At the end of last week, during the G20 conference in Seoul, the world delivered Obama a stunning defeat. He had the arrogance to accuse China of currency manipulation, while he himself is engaged in a big devaluation of the US dollar. The world leaders told him flat out his policy of huge government debt while debasing the value of the dollar, will not work to strengthen the US economy. They called Obama’s policy also highly damaging to the economies of the other countries, and to world trade.
 
While he was now in Korea anyway, Obama wanted to dominate the Koreans. Three years ago President Bush negotiated a trade pact with South Korea. As a Senator Obama opposed this deal, and the Democratic Congress refused to ratify the treaty.  Last week Obama counted on all his personal charms to sign a new trade deal. He had already sold in the US his big coming success. Hubristic as he is, he added a bunch of new conditions to the trade accord, without giving the Koreans ample time to evaluate his new demands. Obviously the Koreans sent Obama home empty handed.
 
The words of German, Brazilian, Chinese and other international politicians about the ongoing devaluation of the dollar confirm the anxieties of the Americans. They know the fast climbing prices of the basic commodities. Once, and rather earlier than later, these extra costs will be calculated in the cost of end products. The US populace understands Obama is sending them a huge inflation wave. A recent study in the Walmart stores (the largest retailer of the world) by the research company MKM Partners shows the prices for basic necessities, the kind of products people buy every day, to have advanced 0.6% over the last two months. This is an inflation of about 4% per year.
 
Bernanke, as Chairman of the Federal Reserve, doesn’t see any inflation. He thinks it is acceptable for him to ‘print’ another 600 billion dollars to create 2% inflation, a ratio he thinks ‘ideal’. During the recent two years he tripled already the supply of dollars in the world! (2008: 800 billion, now in 2010: over 2 trillion – Wall Street Journal 15 November 2010) Bernanke and Obama defend this policy as THE solution to create jobs and to grow the US economy. But, unemployment swells, or circles around double what it was before the financial crisis. The economy is only growing very slowly at an insignificant pace. Bernanke’s blindness for the coming consequences of the rise in the prices of basic commodities like coal, cotton, grain, copper, oil etc, not to mention gold and silver, prove his incompetence as Chairman of the US National Bank, the Federal Reserve.
 
Since, what is going on in the US?
 
Obama creates enormous budget deficits. Foreign money suppliers ask for more compensation. So, interest rates on long term US government debt jump. To be able to get his hands on cheap money, Obama ‘sells’ the debt to the Federal Reserve. Over there they just ‘print’ more money. They ‘create’ dollars out of nothing! Something a National Bank is able to do. This means Obama steals from all who own now dollars. The stealing happens by inflation.
 
It is as in the time of the kings, when they smelted their gold coins, just to make new gold coins with only half the grade of gold, but stamping the same value-number on them. As by miracle, the king had double the amount of money to pay his debts. An example of the consequences in the real world: if the price of one donkey was one old gold coin before the king’s action, very quickly the price for that same donkey was two new gold coins. People are not that stupid.
 
What is the alternative?
 
The government can immediately stop creating government debt. Balanced budgets are possible by raising the income, by cutting spending, or by a combination of the two.
 
Income can be boosted, or by raising taxes, or by growing the economy. Raising taxes tend to slow and hamper the growth of the economy. So, it is not really a good solution to grow income, and certainly not a good time now that the economy is limping forward. Lowering taxes seems to be a better way to stimulate the economy.
 
One other way to energize the economy is to abolish government control, or at least cut the government intrusion in a meaningful way. So: less administrative paperwork and ‘red tape’. This cuts government spending on its own merits. Complete government departments could be closed. Although important as a saving on its own, killing one such government department only means saving about 2% of the total budget. Real savings are realized when the social expenditures are cut, since they drag two thirds out of the government budget.
 
The counterattack is launched.
 
The international reaction of recent weeks towards the American financial policy seems to be the drop causing the bucket to overflow. The opposition to Bernanke’s policy to keep printing more dollars, and by doing so enabling the Obama administration to go deeper into debt, is growing in the USA. Republican politicians, economists, and political strategists are trying to stop Bernanke in a concerted effort. Tea Party activists inform the public on what Obama and Bernanke are up to with the dollar. Sarah Palin was first as a well-known Republican to write an open letter about the subject, and harvested outspoken praise from the Wall Street Journal in an editorial article for her financial and economic insights. Ron Paul becomes Chairman of the House committee on Financial affairs once the new Republican majority is installed in January. He promises to grill Bernanke in hearings. Although he will not be able to force Bernanke to resign, the open discussions will bring the policies before a broader public.
 
The new elected Republicans in Congress give the impression to focus on severe spending cuts, as soon as they are installed in January. The chance exists Republicans will refuse to hike the debt ceiling next year. This would effectively stop Obama to run any more deficits. Paul Ryan, one of the young Republican leaders, has a detailed plan in his ‘Roadmap for America’ to reorganize and cut the outlays in social programs.