Is the decline in the dollar merely a “return to normalcy” story, as many bulls contend, and not a harbinger of a coming currency crisis?
Short version: The 2008 financial crisis and ensuing collapse in confidence drove investors to dollars and dollar-based instruments. And as the crisis has ebbed, investors are rebalancing back toward riskier assets.
Thus the falling dollar should rightly be interpreted as a sign of “new economic optimism,” argues JPMorgan Chase economist Jim Glassman.
Then again, perhaps future economic historians will look back at this stage of the dollar’s decline as the currency calm before the storm. Because at some point, investors may suddenly realize that America’s already somewhat devalued currency should not be trusted.
As Senator Judd Gregg, a New Hampshire Republican and noted budget hawk, said recently, “We’re basically on the path to a banana-republic type of financial situation in this country … You can’t keep throwing debt on top of debt.”
Indeed, the evidence points to a nation fairly far along that path. Healthcare reform is supposed to be deficit neutral — everything paid for via spending cuts or tax increases — while also helping bring government’s overall long-term budget into balance.
But to keep the 10-year price tag under $900 billion, Democrats have quietly shunted $247 billion in spending for Medicare physician payments into a separate bill. And no effort is being made to pay for it.
Just as egregious, though less expensive, is the Obama administration’s $14 billion plan to send a $250 “stimulus” check to 57 million American Social Security recipients in lieu of an annual cost-of-living increase.
See, a 5.8 percent COLA increase was paid last January to compensate for a 5.8 percent jump in consumer inflation driven by surging oil prices in 2008. Then oil prices and inflation collapsed.
“In effect, a COLA was paid on inflation that no longer existed,” notes Andrew Biggs of the American Enterprise Institute.
So even though none of this makes seniors essentially any worse off, Uncle Sucker is still going to cut them a check.
Two examples — one ridiculously expensive, one just ridiculous. But both reveal a nation completely unwilling to deal with current trillion-dollar deficits or long-term shortfalls many multiples of that number.
What confidence should dollar investors have that America will really cut entitlement spending? Very little. Instead, we are more likely to see huge tax increases that could cripple productivity, or further dollar neglect, or a central bank that turns dovish on inflation. Or perhaps all three.
If Washington doesn’t care to support the dollar, why should investors?