Wednesday, April 27, 2011

Reacting to the fall of the dollar, if the stories are true this time..

There is a lot of clamor around the net about the incipient fall of the US dollar and how the world's financial system will soon be rebuilt with a new global currency leaving the dollar in the scrap heap of history, decimating the American economy in its wake. As the story goes, global investors are now dumping US Treasury Bonds and this will soon cause interest rates to skyrocket in the USA which will lead to a fall-off-the-table effect to the value of the dollar and with it American purchasing power.

I'm a bit skeptical in that I have been hearing this same doomsday prediction for decades but I recognize this time it really could all be just around the corner. Nothing would surprise me anymore. Its not a secret that the US and global financial systems are essentially giant houses of cards built with IOU's.

The only thing that makes a currency have value is confidence that you will be able to exchange that piece of paper for something of value later. When public confidence in the future value of currency  wanes, people holding them will want to trade them for something of real value before its too late.   It can turn into a death spiral as lack of confidence leads to massive sell-offs and vice versa. 

To prevent or offset this scenario I think President Obama and the Congress need to enact some measures to restore confidence, and now would be good.  People need to see that there is a navigable plan out of the mess because all they are hearing now is that there isn't.  To have any chance at controlling the debt requires both less spending and increased tax revenue. 

A part of the plan to restore confidence has to include provisions to reduce oil prices.  I think we need to begin releasing some of our strategic petroleum reserves to cool off the speculative oil investment which is skyrocketing prices and squeezing our recovery. The whole point of taxpayers buying oil on the open market just to store it in caverns underground was for future national security reasons, and if impending economic collapse doesn't rate as a national security issue, I can't imagine what would. Secondly, we need to open up more licensing of US land and coast for regulated oil drilling.  Even though actual production from new sites might be months or years off, just the prospect of increasing supplies will help cool off demand for futures.

It would also help if there was a concerted National effort for conservation of gasoline (as if the $4 gasoline wasn't enough prodding).  For example there could be initiatives to reduce the US Mail to 3 days delivery per week, promote public schools to convert to 4-day weeks, direct road crews to time stoplights on major roads to ease traffic congestion, and promote general public awareness to do the little things like carpool when possible, keep the tires fully inflated and skip the drive-through and walk-in instead. Anything that enables us to use less oil will help build a glut in supply and eventually lower the market price which will help pump money into the economy and help rebuild consumer confidence, the most precious of all commodities.

And Americans can keep in mind we have some fundamental strengths in our economy. We are the world's largest producer and exporter of food and no matter what oil or gold may fetch on the open market, you can't eat them. We have by far the world's most capable military and defense systems. We have tremendous reserves of fresh water, preserved natural beauty and a wide range of natural resources. We have a stable political and legal system and highly developed utility infrastructure and transportation system. So as bad as the doomsday predictors make it out to be, where else in the world would be a better place to invest when it all comes tumbling down.
I hope the ones betting their fortunes on the demise of the US economy end up on the wrong side of history and their short-sells.  But first we need the partisans in Washington recognize how silly they look arguing over trifles when the perhaps the biggest challenge this Nation ever faced might be just around the corner.

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