The Case for More Sequester | | 4.08.13

I’m guessing you missed the latest troubling economic news.

I am not talking about last week’s unemployment figures. A record 90 million Americans are now out of the workforce, taking the U.S. labor participation rate back to Carter administration levels – 63.5 percent.

The White House tried to blame The Sequester. But the job trend is years old now. Since the end of World War II, we have not had a longer period between the day that the number of U.S. jobs started to drop and the day the total number got back to the pre-recession starting line.

President Obama came to office wanting to reverse the Reagan Era. You remember the Reagan Era. It had the longest period of peacetime economic growth in American history (1983-2001). Well, Obama’s sure reversed that. Today the economy is in Carter-style doldrums, with barely a hint of real growth and worries everywhere that the Fed’s money-printing binge will catch up with us and reignite the stagflation of the late ’70s.

Even the global security conditions look like Carter redux. The Russians are acting more and more like the Soviets. Reports circulated Friday that they have practiced taking out missile defense facilities that protect South Korea, Japan and us against North Korea. “We should understand that they look at ‘reset’ differently than we do,” a retired senior Air Force general was quoted in the Washington Free Beacon. “They look at it as regaining their previous USSR position as a superpower while this administration is moving towards unilateral disarmament.”

But, no, the economic news I’m thinking of is more serious than today’s or tomorrow’s job numbers, for it points to a truly new and much more dangerous world order.

For seven decades, the anchor of American power has been the strength of the dollar, roughly 160 years (as of 1945) of careful financial management by the U.S. government. Yes, since World War II’s end, we have had an enormously capable military. Yes, our weapons – particularly since the Reagan build-up of the 1980s – have been the world’s most sophisticated. But even so, the power of the dollar, the global reserve currency and the medium of exchange in virtually all global trade gave options for projecting our power, financing our government and managing our global position that no other nation could come close to matching.

This isn’t an abstract thing. Remember that the final victory in the Cold War came about as a result of an economic strategy to which our military strategy was a contributor, not the other way around. The strategy’s elements were simple: 1) the enormous U.S. economic growth of the Reagan years, 2) the crushing costs to the Soviets of matching our arms buildup, 3) the prospect of seeing a generation of Soviet investment in first strike nuclear capacity made worthless by U.S. missile defense and 4) the ratcheting down of lending and advanced technology transfers from West to East.

The strong dollar was at the center of this unprecedented and unprecedentedly successful global strategy.

But in the past week reports have surfaced in Asia that China and Australia are concluding a deal to bypass the U.S. dollar in their bilateral trade. In other words, in one of the world’s more critical trade relationships, the role of the dollar as the currency of exchange – the reserve currency – is about to end.

For the last three years, we’ve heard rumblings out of Asia about China’s eroding trust in the reliability of our currency as a holder of value. Australia has an unusually close trade relationship with China. About a third of its exports go there. Thirty-five nations send 15 percent or more of their exports to China. Those nations could go the way of Australia next.

Consider this: For several years now, the U.S. government has had to borrow roughly forty cents of every dollar spent, with the Fed as the primary lender, basically printing money to pay the government’s bills. No wonder countries as much as private investors have begun to wonder if the dollar is worthy of their trust. Today, some of those countries are crawling away from the dollar. But tomorrow the crawl could become a walk and later a stampede.

What then? Federal Reserve Chairman Benjamin Bernanke has said that he can’t stop the massive money creation policies of the last few years until the government gets a hold on its spending and deficits.

Signs are accumulating that we need more sequestering, not less – and we need it soon.


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