Passing The Devalued Buck

Meanwhile, U.S. policymakers are mollycoddling American consumers. Of particular concern is the Bush administration's mortgage-freeze plan. By unilaterally shifting the financial pain to lenders, many of whom live overseas and don't vote in U.S. elections, politicians are making it clear that American consumers will not be allowed to suffer the ill effects of excessive indebtedness.

Damaging as the plan may be, it is nothing compared with what some presidential candidates and members of Congress are cooking up. As the housing crisis gets political, we can expect ideas such as a perpetual freeze on foreclosures, automatic loan reductions and enormous tax breaks financed by increased deficit spending. Delinquencies on auto loans are reaching record highs. What's next, a moratorium on car payments? In an election year, anything is possible.

With the U.S. economy finally stalling under its gargantuan debt burden, the rallying cries for Fed rate cuts have been deafening. Although "Helicopter" Ben Bernanke has done his part by cutting rates 100 basis points and devising new ways to shower the country in cash, his efforts have not been enough for ravenous bankers and politicians. Their zeal to keep the housing bubble from deflating, and the economy from tipping into recession, should make it clear to foreign investors that the United States will continue to rely on dollar depreciation as a blunt instrument to fight all its economic battles. As a result, America will remain a financial black hole in the coming year.

These are real risks that will not go unnoticed by a world already saturated with depreciating U.S.-dollar-denominated debt. Given that access to foreign savings is vital to America's economic survival, we should think twice before biting the hands that feed us.

Schiff is president of the brokerage firm Euro Pacific Capital and author of “Crash Proof: How to Profit From the Coming Economic Collapse.”

© 2008