Friday, March 14, 2008
The dollar declines and it is good
Almost all of the cries that the decline of the dollar is bad are made by economic morons. The decline in the relative value of the dollar against foreign currency isn't a sign that the USA is declining as much as that the rest of the world is growing. The world is in such good economic shape that the International Monetary Fund (IMF) is running out of countries who needs its help. Africa, long the economic ghetto of the world, is doing better, although its dictatorships are still slowing its growth. Ironically for those who hate Bush, Bush's infusion to stem AIDS in Africa has a lot to do with Africa's relative stability compared to the past which shows that throwing money in general at Africa does nothing, but targeted and monitored aid actually works. The benefits for the USA will be a decrease in the trade deficit as exports become more price competitive, decreased outsourcing of jobs as it becomes more and more expensive to do so, increased tourism as the USA becomes cheaper to visit, and the rebirth of domestic industries like domestic oil. However, there can be too much of a good thing. The dollar has been artificially kept high by foreign countries for so long in fear of losing exports to the USA, that when those crutches aren't enough, the dollar's rate of decline might be like an avalanche rather than the gradual walk down a hill it should have been. This may cause critical imports like oil to increase in price too fast to adjust smoothly causing a roller coaster effect on our economy. Right now, nobody knows if the dollar will decline too fast or not, but our economy has already absorbed a drastic increase in oil prices without really batting an eye and is only starting to feel the strain only when the additional weight of the subprime bubble popping came into play. So what should the government do about it? The best thing the government could do is cut government spending and eliminate taxes permanently (no temporary tax "breaks" where the government thinks it knows best how to redistribute the money back to us) for the long term benefit of the economy. The history of government economic interference shows that it is notoriously bad at timing its infusions to actually properly buffer the dips in our economic cycle and just make subsequent peaks and valleys greater than they should be. Since the government is the worst allocator of resources, its best role would be to do nothing during times like this. Unfortunately, congress is almost entirely run by economic liberals and/or morons on both sides of the fence who couldn't cut government spending to save the country and couldn't resist political pressure to "do something" about natural dips in the economy. The greatest danger to the USA is a result of one of the biggest misguided attempts to "help" the people. When the bulk of the baby boomers retire, they will increase government spending in Medicare/Medicaid and Social Security so fast and so high that the debt to GDP ratio will skyrocket past the all time high right after WWII, and it will bring our country to its knees like nothing since the Depression. We and our leaders don't have the courage to do so, but if we are to avoid this economic armageddon, we must bite the bullet and cut down these programs.