Strike One on Our Economic Scorecard

Down one credit rating strike, two more left to go.


Default still ahead, and, make no mistake about it, it's coming. It's nature is becoming clearer . . . though still not precisely certain.


The government will discharge its financial obligations as they become due . . . but it will do so only nominally, just as it has in recent decades. It has paid and will pay the requisite number of dollars, simply by printing them as necessary to do so. But the dollars paid out have had, and will have no substance behind them and therefore possess only a fraction of the buying power they had when the obligations were incurred.


The best illustration of this is the price of gold. Gold is very stable in terms of buying power as its quantity is relatively fixed. I began buying gold when the supposedly conservative and fiscally responsible Republicons took control of congress after the 1994 elections. Although they since have been greatly surpassed by the recent administrations and congresses, the Republicon went on a spending binge that greatly exceeded those of their Demorat predecessors. In any event, my small stock of gold has an average cost basis of under $400 an ounce. Gold today is selling for more than $1,700 an ounce, which means that dollars today are worth less than 25% of what they were about a decade and a half ago.


That U.S. dollars still have any viability is due largely to their continuing role as the world's reserve currency. So long as our dollars continue in that role, they will depreciate at a rate similar to what we have experienced in the past and inflation will continue to grow at commensurate rates.


Although a fair number of nations are understandably dissatisfied with having the dollar continue as the world's reserve currency, there currently is no alternative available. Among western currencies the dollar is what a financially astute friend describes as "the cleanest shirt in a bad laundry." None of the other currencies out there could replace the dollar in its global role. They are either, like the Euro, in worse shape than the dollar, or, like the Swiss franc, from nations with insufficiently large economies.


However, I am inclined to believe that if enough of the world's powers continue for a long enough time to be dissatisfied with the dollar, they eventually will find or manufacture an alternative. If and when that occurs, watch out. The result probably would be a horrific rate of inflation or something else altogether without precedent.


Were the alternative, for example, to be an abrupt return to the gold standard, the dollar would be devastated. Even if the U.S. actually has in Fort Know the gold the government claims to still have in storage there -- an assumption that is subject to considerable doubt -- fully backing our outstanding dollars with that gold would mean that every ounce of the metal would have to back, and therefore be worth, somewhere between $25,000 and $30,000. That would mean that a dollar would have the buying power of something under 15 of today's pennies.


Hang in there sunshine. More hardball pitches are headed into our strike zone.