In the 1970s, a decade of relative economic, military, and political weakness for the United States, American monetary authorities built up considerable foreign currency reserves. The U.S. hastily withdrew from Vietnam. The country experienced an oil and gasoline crisis because of tensions in the Middle East. U.S. national prestige plummeted during the Iranian hostage crisis. If that were not enough, the dollar sustained weakness in global markets.
During this decade of national decline, the U.S. borrowed hard currency from West Germany. In addition, the U.S. Treasury issued foreign currency-denominated securities, so-called Carter bonds, and the U.S. drew down its currency reserve positions in the International Monetary Fund.
Put simply, the U.S. dollar has not always been strong. In turn, the U.S. should use this period of dollar strength to pursue policies to prevent another decade of decline and perhaps even a recession on the order of the Great Depression.
WHAT THE STRONG DOLLAR TELLS US ABOUT AMERICA
Fears of a civil war are without foundation. During the period between the 2018 presidential election and President Joe Biden’s inauguration, U.S. institutions proved resilient. Jan. 6 was a national embarrassment, but most politicians, the U.S. courts, and the military stood firm against would-be insurrectionists. Two years later, U.S. institutions remain strong. Equally important, the U.S. federal system of government is a release valve when polarization becomes heated. Polarizing political issues should be pushed down to state and local governments. After all, under the Constitution, the federal government is supposed to have limited power. The Founding Fathers did not envision an all-powerful executive branch of government.
But two issues could be catalysts for a severe economic crisis that would test the mettle of the country’s people, institutions, economy, and dollar.
The federal deficit is now well and truly out of control. Federal debt held by the public, both domestic and international, has grown to 98% of GDP. Entitlements, Social Security and Medicare, are not subject to annual appropriations bills. Such spending grows automatically as the U.S. population ages. Moreover, the drain on the Treasury increases on a relative basis because the dependency ratio — workers to retirees — worsens day by day. Fewer workers support more retirees. In addition, the nation must increase military spending to confront China’s existential threat.
We should thus give thanks each day for the strong dollar, which encourages non-U.S. investors to buy Treasuries. Imagine if the nation were required to fund its Social Security obligations by incurring foreign-denominated debt. What interest rate would Germany or Japan or even China demand? I shudder to imagine.
More immediately, the Biden administration’s green energy policies put at risk the structural underpinnings of the U.S. economy. The U.S. has an enormous comparative advantage in fossil fuel energy, which is cheap and reliable and sustains the U.S. manufacturing and high-technology sectors, the crown jewels of the economy. Green energy is not cheap — see Europe. Nor is it 24/7 reliable — see recent power shortages in Europe, Texas, and California. Moreover, green energy is too expensive for the manufacturing renaissance currently unfolding in the U.S.
Because of out-of-control deficits and the fiasco of green energy, it is plausible that within two decades, the U.S. will have to issue foreign currency-denominated debt and have a third-world economy running on windmill power.
The strong dollar is a blessing; stop whining.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
