The Demise of the Dollar

The United States faces an economic crisis greater than the current recession.

A lack of regulatory oversight and aggressive deficit spending by both government and consumers led to the recession, but now the federal government is tackling the recession by spending even more money. And this approach is severely jeopardizing the future of the U.S. dollar as the prime international medium of exchange.

Deficit spending can’t be blamed on a single administration or one political party. It has been growing for almost a generation as our government continued to spend more money than it collected, assuming that some future generation would pay.

The U.S. Treasury is offering record levels of debt instruments to finance our growing deficit. But if we don’t raise taxes and cut spending, which politicians never want to do, then how do we pay for all the spending? Aha! We can just have the Treasury print more money until other countries decide to quit accepting devalued greenbacks.

In the last 12 months, the United States had doubled its money supply. This is unprecedented in American history.

China, which holds more of our nation’s debt than any other country, has warned the current administration about its concerns regarding the United States’ growing deficit. In addition, China has started lobbying for a new global reserve currency. Several other nations, including some of our allies, also have begun raising questions about the value of the dollar as the world’s reserve currency.

The future of the U.S. dollar is in the hands of our elected officials, and the outlook isn’t good. If the dollar continues to decline, then all of us who have savings and incomes valued in dollars are going to see a significant increase in our cost of living.

More than 10 years ago, the euro was introduced as the standard currency for most of the European Union. Its value then was roughly on par with the U.S. dollar. It is now the second-largest reserve currency after the dollar, and it has surpassed the dollar as the currency with the highest combined value of cash in circulation. Why? Because of the decline in the dollar’s value.

Is it any wonder that our largest creditor, China, has pulled back from investing in U.S. Treasury debt and has started to buy more instruments valued in euros? Many economists believe the euro’s movement above $1.50 is a significant event. The dollar also has fallen compared with other currencies.

The decline happened about the time the federal government announced a record budget deficit of $1.42 trillion in the fiscal year ended Sept. 30. This wasn’t a coincidence.

So why should we worry if we live in the United States and continue to spend our less valuable dollars here at home? Because we live in a global economy, and everything we buy – from oil, to electronics, to cell phones – is likely made, partially or completely, in other countries. We have recently seen the price of oil, gold and most commodities rise. Those increases came not because there is less of these commodities, but because the dollar is worth less.

As an individual, if you spend more than you make, you create debt that eventually has to be paid. To pay the debt, you either bring in more money or spend less. It’s Economics 101.

For some time, however, our elected officials have been spending a lot more than the government has collected in revenue. I think they do this because they are more interested in getting elected – by offering attractive new programs that will benefit the voters – than in balancing the budget.

The biggest debate in Washington now concerns health care reform, not reducing the deficit and saving the dollar. Reform is a noble goal that, in principle, most support. But if we’re having problems paying for Medicare and Social Security, then how do we pay for health care reform?

Even the nonpartisan Congressional Budget Office says that none of the health care plans under discussion on Capitol Hill will control long-term spending, and most of them will significantly add to the deficit.

I support health care reform, high-speed rail service, effective mass transit and other initiatives. But someone has to ask, “How do we pay for these programs?” We must save the U.S. dollar before it’s too late. Watching the debates in Washington, I’m afraid that we already may have passed the tipping point. However, with hope in my heart, I pray that the current administration and Congress can cut spending and raise revenue while the dollar still has some value.

Otherwise, the richest country in the world will end up with a devalued currency and a deficit that will strangle our economic growth for generations to come.

Randy Oates of Little Rock spent 37 years in marketing and advertising in the banking industry.