Dollar Woes + Gold Spike = Political Opportunity
A Heritage Foundation blog post calls the news a warning to Obama and Congress "that they are spending too much money." On Facebook, former VP candidate Sarah Palin wrote: "We can see the effect of (out-of-control debt) in the price of gold, which hit a record high today in response to fears about the weakened dollar." RedState.com recently quipped that "The Dollar is the New Peso," while RightSideNews.com (which describes itself as fending off "threats against Western civilization"), worries about the dollar becoming a second-rate currency.
They have a point. The U.S. dollar index has been slipping continuously since March 2009, and gold on Wednesday closed at a record high of $1,043.30 an ounce (not adjusting for inflation). When the dollar falls, of course, imports and commodities including gold and oil tend to become more expensive.
This comes as the Congressional Budget Office estimates that the federal government's budget shortfall has increased a remarkable 3.1 times from fiscal year 2008 to 2009. In a report released on Wednesday, the CBO says that the Feds' annual budget deficit will grow from around $450 billion ($4,044/household per year) to $1,409 billion ($12,414/household per year), thanks to a combination of reduced tax revenue and increased government spending.
And those are annual figures. When that kind of deficit spending takes place over multiple years, the sums add up quickly. The Heritage Foundation says that the public national debt -- $5.8 trillion as of 2008 -- will nearly triple by 2019, the largest increase in history. A decade from now, taxpayers will be paying an estimated $774 billion on interest to creditors, which is over half of what the IRS currently collects each year in individual income taxes. (Put another way, without such a huge debt, we could cut personal income taxes by over 50 percent.)
If the United States government is living beyond its means, including spending $1.4 trillion a year more than it collects in taxes, then it's small surprise that the once-mighty U.S. dollar is sliding as fast as Congress' approval ratings. Why would Japan and China be as eager to buy dollar-denominated bonds if our whopping national debt, not counting the unfunded mandates of Social Security and Medicare, means they're likely to get paid back in a devalued currency?
Then there was the report this week in the U.K. Independent, which rattled financial markets by reporting:
In the most profound financial change in recent Middle East history, Gulf Arabs are planning -- along with China, Russia, Japan and France -- to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar... It is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.
If this trend continues, then the president's conservative critics will be proven correct: the dollar's fall is a message to the White House and congressional Democrats to rein in spending. Though I wonder where those same critics were when a Republican administration wanted expensive wars and new agencies (Homeland Security) and entitlements (Medicare prescription drug benefit) and increased the national debt by roughly 2.5 times in eight years. With consistency, perhaps, comes greater credibility.
Declan McCullagh is a correspondent for CBSNews.com. He can be reached at declan@cbsnews.com. You can bookmark the Taking Liberties site here, or subscribe to the RSS feed.