Government's attack on the dollar: the government is weakening the value of the dollar through deficit spending, thereby passing on a huge hidden tax to American citizens.

"The ol' dollar, it's gonna go down. I'm short on the dollar." So warned Bill Gates, reportedly the world's richest man, at the January 2005 World Economic Forum in Davos, Switzerland. Describing the situation as "scary," he added, "We're in uncharted territory when the world's reserve currency has so much outstanding debt." Forum attendees from Europe and Asia echoed his fears.

Five weeks later, billionaire American investor Warren Buffett surveyed the deteriorating condition of the dollar and told his company's shareholders, "The decline in its value has already been substantial, but is nevertheless likely to continue." Pointing to our government's enormous indebtedness and the interest due on the debt that must be borne by U.S. taxpayers, he suggested that "paying tribute to creditors and owners abroad" might lead to "a sharecropper's society" here at home. He's selling dollars and buying foreign currencies.

During the past two years, the dollar has declined 52 percent against the European euro. Less dramatic, but also worrisome, are declines against the currencies in major industrialized nations such as Canada, Australia, China, Japan--and Britain, which has not yet abandoned the pound. Much of the world has come to realize that the dollar's value is steadily being undermined. But few Americans understand that our own government--along with its partner, the Federal Reserve--is accomplishing the undermining. And few also realize that the underlying cause of the continuing demise of the American dollar is federal indebtedness brought on by virtually uncontrolled federal spending. Responding to the cavernous hole they have dug for all Americans, our leaders have paid the nation's bills by borrowing from almost every corner of the globe and by creating more currency out of nothing (inflation). These two methods of dealing with their profligacy have only made matters worse. Our leaders have thereby steadfastly ignored the first rule of holes: when you're stuck in one, stop digging.

Spending Binge

As a measure of the size of the hole the current spendthrifts have dug, consider that in 1981, the government's accumulated debt broke through the $1 trillion level. It now stands at $7.8 trillion, of which about $2 trillion was compiled during the first four years of George W. Bush's presidency. The current occupant of the White House is supposed to be a conservative, but his four-year borrowing binge has piled up debts that are actually twice the amount of the nation's accumulated indebtedness from 1776 to 1980.

Congress, of course, is complicit in digging this massive debt hole because, if there were enough backbone on Capitol Hill and any application of the many constitutional limitations on government, the process could be stopped at any time. But rather than stop the flow of red ink, Congress approved an $800 billion dollar boost in the allowable debt ceiling in November 2004. Raising the limit that fedgov's spenders are legally allowed to reach is akin to giving an alcoholic the key to the liquor cabinet.

Our leaders regularly avoid fiscal sobriety as if it were an anthrax attack. And there is confirmation that the spending spree will get worse. Last year, number crunchers at the Congressional Budget Office (CBO) predicted that the debt will escalate by more than $5 trillion over the next 10 years. Obviously, balancing the budget or even retiring some of the debt isn't on the government's agenda. On February 1, the Bush administration announced plans to borrow $147 billion during the first quarter (January through March), the highest quarter ever. Is it any wonder that Gates and Buffett are no longer banking on the dollar? Is it any wonder they're not alone?

Economic Mush

Deficits followed by inflation and borrowing are the cause of the plummeting worth of the dollar. Predictably, there's no shortage of economists in and out of government who claim that our nation's trade deficit is to blame for the plunge. While it's true that the nation is importing far more goods than we are exporting, the trade deficit is a different problem. The dollar is losing its value because more dollars have been created to meet the demands of creditors. It's that simple.

Future of Freedom Foundation President Jacob Hornberger agrees. Last December, he wrote: "Despite all the economic mush and mish-mash that federal officials are now spouting, there is one and only one cause for the rapidly depreciating value of our currency: uncontrolled federal spending." He insisted that the out-of-balance spending spree inevitably results in "borrowed money" and "flooding the market with newly printed money," both practices designed "to avoid raising taxes." He accused U.S. officials "from the President on down" of working hard to have the American people mistakenly believe that the "budget deficit" and the "trade deficit" must share the blame equally for the dollar's sickness. And he added: "The reason they do that, of course, is to avoid responsibility for what the uncontrolled federal spending is doing to our nation." Another reason for the obfuscation is that it deflects attention away from the Federal Reserve's pernicious role in creating the problem by mismanaging the nation's economy--something that never should be managed by anyone but left alone to the free market.

