Disclaimer: I am not a conservative, nor am I a Republican.
I'm a believer that in the wingers' rush to slap Reagan's name on everything to "protect" his "legacy", they've neglected the one thing that should carry his name. Therefore, I think it's time we took up the cause to officially christen the Ronald Wilson Reagan National Debt.
That said...
I read with great interest the story this week about S&P downgrading the US' outlook, saying that there is a one-in-three chance that within three years the country's credit rating will be downgraded.
Meteor Blades' piece on the announcement was excellent. No surprise there.
I don't agree with the entirety of his assessment, as I firmly believe that we don't eventually need to deal with the debt. We need to deal with the debt NOW. But unlike many other colleagues in my field, I believe that the issue can only be addressed by rolling back the tax code to not only include higher marginal rates, but also to include strengthening the social programs that have done so much to keep our great nation strong.
I don't believe we're any sort of default risk (and neither does S&P, apparently, as they're still rating us AAA). However, the alternative can be dangerous and have consequences as well.
So now, on to my thoughts, cleverly disguised as analysis.
WARREN RED CLOUD: Once upon a time, a woman was picking up firewood. She came upon a poisonous snake frozen in the snow. She took the snake home and nursed it back to health. One day the snake bit her on the cheek. As she lay dying, she asked the snake, "Why have you done this to me?" And the snake answered, "Look, bitch, you knew I was a snake."
That snake is the two headed monster of inflation/dollar devaluation. It is a snake that economically, we have been doing a dangerous dance with.
From 2002-08, the dollar declined in value 40% relative to other world currencies. During the recession, the dollar actually strengthened as investors exited the stock market en masse and went into dollars as a "safe haven"; however, since the markets bottomed, the dollar has weakened as investors moved out of cash positions and back into the markets.
While the dollar hasn't collapsed (and in my mind won't), the decline has been undeniable.
In my mind, that's been the goal. A gradual, systematic devaluation of the dollar that will allow the U.S. to pay down its debts with cheaper dollars. In March 2009, IMF Chief Economist Olivier Blanchflower said (courtesy The Daily Pfennig):
"A U.S. economic recovery will only be sustainable if there is a "large increase" in net exports, which may require a dollar adjustment. It may not be very easy, It may require "an adjustment in the dollar, but it is needed."
As the dollar declines, our purchasing power is reduced. The flip side is that it makes our exports cheaper for other countries to buy. The problem is that like the snake above, you can try to tame the devaluation/inflation beast all day long, just don't be surprised when it bites you.
While we haven't reached the point of no return yet, a debasement of the currency is to me a far more likely outcome than default. As long as we can continue to print dollars, we will be able to pay off our treasuries as they come due.
For the individual concerned about their 401k/IRA/other investment accounts, fortunately there are ways to hedge against this currency risk.
If you have concerns about hedging against a weakening dollar and inflation, talk to your financial advisor for advice specific to your situation. If the right wingers have their way, you won't be able to count on Social Security or Medicare when you reach retirement age, so make sure you are doing everything you can to protect what you have.