Much has been made of the United States’ astonishing deficit spending in the first half of this decade, and also of the rapid decline of the value of the U.S. dollar, but not everyone wants to draw the link between the two. Historically and in the present case, deficit spending is the main cause of currency declines, and in a much smaller way, the decline in currency adds to the budget deficit.
To get the bigger picture, you need to see the cause of the deficit spending. Some would want to blame the Bush tax cuts, but while those tax cuts are certainly hurting the U.S. economy, they are not nearly large enough to account for the deficits we are seeing. This is a deficit caused by deficit spending, and specifically, spending on the U.S. invasion and occupation of Iraq.
There are other ways to measure a war besides money, and the millions of people dead and millions more homeless are the real story of the war, but it is also important to look at how much money is being spent. If you measure the war according to military spending, the U.S. war in Iraq is probably already the most expensive war undertaken by the United States, which also means it is the most expensive war undertaken by any country ever. Unless the United States winds it down precipitously, it is likely to have an official cost over 1 trillion dollars, with the unofficial cost much higher. And that money is borrowed.
You don’t borrow and spend that kind of money with no consequences. Economists describe currencies like the U.S. dollar as “deficit currencies.” In traditional economic thinking, it is impossible for a country like the United States, buying more than it produces, to maintain the value of its currency.
Warren Buffett put it this way four years ago: “In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.”
In the most dire scenario, we risk becoming a “tenant nation.” Our own currency becomes worthless and we own so little of our own land that we no longer have much collective control over the prices we pay for housing, farmland, and the other essentials of life and work.
The federal budget deficit adds to the trade deficit and speeds up the decline in the dollar — and the federal budget deficit in this decade is basically the Iraq war. Without the war, the federal budget could be in a small surplus and could be easing, instead of accelerating, the decline in the dollar.
The declining dollar also worsens the budget deficit, as the government has to spend more dollars for the products and services it has to buy from other countries — mainly energy.
There were those who supported the Iraq war because they thought it would mean more oil for the world. Perhaps that will come to pass, but if it does, it will not benefit the United States. The declining dollar means that, for Americans, the price of gasoline can only go up.
Nearly half of U.S. imports are energy — crude oil, natural gas, nuclear fuel, electricity, and so on. The only way we can eliminate the trade deficit is by importing less energy through a combination of using less energy and creating more energy ourselves.
It would take an investment of around $1 trillion — a huge amount to spend, but not larger than the Iraq war — for the United States to have energy independence. And the cost could be smaller if technological breakthroughs drive down prices or if people find new ways to conserve energy. The decline in the U.S. dollar is likely to continue until the economy returns to its peacetime footing and the country decides to take the idea of energy independence seriously.