There certainly is a trade deficit, and it's huge and getting larger. But, as Hornberger explained, "when you factor in foreigners' purchases of American goods and services and their purchases of U.S. government notes and bonds, there is, for all practical purposes, a trade balance." We import goods, and foreigners, with their profits, purchase our nation's debt. In effect, foreign nations most notably China and Japan are lending us money to buy their goods. This points to another problem, the huge amount of U.S. debt owned by foreign governments.

Governments can finance their spending programs by 1) taxing, 2) borrowing, or 3) inflating. The current holders of power in Washington shun additional taxation, fearing a voters' revolt. But instead of reducing the size of government to bring spending and tax revenues in line, they have increased spending and the annual deficits have mushroomed. To finance the growing indebtedness, they regularly both borrow and create new currency (inflate). Because the savings rate in this country is relatively low, they look overseas for money and borrow by selling Treasury bonds and notes to foreign governments and individuals. Such a practice waters down our nation's ability to act in its own self-interest because those who hold enormous amounts of U.S. indebtedness are well positioned to dictate U.S. policy. It is hardly comforting to know that China (that's Communist China) holds a sizeable amount of U.S. debt.

Should China and other foreign governments and individuals divest themselves of their U.S. debt holdings, the U.S. government would have to find alternative lenders in order to meet its obligations. Or the Federal Reserve would finance it with newly created dollars.

This little-understood process of inflation significantly eats into the value of the dollar. The injection of newly created money into the economy diminishes the value of the money already in circulation. As the dollar tumbles to an all-time low, the price paid for goods and services goes up proportionately. Everywhere one turns, however, the condition of rising prices is identified as inflation, perhaps the greatest falsehood of our time. Yes, prices seem to rise, but the reality is that the value of everyone's dollars has shrunk. Inflation is, in essence, another form of taxation that steals the value of all dollars. But it is a hidden form of taxation, enabling politicians to hide the total costs of government programs. Meanwhile, uninformed consumers blame sellers instead of government for the price increases.

Propping Up the Dollar

At present, the United States is borrowing 80 percent of the world's savings. Approximately 43 percent of our $7.8 trillion national debt is now in foreign hands, a huge portion of it in central banks. During the current fiscal year, the gross federal debt will increase an estimated $670 billion according to the Bush administration's own budget--and that debt will also have to be financed. Harvard University Professor Niall Ferguson says "between 70 and 80 percent of America's vast and continuing borrowing requirement is being met by foreign (mostly Asian) banks."

At the end of 2004, the leading owners of U.S. debt were Japan ($720 billion) and China ($174 billion). Taken cumulatively, Japan, China, Hong Kong, South Korea, and Taiwan hold a combined 56 percent of the Treasury securities owned by foreigners. Beyond this, national banks in these countries hold large amounts of dollars in reserve. As the dollar's value shrinks, so does the value of these holdings. In his speech to the Council on Foreign Relations on March 10, Federal Reserve Chairman Alan Greenspan, a primary digger of America's economic hole, said that these foreign investors "will at some point choose greater balance in their asset accumulation." Of course they will! In other words, they will flee from the dollar if its free-fall isn't corrected, and exodus will result in an explosion in amount of money circulating at home, followed by the need for many more dollars purchase goods and services. Unfortunately, the point at which this could happen seems not so far away.

In late February, the Bank of (South) Korea indicated an intention to convert a of its reserve holdings into something than depreciating dollars. The mere announcement sent the U.S. stock market into a mini-tailspin. One day later, the Koreans recanted, saying they really didn't intend to dump their dollars. The stock market recovered, but the ominous consequences that will surely follow any real flight from the dollar remain unaddressed. Writing in the London Times last November, William Rees-Mogg likened America's situation to an impending avalanche. "There is a huge overhang," he wrote. When investors realize there is "too much of it," he continued, "fear sets in and the avalanche is upon us."

