The Price of US Domestic Economic Folly

While reading Mary Anastasia O'Grady's excellent editorial in a recent Wall Street Journal concerning Venezuelan dictator Hugo Chavez' dependence upon a weakening US dollar to maintain power and stave off economic collapse, I was reminded of how foolish the recent and current administration's exclusive focus on domestic economics has been. How much it has damaged, and will continue to damage US economic and, eventually, military power throughout the world.

O'Grady's piece concentrated on the effects on Venezuela, a major oil exporter, as the US dollar had strengthened prior to our recent financial/economic debacle. This rise in the dollar's value put extreme pressure on Venezuela's economy, because oil is priced in US dollars. Thus, the stronger dollar resulted in fewer dollars flowing into the country, which heavily imports food, equipment, and, according to O'Grady, so much as to make it essentially totally dependent upon dollars for currency with which to purchase imports.

Now that the dollar is weakening, in light of a US political system gone insane, rescuing GM, AIG, Fannie Mae, Freddie Mac, and Chrysler, plus spending literally trillions of dollars on 'stimulus' plans, the price of various commodities, including oil, is rising. This is relieving economic pressure on oil producing countries with hostile intentions toward the US.

As I reflected on O'Grady's column, I realized how very little is written or discussed on this topic in the business media. Or in the political realm, either, for that matter.

In my youth, I was acutely aware of LBJ's folly in debauching the dollar to pay for the Vietnam war and the many misguided programs of his "Great Society" initiative. Inflation rose, and shortly thereafter, so did taxes. LBJ's lack of comprehension of basic domestic and international economics, both fiscal and monetary, resulted in a 'lost decade' in America, although I don't think I've really seen it referred to quite that way.

From the late 1960s until Reagan's election in 1980, the US economy's growth slowed under more regulation, higher taxes, inflation, and a weaker dollar. Trade was not as large a component of GDP 30-40 years ago, so the weaker dollar's impact on exports, especially with a large Soviet bloc, was much less pronounced than it is today.

What the world saw back in LBJ's day was a US that wanted to borrow from the world, or print, money to spend on non-investment items- war material and social programs. Investors fled the dollar and its inflation, realizing the folly of America's spending binge at the expense of the rest of the world's capital needs.

It's much the same now. Only we have the 1960s-1970s as a guide to what will happen again. Probably faster and more harshly, since there are some important changes since LBJ's day:

-a more balanced, less US-dominated global economic product
-more industrialized countries which don't require US goods
-better communications and information dispersion, allowing global realization of US economic policies and their implications
-larger, deeper, freer and faster-moving international capital markets
-major foreign governments with interest in seeing a weaker US in a position to exploit our economic mistakes, and an ability to do so by being part of the global economic system

The best way I can express what I see is to summarize what the current administration is, in effect, saying to the rest of the world, in an economic sense,

'We in America want to reduce our standard of living and productivity levels by imposing on ourselves massive penalties in the form of pollution and energy-usage regulations.

Meanwhile, we are also choosing to abandon our prior policy of letting private sector companies fail. Thus, we've borrowed and printed money to 'save' several failed financial institutions, two car producers, and, in directly, an entire union, the UAW.

At the same time, to stave off the real and healthy consequences of such failure, which would be Schumpeterian recycling of resources from failed to new enterprises, especially amidst a naturally-occurring recession phase of our economic cycles, we have committed to borrowing or printing in excess of one trillion dollars for 'stimulus' spending.

Not to be satisfied with imperfection, and lacking any sort of patience to save our own profits to fund the foregoing spending, we are also planning to embark on a wholesale federalization of our healthcare sector.

All of this takes money. A lot of money. Several trillion dollars which, frankly, we don't have, and won't generate for decades, at the rate at which we are dampening economic growth, private investment and entrepreneurship.

We'd rather not wait for our own capital generation for any of these spending programs. Instead, we'd like you, the rest of the world, to lend us your capital by buying our Treasury securities.

In return, we'll probably print more dollars, too, and debase the value of the very Treasuries we want you to buy. We hope we can inflate our way out of this mess by simply devaluing our liabilities, while you don't notice.

Won't you please help our country indulge ourselves in immediate gratification on a level nobody else on the planet can afford? Even as we dismantle the confidence in, and workings of, a predominantly free-market economy which used to deliver growth and profits which could help fund a modest portion of these wants?'

Never mind our petty domestic 'needs' and wants- healthcare, union jobs, a never-receding economy, pollution-free energy at no added cost. The international consequences of our current economic madness may, for the first time in a century, cause the US to lose its economic and, as a result, military power and influence just as two centers of power not aligned with American interests- China and the Arab world- stand ready to take advantage of our mistakes.

In my lifetime, I don't think I've seen quite so dangerous a confluence of American economic stupidity, preoccupation with domestic affairs, deliberate ignorance of the international consequences of that economic stupidity, and the existence of other powers able to capitalize on our folly.