Repeating History

By INVESTOR'S BUSINESS DAILY | Posted Wednesday, September 09, 2009 4:20 PM PT

Economy: The dollar is weakening, gold is hitting new highs and some foreign officials now want an alternative to the U.S. currency. If you're looking for a market verdict on U.S. economic policy, look no further.

---

Read More: Economy

---

Ordinarily, we don't pay too much attention to the dollar's ups and downs. Neither do we closely watch gold. It can vary widely in price based on nondomestic demand and supply, and thus isn't always useful as an indicator.

That said, since the advent of the new administration last November, the trade-weighted dollar has fallen 7%, while gold in recent days has risen above $1,000 an ounce — a record level.

The two are sending a clear message: Investors are worried about what they see in the U.S. and are parking their money in nondollar foreign assets and gold. When nonproductive assets are more valuable than land, factories and labor, something's amiss.

The World Economic Forum recently pushed the U.S. out of its top perch as the world's most competitive economy, to No. 2. Not a big drop, of course. Still, why did the WEF lower our ranking at all?

Because of "concerns on the part of the business community about the government's ability to maintain arm's-length relationships with the private sector and in the perception that the government spends its resources wastefully."

This won't change soon. Congress has now heard testimony that it's unlikely the government will recoup much if anything from the auto bailout. And it's hard to say what was gained from the $787 billion "stimulus," given that less than $100 billion has been spent.

Meanwhile, our fiscal future looks grim. As Heritage Foundation economist Brian Riedl notes, Washington is set to spend $30,958 per household this year — taking $17,576 in taxes and borrowing the rest from our kids.

If this were a temporary thing, it might not be so bad. But we're boosting federal spending from the 18%-to-22%-of-GDP range that has prevailed since World War II to 26% this year. And if Congress and the White House get their way, spending will stay at least that high forever — in effect, a 30% rise in real spending and taxes.

Investors worry about surging U.S. government debt, conservatively expected to grow by nearly $10 trillion over the next decade. Since every dollar the government spends comes from the private sector, that won't leave much for private investment here.

And this doesn't even count our exploding entitlements problem. We owe $51 trillion to Social Security and Medicare over the next 50 years or so — about $205,000 per person alive today.

By our foolish fiscal choices, we're in effect opting for stagnation and inflation over growth and prosperity. New regulations and government control of the auto, banking and financial services industries will lower corporate profits. So will higher taxes on individuals to pay for it all.

Nobel Prize-winning economist James Buchanan recently observed that the U.S. is duplicating many of the policies implemented during the Great Depression. Why? Mainly because politicians lack "any basic understanding of what makes capitalism work." The action in the dollar and gold suggests that investors concur.