On March 10, which happened to be the very day Greenspan took his road show to CFR headquarters in New York, Japanese Prime Minister Junichiro Koizumi indicated that his country's central bank might shift some of its reserves away from dollars and U.S. Treasury securities, Immediately, the value of the dollar, relative to other currencies, took another dive. Japan's Ministry of Finance promptly denied there was any plan to do what the Japanese leader had suggested, and the damage here at home turned out to be minimal. But when the issuance of a minor hint in Asia about the possibility of shifting investments away from the United States can cause a shock wave in America's stock and money markets, imagine what will happen should a mere hint become reality. Several years ago, the late Herbert Stein warned about an inevitable paying of the piper when he said, "If something can't go on forever, it won't."

The American dollar has, for many years, been the "reserve currency" for many national banks. A total of 76 percent of China's reserves were in dollars in 2004. Should major industrialized nations like China decide to shift to some other currency such as the euro for their official reserve, the greenback's worth will plunge even further. London's Financial Times reported in January that this is already beginning to happen. China's dollar holdings are down from 83 percent to 68 percent over the past three years. According to the Asia Times, even India has reduced its dollar assets "from 68 percent of total reserves to just 43 percent" over the same period. The only relatively good news here is that foreign governments aren't going to dump great quantities of dollars suddenly because they hold too many and know that a sudden infusion would only depress the dollar even more. But steady selling of their dollar assets seems likely.

Here at home, the price of gold has jumped 70 percent since 2000, now approaching $450 per ounce. The rising price of gold is an obvious indicator of the dollar's decline in value. Financial analyst Harry Shultz points out that "when gold prices are low, the financial press calls gold a commodity [but] when prices are high, they call it a currency." The lesson, of course, is that the amount of gold can't be inflated. If the U.S. had remained tied to a gold standard, government would have been restrained, since the Federal Reserve cannot create more gold.

Why, some wonder, aren't the leaders of America's large corporations demanding balanced budgets and an end to inflation? The answer is that mega-corporations love a weak dollar relative to other currencies because it makes exports less costly and imports more expensive. They care little about the looming consequences to the nation and work only to see that their bottom line shows a profit.

Any survey of the damage being caused by debt accumulation--no matter who holds it--can't ignore the requirement that lenders must be paid interest. In fiscal year 2004, the U.S. government paid a whopping $322 billion worth of interest to debt holders, the third largest item in the federal budget. Interest on the national debt alone adds up to an annual tax of more than $1,000 for every man. woman, and child in this nation. Take out those who don't pay taxes (children and others) and the amount doubles for those who are taxpayers.

Printing More Money

For an unimpeachable indicator of new currency creation (inflation), we turn to Federal Reserve data published on February 3, 2005. It shows that the nation's "Money Stock, M-3" rose during 2004 from $8.877 trillion to $9.426 trillion. Simple arithmetic confirms that, in this single year, $549 billion was added to the nation's money supply via a few strokes of a pen, or a few entries into a computer. It's money that didn't exist before, and it derives its value by reducing the value of all existing money (as well as anything else denominated in money such as insurance policies, pensions, etc.). If you're finding lots of items costing more--fuel, groceries, homes, electric power, etc.--don't blame the sellers. They're simply asking for more of less-valuable dollars in return for what they provide.

Even the Wall Street Journal got this right in an editorial last November. Referring to nations generally, it stated, "Currency values are determined by monetary policies set by a cartel of banks." Correct! In addition, the gurus at the WSJ reported, "The dollar's weakness is largely a function of the fact that the Federal Reserve has for some time been running a looser monetary policy than either the European or Japanese central banks." Translated, that says, "If only the rest of the industrialized world would inflate at the same rate or higher than the U.S. is doing to our nation's currency, the dollar wouldn't be in such trouble." The fact is that the U.S. has inflated more irresponsibly than money managers in other nations and, therefore, the dollar has sunk more dramatically than have foreign currencies.

