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Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
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Monetary Policy and Welfare-Warfare Adventures

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As we have been saying for the last several years, the out-of-control federal spending to fund both domestic welfare-state programs and foreign warfare-state adventures, would ultimately threaten the economic and financial well-being of the American people.

Among the threats were inflation, i.e., a debasement of the currency, and a flight from the dollar, resulting in a major monetary crisis. Today, the Telegraph is reporting that two countries — Vietnam and Qatar — are planning to reduce their purchases of U.S. treasuries and other dollar bonds. Within the article there are links to the following related articles:

“Fears of Dollar Collapse as Saudis Take Fright”
“China Threatens ‘Nuclear Option’ of Dollar Sales”
“Jump Off the Deranged Bull Now”

This is what the neo-cons and other pro-empire interventionists never thought would happen. They figured that they could invade and occupy Afghanistan and Iraq without any risk to the American people whatsoever. They even dreamed of using Iraq’s oil revenues to finance their imperial adventurism.

Meanwhile, many Americans continued supporting the Afghan and Iraq escapades despite the fact that federal spending was going through the roof. As long as the Bush people were standing fast against tax increases, the idea was that somehow, magically, the U.S. government could continue spending money as if there were no tomorrow.

What the feds were doing, of course, was borrowing to finance their ever-growing expenditures. That borrowing entailed sucking billions of dollars of private savings into the coffers of the U.S. government, along with massive borrowing from central bank reserves of foreign regimes, including such communist countries as China and Vietnam. That credit squeeze finally erupted with tremendous fanfare in the housing market, where people have been unable to refinance their adjustable home mortgages. (It would be interesting to know how many people who have been hurt by the mortgage crisis were also ardent supporters of the military adventures in Afghanistan and Iraq.)

Still, something had to give, as we have long maintained here at FFF. Ultimately, all that borrowing has to be repaid, either with tax money or by inflation (i.e., simply printing the money to pay off the debt). Not surprisingly, the feds have chosen inflation because they know that the average public-schooled American is unlikely to figure out that it’s the feds, not the speculators and business community, who are fleecing them as prices in the economy rise.

That’s what the recent half-point drop in official interest rates by the Fed all about. Fed officials knew that that all that debt that has been piling up for the last several years had to be paid either with taxes or inflation. The Fed, realizing that the Bush people weren’t about to raise taxes, blinked. The signal was sent to the currency markets: the Fed is going to accommodate the debt by printing the money to pay it off.

That’s what is behind the plummeting dollar. People are reluctant to hold an asset that is likely to continue dropping in value. There are people who say that the Chinese communist regime would never dump the dollar because it wouldn’t be in their interest to do so. Don’t count it. For one, it might be in their interest to do so if there is a stampede for the exits and the dollar is dropping precipitously. Second, sometimes politics trumps self-interest and if the Bush people make the Chinese communist rulers angry, say, with tariffs, they might just put politics above money.

In my opinion, we are seeing only the tip of the iceberg. If there is a run on the dollar, it is impossible to predict how bad the crisis could become. Regardless, everyone should keep an important point in mind: Despite predictable hoopla against speculators and capitalists, the root cause of the monetary crisis will be out-of-control federal spending on both domestic welfare-state programs and foreign warfare-state programs, including the military escapades in Afghanistan and Iraq.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.