We wanted a free lunch, now we’re in a pickle

We wanted a free lunch,
now we’re in a pickle

For years, fiscal conservatives have been warning that running up trillions of dollars in budget deficits and trillions of dollars in trade deficits would eventually have consequences. But spend-and-borrow politicians and free traders have gone happily along, acting as if there were no tomorrow.

Well, tomorrow has arrived, and it is becoming painfully obvious that spending money you don’t have and buying boatloads of stuff produced by dollar-a-day workers comes at a real cost. And the cost is being defined by the international financial markets, where the dollar is shrinking against any other currency that matters.

Dramatic example

Take the euro. In 2000, about 80 U.S. cents would buy a euro. Today it takes more than $1.45 in U.S. money to equal a euro.

It is worth noting that when the euro was created in an effort to standardize currency among the Common Market nations, deficit spending and national debt were taken into account. For a European nation to participate in the European Monetary System back in 1992, a nation had to have a budget deficit of less than 3 percent of Gross Domestic Product and a debt ratio of less than 60 percent of GDP.

The United States would have met those benchmarks only in the last year of Bill Clinton’s presidency and the first two years of George W. Bush’s presidency. Since 2002, the U.S. budget deficit has been as high as 4.2 percent of the GDP and the debt ratio has climbed above 66 percent. The numbers are now at about 2 percent and 65 percent.

It should not be a surprise, then, that the U.S. dollar has been steadily dropping against the euro. What is surprising is that very few in Congress and no one in the administration had the intestinal fortitude or the intellectual honesty to demand a change in the nation’s course.

It does not take a Ph.D. in economics to see that growing debts and deficits will eventually undercut the dollar. Nor does it take a degree in ethics to understand that it is morally wrong for one generation to shift the economic burdens of its social programs at home and its wars abroad onto the next generation and the generation after that.

And yet, that is exactly what the United States has done.

All time lows

The result is a U.S. dollar that is as low as it has been against the Canadian dollar since 1950. A U.S. dollar now buys only about 93 Canadian cents, which should come as a shock to anyone who hasn’t been to Canada for a few years. The dollar has slipped dramatically against the British pound, Swiss franc and Japanese yen, and the New York Board of Trade’s dollar index is the lowest its been since its inception in 1973.

China presents a double threat. Thanks to a decade of increasingly larger trade deficits, it is now sitting on a stash of $1.3 trillion, much of which it has invested in U.S. Treasury notes. China has been the chief enabler and beneficiary of bad U.S. policy, but its holdings have become so large that even a threat that it might dump some of its treasury holdings sends shivers through the U.S. and world economies.

Currency traders expect the dollar to rebound somewhat, but Americans would be doing themselves a disservice if they took comfort in an upward fluctuation.

The steady decline of the dollar should be seen for what it is, a warning that a nation cannot afford to live beyond its means. We’re all just beginning to get an appreciation for what subprime mortgages can do to families; just consider what the equivalent of a subprime dollar can do to the United States.