I'm not sure what President Bush thinks his legacy will be when he leaves office, but one thing we can count on is that it will be a legacy of debt. Enormous debt. A Senate panel voted today to increase the nation's debt ceiling by $850 billion to $9.82 trillion. When the new ceiling is reached at some point in the future (which it inevitably will) it will equal a $4 trillion increase in the national debt since George W. Bush took office. 1 Folks, if you have ever thought of Bush as a true conservative, think again. No President in history has ever presided over such a large increase in our national debt. And all these bills are going to have to be paid back someday, most likely by our children and grandchildren. There should be no question that this is absolutely immoral; no good parent would abuse the credit cards and stick their children with the bill.

 

Dollar Index Drops Below 80 

   The U.S. Dollar Index continued its decline this week to a 15-year low. 2 The index, composed of six different foreign currencies, provides a benchmark to measure the purchasing power of the dollar against foreign currencies. The dollar has been in a decline for years in part because of mounting federal debt and continued expansion of the money supply by the Federal Reserve. The result has been inflation, a decline in the purchasing power of the dollar that erodes savings and makes everything more expensive. With the Federal Reserve lowering interest rates an aggressive 50 bps this week, the dollar has become even less attractive for foreign investors. The resulting reduction in demand for the dollar drove it to record lows against the euro and to an even parity with the Canadian dollar - something that hasn't happened for over 30 years. 3 Additionally, the weak dollar pushed the price of oil to a record $83/barrel and gold to over $745/oz - a gold price not seen since 1980. 4 The Saudis placed additional pressure on the dollar with the raised possibility that they would unpeg their currency from the dollar to fight inflation, stoking fears that the move would trigger a "stampede out of the dollar across the Middle East" 5

   Folks, the position of our currency is precarious; a declining dollar means that inflation is upon us and probably will get worse. As the dollar becomes even less attractive to foreign investors over the coming months, we can expect it to decline even further. The safe harbor to protect your purchasing power is still today what it has always been throughout human history: gold.  

 

Is China Selling U.S. Treasuries? 

   Ambrose Evans-Pritchard of the Daily Telegraph recently wrote that the recent "sharp drop in foreign holdings of U.S. Treasury Bonds" over recent months has "raised concerns that China is quietly withdrawing its funds from the United States". 6 Based on recent comments by senior officials in China, this would be no surprise and it is worrisome because it increases the vulnerability of the dollar. With the high rate of money supply expansion in the U.S. in recent years the U.S. dollar ought to have a much lower purchasing power than it does, meaning that inflation should be much higher and the goods we pay for every day should be more expensive. The fact that the Chinese are willing to hold such large amounts of U.S. debt has helped keep inflation and interest rates in the United States much lower than they should be. It won't be known until November - when the Treasury releases the data - if China is indeed behind the drop in holdings of Treasury debt. If they are, they undoubtedly would prefer to divest themselves of their dollar holdings quietly to prevent a run on the dollar and a crash that could destroy the value of dollar holdings they need to keep for now. As I wrote before, Americans should be furious that we are in this position. The government has put us in this position by borrowing massive amounts of money from foreigners like the Chinese to finance unending deficits. If we were on a sound money standard, i.e. a gold money standard, we likely would not be in the position of hoping that China will be nice enough not to destroy our currency and wreak havoc on our economy.