The Obama Shock

Gold has always had a magic allure. So it was a shock when in 1971 U.S. President Richard Nixon suddenly and without warning ended the direct convertibility of the U.S. Dollar into gold. For the first time in the 20th century the United States began piling up budget and trade deficits. It was unimaginable that a country that had enacted the Marshall Plan to help our enemies rebuild their economies by opening wide U.S. markets to imports without demanding equal access to foreign markets for our exports, would find itself on the short end of the trade stick.

By 1970 we were printing U.S. Dollars like comic books to send overseas to cover our expanding trade deficit. The gold coverage of the U.S. dollar shrank from 55% to 20%. Our trading partners began demanding “promise to pay” gold bullion in exchange for our debased paper dollars (the U.S. currency is actually a fabric made from cotton). Switzerland, then France demanded and received their gold.

Nixon’s worst nightmare was the thought of Fort Knox being emptied to pay for Japanese stereos and Taiwanese knick-knacks. On August 15th President Nixon in a televised speech carefully scheduled not to conflict with the popular TV series “Bonanza” used the lead-in of the show to ensure the greatest audience. Instead of Little Joe and Hoss, viewers witnessed Nixon closing the “gold window,” making U.S. paper dollars nonconvertible to gold. This was the genesis of the floating and volatile exchange rates we have today. This was also the beginning of runaway budget and trade deficits fueled by paper currency that was no longer a hard asset, but a fictitious piece of paper that could be printed at will.

If the printing presses ever landed in the hands of the wrong people in calculable harm could be done . Take a moment to reflect on the developing countries over the past twenty years that have debased their currencies through deficit spending. Argentina, Brazil, Egypt, Indonesia, the Philippines, Russia, Venezuela… The list goes on and on. I have witnessed it repeatedly. It is the same everywhere. You work your entire life and save whatever you can. Over time you accumulate enough to retire. You are looking forward to some years of tranquility. Then poof…some corrupt, greed imbibed leader turns on the printing presses and your entire life’s savings is devalued to the point where you spend your retirement struggling for survival. What makes it intolerable is you have no time to recover. You are doomed. It is the ultimate “Catch 22”.

President Obama has been in power just a few short months. The printing presses have never worked so hard. Our 2009 budget deficit, as calculated by the nonpartisan Congressional Budget Office (CBO), is estimated to be $1.85 trillion out of a record breaking federal budget of $4 trillion (a trillion is twelve zeros, an incomprehensible number to grasp). For every dollar we collect in taxes we spend two.

The CBO further projects a budget deficit from 2010-2019 of $9.3 trillion on top of the $1.85 trillion. Our current national debt is $11 trillion. We are doubling it in just ten years. This is the good news. The bad news is it will be much worse. This is the best case scenario based on current spending, overly optimistic economic growth projections and higher tax collections.

An inevitable increase in tax rates will assuredly result in a lower tax base as business declines, American companies move offshore and jobs disappear. The alarming rise in unionism will also accelerate U.S. jobs losses. The budget projections do not yet take into consideration other large Obama campaign promises including healthcare reform, renewable energy, environmental and global warming initiatives, and education reform.

In the eight years that George W. Bush was President, the federal budget increased by $700 billion, for which he was relentlessly and correctly criticized, notwithstanding the events of 9/11 and fighting two wars. In just four months Obama has added another $1 trillion to the federal budget.

Our 2009 budget deficit is 2.5 times our total currency in circulation. It is $500 billion more than the worldwide exports of American products and services.

US Deficit

Ronald Reagan has been criticized for his deficits. The Obama deficit after four months is four times greater than any deficit during the Reagan years. I might add Reagan also inherited a struggling economy with a “misery index” in the stratosphere.

The Obama deficit can only be covered by borrowing or printing dollars. Even the Chinese don’t have enough dollars to invest to shore up the Obama deficits. We are participating in a dangerous board game with play dollars in which we cannot possibly win.

What makes us any different than the reckless governments that trash their countries through printing press economic policies? Aren’t these the same folks who we love to lecture about fiscal responsibility?

The U.S. dollar will never be the same. The American worker put their faith “In God We Trust.” Yet, there are millions of Americans reaching retirement age who will be shocked to learn that they will fare no better than those in developing countries with debased currencies that have driven them into poverty. We lived through the Nixon Gold Shock. But I’m not sure we’ll make it through The Obama Deficit Shock.

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