The Dollar Collapse

What explains the dramatic dollar decline over the past several months? Very simple: The Republican pledge of no new taxes.

Outside of the United States -- those selling the dollar -- know full well that no modern national state can be run on revenues of less than 20 percent of GDP. No other large advanced country in the world is even attempting to do run its economy on tax revenues of less than 30 percent of its GDP. Yet in the past year, the Federal Government took in a stunning 15 percent of GDP while spending nearly 25 percent.

This extraordinary gap was virtually required by the financial collapse of 2008. The gap was created by ever lower tax rates and resulting lower revenues, and by moneys poured out as economic stimulus to avoid economic collapse. Such Keynesian spending is justified, even mandated, because at a time of zero interest rates, only strong fiscal policy can offset deflationary dangers and avoid catastrophic consequences.

But now as we all know, we have to face the deficit. Yes, we have to cut spending. But as a country supporting two wars, having a military presence in more than 100 countries, paying social security to our elderly, and supporting health care for the poor and the elderly, Federal revenues must rise to at least 20 percent.

The Republicans have made clear that this is not going to happen. Yet even under Representative Ryan's budget plan focusing only on spending cuts, Federal expenditures would exceed 20 percent of GDP.

Unless you believe that somehow this Republican limit will be overcome, you have to conclude that the dollar is in trouble. The international financial world has reached that conclusion. Until the conclusion is reverse, holding the dollar does not make sense. It must decline.