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The Myth of the Invincible Dollar

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I write a lot about the national debt.

And most people don’t care.

That’s because there’s a widespread belief that the dollar is invincible.

It isn’t.

The prevailing attitude is that the US government can borrow and spend indefinitely. After all, it hasn’t caused a problem so far. But a long fuse can burn for a long time before it finally reaches the powder keg.

I don’t know how long we have before the debt bomb explodes, but I do know we get closer and closer every day. And sadly, very few people care enough to address the problem.

The recent government shutdown drama is a case in point.

A stopgap spending deal swept the shutdown threat out of the headlines, but it’s still there lurking in the shadows of the halls of Congress. If lawmakers don’t figure something out by Nov. 17, the government will be forced to shut down.

There isn’t much talk about a shutdown right now, but when people do discuss the possibility, they almost always focus on the mythical crisis that shuttering the federal government might cause. That sidesteps the real problem — out of control government spending.

Conventional wisdom is that Congress needs to do whatever it takes to avoid a shutdown. If that means maintaining spending at current levels or even increasing spending, so be it. The handful of intransigent members of Congress who want to hold out for spending cuts are always cast as the bad guys in this kabuki theater.  As economist Daniel Lacalle put it in a recent article published by Mises Wire, “The narrative seems to be that governments and the public sector should never have to implement responsible budget decisions, and spending must continue indefinitely.”

But the whole government shutdown charade is merely the symptom of a much deeper problem. The US government is over $33 trillion in debt. In fact, the Biden administration managed to add half a trillion dollars to the debt in just 20 days.

It’s hard to overstate just how bad the US government’s fiscal situation has become. We have a trifecta of surging debt, massive deficits, and declining federal revenue, and the federal government’s spending addiction is at the root of the problem. Lacalle summed it up this way.

The problem in the United States is not the government shutdown but the irresponsible and reckless deficit spending that administrations continue to impose regardless of economic conditions.”

In August alone, the Biden administration spent over $527 billion. In fact, the federal government has been spending an average of half a trillion dollars every single month.

And there is no end in sight. There is no political will to substantially cut spending. Meanwhile, the federal government is always looking for new reasons to spend even more money. With war raging in the Middle East, there is already a proposal to send aid to Israel and possibly add more aid to Ukraine to that deal.

As Peter Schiff said in a recent podcast, the US can’t afford peace, much less war.

Lacalle summarizes the current fiscal condition of the United States government. It’s not a pretty picture.

In the Biden administration’s own projections, the accumulated deficit between 2023 and 2032 would be over 14 trillion US dollars, assuming that there would be no recession or employment decline. Public debt has risen above 33 trillion US dollars, and the budget deficit in a period of growth and strong job creation is over 1.7 trillion US dollars. As of August 2023, it costs $808 billion to maintain the debt, which is 15% of the total federal spending, according to the U.S. Treasury. Interest rates are rising at the same time as the government rejects all budget constraints. This is a monetary timebomb.”

And as Lacalle pointed out, the government keeps spending no matter what’s happening in the economy. According to government people and their academic support staff, there is never a good time to cut spending.

When the economy grows and there is almost full employment, governments announce more spending because it is ‘time to borrow,’ as Krugman wrote. When the economy is in recession, governments say that they need to spend even more to save the economy. In the process, government size in the economy increases, and record tax receipts are fully consumed in no time because expenditures always exceed revenues.”

The constant borrowing and spending is fueled by the myth that borrowing doesn’t really matter, and the rise in popularity of Modern Monetary Theory (MMT) put that myth on steroids.

MMTrs claim that spending doesn’t matter. As Lacalle notes, they even go as far as to claim that the world could “run out of dollars” if the federal government took significant steps to rein in deficit spending causing a “monetary meltdown.”

It is so ludicrous that it should not even have to be discussed. The world does not run out of dollars if the United States government cuts its imbalances. Global dollar liquidity is a result of central bank swaps between monetary institutions. There is no such thing as a global dollar liquidity crisis because of a United States surplus, as we saw when it happened in 2001. Furthermore, the idea that the dollar supply is created only by government deficit spending is insane. This distorted view of the economy places government debt at the center of growth instead of private investment. It tries to convince you that a deficit is always positive and that the only creation of currency must come from unproductive spending, not from productive investment credit growth. Obviously, it is wrong.”

But no matter how loudly contrarians sound the warning, people in the mainstream continue to shrug their shoulders at the mounting debt and ever-growing deficits. They seem to believe that since it hasn’t mattered yet, it won’t matter ever.

The dollar’s status as the global reserve currency enables the US government to get away with a lot. As Lacalle explains, global demand for dollars is still high. The dollar index (DXY) is rising because the monetary imbalances of other nations are larger than the United States’ challenges.

This has lulled Americans into a false sense of security. A lot of Americans, including most in positions of power, seem to think the US can do whatever it wants when it comes to borrowing and spending.

Lacalle makes a sobering point — “All empires believe that their currency will be eternally demanded, until it stops. ”

When confidence in the currency collapses, the impact is sudden and unsurmountable. Global citizens may start to accept other independent currencies or gold-backed securities, and the myth of eternal U.S. debt demand vanishes. Unfortunately, governments are always willing to push the limits of fiscal responsibility because another administration will face the problem. The United States’ rising debt and deficit irresponsibility means more taxes, less growth, and more inflation in the future. Government debt is not a gift of reserves for the private sector; it is a burden of economic problems for future generations. Sound money can only come from fiscal responsibility. Currently, we have none.”

The bottom line is the dollar is not invincible.

The fuse is burning.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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