Is the Collapse of the Dollar a Blessing in Disguise?

Over the last several weeks there have been rumors that a group of countries, including China, Russia, Japan, France, and the oil rich Gulf States are preparing to dump the dollar for oil trades. This follows months of speculation that many of the same countries have been working to replace the dollar as the world's primary reserve currency with a new international monetary standard based on a basket of currencies. The dollar has been plunging on world markets.

Why is this import? Well, because the massive and ever increasing U.S. government debt has been largely financed by foreign countries. When a country sells us products for dollars, it can use the dollars in four ways:
• It can buy things from us
• It can buy things (like oil) from other counties that are priced in dollars
• It can invest in U.S. assets (stocks, bonds, real estate, etc)
• It can lend the money to the U.S. government to finance deficit spending

Countries like China sell us products for dollars. They lend a lot of this money to the U.S. government to finance deficit spending. China also uses some of the dollars to buy oil, which is priced in dollars. The countries who sell oil for dollars also use their dollars to finance U.S. government debt.

If countries stop taking dollars for oil and other products they sell to us, it will be the end of the U.S. government’s ability to borrow enormous sums of money. If that happens, the days of big government would soon be over because they wouldn’t have the money to keep spending. That’s a very good thing.

The question is how it would happen? If the world dumps the dollar, the government will have two choices. They can cut spending and live within their means. Or they can turn the printing presses on to keep spending just a tiny bit longer, and create a hyperinflation in the process. The latter would be a catastrophe that would wipe out the middle class and set the stage for political upheaval, including the potential for violent revolution. It’s happened in other countries. We don’t need it to happen here.

If the world does dump the dollar, let’s hope that there are enough rational people around to realize that the party is over and have the courage to reign in government spending. If not, things will get much worse before they get better.

John McCain: Space Cadet

This week brought us an incredible amount of bad news that bodes ill for our future, as well as John McCain’s bid for the White House.

Oil prices made their largest single day increase ever on Friday, surging nearly $11 a barrel to $139. This was after an increase of $5.50 the day before. The unemployment rate rose to 5.5 percent in May from 5 percent -- the largest monthly increase in 22 years. The Dow Jones industrials declined nearly 400 points, the biggest drop in more than 15 months. The already weak dollar plunged against the Euro and gold prices registered their largest increase in six months. Russian President Dimitry Medvedev warned that the world may be headed for the worst economic decline since the Great Depression.

If this wasn't bad enough, an Israeli Transportation Minister Shaul Mofaz said that his country will attack Iran if it doesn't abandon its nuclear program. In addition, Israeli paper Ha'aretz reported that Prime Minister Ehud Olmert was in Washington trying to convince Bush to set aside our own intelligence estimate that Iran halted its nuclear program in 2003. Instead, he wants Bush to use the data presented by Israel, which says that Iran is still actively pursuing nuclear weapons capability. Daniel Pipes, who is a neo-con political commentator, told the National Review that if Obama is elected, George Bush will attack Iran in the remaining weeks of his presidency.

What was John McCain’s response to all of this great news? Well, he wrapped up the week by telling a town hall meeting in Florida that he wants to send a man to Mars to "inspire" the American public, as they were inspired when Neil Armstrong walked on the moon in 1969.

I’m sorry Mr. McCain, but dredging up a stale idea from the 1960s in a sad attempt to pretend that you have some vision is not going to fill our gas tanks, prevent Americans from dying in yet another senseless war, or put you in the White House.