we have money to spend. She is not alone. Between the Senate and the House, there is a whole plethora of worthy projects simply begging for congressional largess to make them happen.

It’s an old story that we have all heard before. We are spending too much. So what? Let the good times roll. After all, as a percentage of our GDP, it really isn’t all that much. Yada, Yada, Yada…

Fact: The U.S. dollar is at record lows against the Euro. Not too long ago, the dollar was worth more than the Euro. Today, it takes nearly $1.50 to purchase one Euro. The pound is worth $2.10 dollars, a level not seen in 26 years. Ditto other world currencies. The dollar is in free-fall. Every day it is testing new lows, despite efforts at home and overseas to prop it up.

Fact: Gold is over $830/ounce and climbing. Silver is over $15.50/ounce. These are 26 year highs. Gold last reached $850/ounce in January 1980. It may hit $850 again this week, or possibly next. It is up so far this week over $50/ounce. Of course, $850 today doesn’t buy what $850 did in 1980. Adjusted for inflation, gold would have to hit $2000/ounce to do that. This just goes to show how badly even “low” inflation has eroded the dollar’s purchasing power, and which also suggests that gold may go quite a bit higher.

Fact: The price of oil is nearing $100/barrel. By the time this is posted, it may be over that mark. A year ago, we were told that oil could spike to $100/barrel if some major event occurred, such as an invasion of Iran, or super hurricane in the gulf. Well, neither has happened, and still we are within spitting distance of $100/barrel. What happens now if a “major event” occurs? $150/barrel? $200/barrel? When does this start to affect our economy in a major way? Adjusted for inflation, these levels are now near what they were during the 1974 oil crisis already.

We have seen these kinds of events before in our economy, 26 years ago. What was going on then that might have triggered them? Well, let’s see. High oil prices, the Soviet invasion of Afghanistan, high taxes, the seizure of US hostages in Iran. Oh yes. And double-digit inflation coupled with high unemployment. Stagflation.

But, the government tells us, inflation is low, as is unemployment. At least we don’t have that worry.

Unemployment is low, currently running at 4.7%. And inflation, as measured by the Consumer Price Index (CPI), a government measure of inflation at the consumer level, shows inflation running at about 1.8% (September 2007 statistics). The CPI is a weighted monthly average of the prices paid by urban consumers for a representative basket of goods and services, and is focused on approximating a cost-of-living index.

The CPI is used for a variety of purposes, which include setting Cost of Living (COLA) increases for Social Security recipients and government retirees, pay raises for military personnel and civil service employees, and a whole host of other purposes. But is it accurate?

Many think not. The index has been changed many times, and for most of us understanding it is an exercise in esoterica. The government reports the numbers and we accept them. What basis do we have to do otherwise? And explanations of what the CPI is and how it is calculated tend to make one’s eyes glaze over after about 30 seconds or so. Still, studies have been done and the results are disturbing, as they tend to indicate that the CPI is continuously underestimating the actual inflation rate by a good margin.

If true, this underreporting has several effects. One is to erode the standard of living of those whose COLAs/pay increases are tied to the CPI. Another is to cause the amount of GDP (gross domestic product – the measure of how much the country is producing) to be overstated. And keep in mind that the amount of overspending the government is doing is explained away as being OK in view of the fact that it is a small percentage of GDP. If GDP is being overstated, and real GDP is actually lower, then the corresponding percentage of government spending is actually a higher percentage of GDP than is being reported.

Personally, I am not sure where the government is getting these inflation figures. My gas bill is up. My utility bill is up. My food bill is up. Everything else, from batteries to stamps (postage increased early this year) is up, and by way more than 1.8 percent. Gas is once again nearing $3/gallon, after dropping to around $2.50 earlier. It is reportedly over $5/gallon in some parts of California this week.

If I recall basic economics from way back in my college years, a falling dollar and rising gold prices are both indicators of higher inflation, despite what the government CPI numbers may say.

Here is one more recent fact for you to chew on. Recently, Brazilian supermodel Giselle Bündchen signed a new deal with Pantene hair products, and as part of the contract demanded to be paid in euros, rather than dollars. Pantene brand hair products are manufactured by Proctor and Gamble, an American company. Why? Reportedly, due to uncertainty over the strength of the dollar, which so far this year, has lost 33% of its value against the euro and other currencies.

Why should we care what currency a Brazilian supermodel gets paid in? We should care because it is symptomatic of foreign views on the strength of the dollar and where it is headed. And we should also care because it points to the fact that the U.S. dollar, once the premier currency of the world, is no longer necessarily in that position. There is an alternative. Times have changed. The “conventional wisdom” when it comes to the dollar is changing. And that means that our assumption that no matter what happens to the dollar on world markets, all will be well because others have no choice but to buy dollars may now be invalid. The ramifications of this may be catastrophic for our economy.

What happens if other countries stop buying our debt because they doubt the ability of the U.S. to pay, and the value of the dollar? What if they start demanding payment in gold or euros, rather than “worthless” greenbacks?

On November 7th, Xu Jian, a vice director of a Chinese central bank told a conference in Beijing that the dollar is “losing its status as the world currency.” At the same meeting, Cheng Siwei, vice chairman of China’s National People’s Congress was reported to have stated “We will favor stronger currencies over weaker ones, and will readjust accordingly.”

There have been rumors prior to this that China was considering diversifying its currency portfolio, by replacing dollar holdings with the more robust euro. This is the first time, however, that senior Chinese leadership has made such comments publicly. The result on the U.S. stock market was immediate and drastic, as the Dow Jones Industrial average posted a 360 point loss, the dollar slipped to $1.47 against the euro, the price of oil moved to $98.62/barrel, and gold posted a 27-year high. The New York Board of Trade’s dollar index fell to 75.077, the lowest level since March 1973 when the index began.

This is nothing compared to what will happen if China actually follows through and swaps out its dollars for euros. And what if countries we import oil from start demanding payment in euros rather than dollars, which are becoming worth less on a daily basis?

The government is caught between a rock and a hard spot. If they raise interest rates to prop up the dollar, the housing market and stock markets will fall precipitously, causing a recession. If they lower interest rates to stimulate the economy, the amount of money pumped into the system will erode the dollar further and spark massive inflation. The falling dollar will also encourage other countries, such as China, to abandon the dollar, greatly exacerbating the problems here in the U.S. The result could be total economic collapse, triggering a depression similar to what we experienced after the stock market crash in 1929.

This sort of event is outside the experience of practically all Americans alive today. The only ones who would understand the ramifications (and know how to handle them) are people who have come here from countries with currencies that have experienced similar circumstances, and Americans who lived through the Great Depression.

As important as the War on Radical Islam is, and as devastating as the explosion of an atomic warhead in the center of a major U.S. city would be, it pales in comparison to the sort of turmoil and suffering that would result from a total collapse of our economy.

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