From economic sleight of hand to grim reality

Politicians must think that voters live in an alternate reality. Why else would they spread fantastical fictions about the bogeymen they claim are responsible for inflation when they see the culprit staring at them in the mirror every morning?

The bill for years of rampant spending and voting for votes is coming, and, as is often the case, compounded by unexpected events. This time, those events include the pandemic, war, and technology. So now is the time for adults to stand up and prevent the rhetorical gymnastics from deviating from the hard and intelligent conversations to be had about the serious issues that threaten the future of our nation.

Our national debt unceremoniously reached $30 trillion at the end of January — three years earlier than the Congressional Budget Office (CBO) forecast in 2020. That’s the equivalent of a $92,000 debt for every person in America. For some perspective, government debt has fluctuated in the range of $6 trillion in 2000 and $14 trillion in 2010

Too much government debt is bad for many reasons, no matter how many times politicians try to portray it as government investment. Governments don’t invest, they spend, and that spending leads to higher interest rates and inflation when things get out of hand. Higher interest rates are a double whammy, making it more expensive for the government to borrow to meet its interest and principal obligations.

The CBO estimates that the country’s net interest costs will be as much as $60 trillion over the next three decades. Left to its own devices, Congress would spend even more than the CBO can imagine. These are numbers that America simply cannot afford if it is to address its current and future domestic and international problems and maintain economic, technological and military superiority in a terrifyingly dangerous world.

About the same time that government debt reached $30 trillion, the Federal Reserve’s balance sheet reached $9 trillion. Again, for perspective, assets on the Fed’s balance sheet totaled less than 10 percent of that — about $800 billion — just before the badly-handled financial panic of 2008-2010.

The extra amount on the Fed’s balance sheet represents the money it has printed in response to the financial crises we’ve faced since then. This tsunami of new dollars pouring into the economy should have been expected as a shortcut to the inflation we are now experiencing.

In addition to the two-headed monster of high interest rates and rising inflation, the attack on the dollar’s superiority is taking place on several fronts. As a result of the deteriorating relationship between the US and Saudi Arabia, Saudi Arabia and China have accelerated negotiations that would allow China to pay for some of the oil it buys every day with the yuan instead of dollars. Keeping the score would be a huge win for the Chinese yuan, and another huge loss for the US dollar.

Whether the dollar remains the world’s most important currency is very important. The United States emerged from World War II as the only superpower and the country with the most gold in its vaults. That enabled it to dictate the terms of the 1944 Bretton Woods Agreement to ensure that the dollar was designated as the global reserve currency (the currency held by monetary authorities such as central banks), giving its place as ” the world’s “vehicle currency” (the one preferred to settle global trade transactions).

In 2000, the dollar represented 71 percent of global reserve currencies, while the euro represented about 19 percent. Today, the dollar has fallen to just 59 percent. If the dollar loses its status as the major global currency, which is plausible if we don’t clean up our reckless government deficits, we will likely face a world where the dollar can no longer be used to impose economic sanctions as a substitute for military actions or cyber war.

The threat is not far-fetched, and it has happened to other countries before us as well (most recently the UK). Not only will the dollar no longer be available as an economic weapon, we will no longer be able to afford our military superiority. The question is how close are we to that abyss?

Finally, the Russian invasion of Ukraine will have a significant impact on the global economy and will realign geopolitical relations and strategies for years to come, with significant economic consequences for the United States. Take, for example, the new financial ties that Russia will necessarily forge with China as democracies turn their backs on Russia.

China is more than willing to buy as much oil as Russia can sell it, ultimately making Russia financially dependent on China. This is undoubtedly another tool that China will use to increase the value of the yuan against the dollar.

The United States finds itself in the eye of a geopolitical hurricane ravaged by high inflation, rising interest rates, mounting threats to dollar superiority and new military and economic alliances. At the same time, we are seeing an increasing willingness from countries like Russia, China, North Korea and Iran to act in ways that are inconsistent with the survival of the planet. Dealing with this is not a job for the faint of heart. It’s time for leaders to step forward who know how to create the future instead of waiting for it to happen and then looking for someone else to blame. And it’s time for us to choose them.

Thomas P. Vartanian is the author of “200 Years of American Financial Panics: Crashes, Recessions, Depressions And The Technology That Will Change It All” and Executive Director of the Financial Technology & Cybersecurity Center. William M. Isaac is a past chairman of the FDIC and Fifth Third Bancorp and is chairman of the Secura|Isaac Group and Blue SaaS Solutions.

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