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Americans ought to be furious that
our elected leaders have put us in this
position. China threatened Wednesday to use the "nuclear option" on
the U.S. dollar if Congress succeeds in passing a trade law intended
to strong-arm China into allowing its currency, the yuan, to
appreciate against other currencies.
1
Many members of Congress have increasingly complained in recent
years that China artificially suppresses the value of the yuan to
boost exports and give it an unfair trade advantage. Many experts
point to this as a big reason for the burgeoning U.S. trade deficit
with China, which totaled $96 billion for the year at the end of May.
2
With its trade profits, China has accumulated vast U.S. dollar
holdings, including a large amount of U.S. government debt. This
makes China our creditor and puts us in some measure of subservience
to the Chinese. As I have written before,
the United States continues to expand its money supply, resulting in
a relentless slide in the purchasing power of the dollar. Nations
like China that have bought up large dollar holdings and held them
in reserve have artificially propped up the purchasing power of the
dollar by creating increased demand for the dollar. Without this
generosity and that of other nations that do the same, the
purchasing power of the dollar would be much lower than it is today
and prices on the goods we all purchase every day would be much
higher due to higher inflation. In other words, the accumulation of
dollar holdings by the Chinese has kept inflation in the U.S. much
lower than it otherwise would be. So what is China's so-called
'nuclear option'? Because China holds so many dollars in reserve,
dumping them all at once could in a single stroke destroy the
purchasing power of the dollar, driving up inflation and interest
rates and sending our economy into a tailspin. Yes folks, because
our federal government has refused to end the red ink, we are now in
the position of hoping that China is nice enough not to destroy our
economy. Would China actually follow through with its threat? Hard
to say, because to some extent they rely on exports to the U.S. and
a reasonably stable U.S. economy to support the financial needs of
the country. However, China could eventually decide they do not need
a strong American economy when their domestic economy grows to the
point that it can rely less on exports. Additionally, the Chinese
have already made it clear they wish to diversify out of U.S. dollar
investments because they continue to lose value due to the slide in
the dollar. Based on this, we can expect that China will, at some
point, offload a significant amount of their dollar holdings. And
we, as proud Americans, will be in the position of begging them to
go easy on us.
There are a couple of
important points to emphasize here. First, China is not our
friend.
Senior Chinese military personnel have spoken openly in the past
that they believe war with the United States is "inevitable",
presumably over Taiwan.
3 A friendly country would never say such a
thing, nor would it threaten to destroy our currency and send our
economy into a tailspin. Second, it is our esteemed leaders in
Congress and the Administration, both current and past, that have
put us in this position by spending us into a hole $9 trillion deep.
We once were the world's creditor, but we have become the largest
debtor in history so that we can continue to finance our consumption
and government entitlements. If Congress and the Administration
actually balanced the budget and kept it balanced, maybe we wouldn't
be in the position of having to hope a foreign and hostile power
won't drop a currency bomb on our economy. Third, if the dollar was
still a commodity-backed currency as our Founders intended, we would
not be in this position. Having a gold standard limits government
spending to whatever gold exists in the Treasury. If the gold runs
out, the government has to either stop spending or find somebody to
lend it more gold. The government is forced to balance the books;
there would be no option to fire up the printing press and kill us
all with inflation or borrow endlessly from foreign powers. The dollar also
would be based on the rock-solid value of gold, which has changed
little throughout human history. With a gold-backed dollar, there
wouldn't be a "nuclear option".
Folks, America needs
desperately to return to the principles of limited government upon
which our nation was founded. Our Founders never intended for the
federal government to be so large, have so much power, and be
involved in so many things. A return to the gold standard would
force the federal government to balance its books and put an end to
destructive inflation and endless government borrowing. It would
also force it to make tough choices about its priorities, likely
resulting in the abolition of countless unconstitutional federal
programs. As Alan Greenspan once
explained, a gold standard is
essential to our freedom and independence; let us return to it and
reclaim the freedom and independence our Founders intended us to
have. |