That our nation's central bank, the Federal Reserve, has been allowed to acquire the power it wields--all of it completely incompatible with America's constitutional system--is something hardly ever questioned, certainly not by the Wall Street Journal. Until it is questioned, there is little chance that this enormously important element of America's self-imposed sickness can be cured.

What Must Be Done

First, stop deficit spending to remove the threat of more dollar inflation and then begin to retire accumulated debt. Continuing on the path currently being traveled will, as noted by John Maynard Keynes and Vladimir Lenin, "destroy the Capitalist system." A new path must be forged. There is no other way.

Obviously, the big spenders in Washington could attempt to pay for government programs through taxes alone. But, as noted previously, that course of action would make the true cost of these programs much more obvious and would therefore be politically risky. Instead of either raising taxes or running up huge deficits, Congress must cut spending, but this step seems almost revolutionary in these near-mindless times. U.S. leaders, who are aware of their deficits, continue to fund a host of foreign aid programs. On December 8, President Bush signed a congressionally passed $388 billion spending measure. It calls for $19.8 billion in foreign giveaways during the current fiscal year, a figure $2 billion more than the year before and $1.8 billion below Mr. Bush's request. Any sixth grader would label as sheer insanity giving away money when faced with heavy indebtedness.

Moreover, the American people tolerate federal officials in each of the government's three branches who swear an oath to the Constitution and then ignore it while they cooperate in pouring funds into programs that aren't even faintly authorized by the venerable document. Great savings could be accomplished if the federal government began backing out of education (current cost $57.7 billion), housing ($37.3 billion), and transportation ($59 billion). Additional billions could be saved if government eased its way out of energy, health, and so much more. Imagine the savings if our nation never went to war unless and until Congress used its sole authority to declare the need to do so.

Eventually, honorable leaders must begin the process of untangling the nation from the Federal Reserve. More Americans must be brought to an awareness that the Fed is the fulfillment of plank number five of Karl Marx's Communist Manifesto, the infamous document containing the various steps needed so that a few can take control of the many.

America is in trouble. Our money system is crumbling. Our productive sector is shrinking. Our standard of living is starting to unravel. And the free enterprise goose that for two centuries has been laying golden eggs is ailing.

Who's to blame? Not foreigners who are shying away from the dollar. Not those outside this country who flood our markets with their products. Not business owners who close their shops or move offshore in hopes of surviving. Not merchants who require more of the increasingly less valuable dollars in return for their goods and services. None of these has put America on what William Norman Grigg aptly terms "a race to the bottom."

The blame for America's implosion belongs nowhere but at the doorstep of America's leaders. And, it must be said without hesitation that some of these elected and appointed officials must know precisely what they are doing.

America is at a crossroads. No longer can anyone rely on a Republican or a Democrat, a conservative or a liberal. Reliance has to be placed on those who understand that our nation didn't become the envy of the world because of what government did. It became the worldwide beacon of hope and the unmatched seat of prosperity because of what government was forbidden to do. Those who understand this understand why the Constitution limited the government, not the people. They deserve the label "Constitutionalist," and it is they who are so sorely needed to reverse our nation's downward slide.

Rocket Science? Hardly!

It doesn't take a rocket scientist to know that increasing the quantity of any commodity will lower its value. If, for instance, the world were suddenly flooded with widgets, all widgets would become less valuable, and the amount of money needed to obtain one would shrink. Similarly, if diamonds became a plentiful as pebbles on a beach, who is the fool who would give one to a prospective bride? Inflate the quantity of widgets, diamonds, or anything else and be prepared to see value diminished.

So, too, with money. Monetary inflation--that is, an expansion of the money supply--lowers the value of money.

John F. McManus, publisher emeritus of THE NEW AMERICAN, is the author of Financial Terrorism: Hijacking America Under the Threat of Bankruptcy (1993). The book (originally $8.95) is still available at $4.95, plus shipping and handling, through American Opinion Book Services (see the ad on page 16 for contact information and shipping charges; this particular title is not listed in the ad).