$1,000 Gold

No doubt there are going to be a surfeit of newspaper editorial writers and politicians who ignore the news that the dollar fell, as it did yesterday, below a thousandth of an ounce of gold. But it strikes us as a milestone to mark. It was only little more than 2 years ago, on December 5, 2005, that we issued an editorial called "The Bush Dollar," charting the collapse of the greenback to barely a 500th of an ounce of gold from the 265th of an ounce of gold that it was worth when President Bush acceded.

At the time, Mr. Bush had just named Benjamin Bernanke to chair the board of governors of the Federal Reserve. Value continued to drain from the dollar at an astonishing rate. In mid-September of 2006, we issued an editorial called "The Greenspan," proposing to rename the greenback after the Fed chairman who'd just written a book that gave short shrift to the value of the dollar in terms of what has been called the barbaric relic.

When Congress took a pass, we issued, on November 30, 2006, another editorial, "The Pelosi," focusing on the fact that is was to the Congress that the Founders of America delegated responsibility for regulating the value of the dollar. But, despite the efforts of Congressman Ron Paul, the Congress didn't do anything more about the dollar under Mrs. Pelosi than it had under Dennis Hastert, and the dollar continued its collapse.

So on October 19 of last year, we put out an editorial called "The Bernanke," saying we were well enough into the years when "blame for the dollar's decline" would belong to the new chairman and his colleagues "and the Congress to which he explains his policies." We called the pace at which the dollar was falling "scandalous" and noted that our taxpayers are being forced to help underwrite the salaries of one staff at the International Monetary Fund to tell us that it's overvalued and another staff at the Federal Reserve to puzzle over the fact that the "core inflation" rate remains steady.

That editorial quoted the only member of Congress who seems even to notice the collapse of the dollar, Ron Paul. "Economic law dictates reform at some point," Mr. Paul had written in the fall of 2006. "But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become." He warned that "runaway inflation inevitably leads to political chaos" and declared that the time for action is now.

Since he wrote that warning, we've begun to reap the sub-prime credit crisis, the crisis in insurance, the collapse of the real estate markets. In recent weeks, a growing number of commentators have begun to see that the story is one of inflation — that is, of a collapse of the dollar. It's story with financial, political, and geopolitical import, a fact that was recognized by Lawrence Kudlow in a column these pages carried. The Federal Reserve has been maneuvering frantically to find a way to solve the credit crisis without igniting inflation, putting, as our Julie Satow reports on the business page this week, something on the order of $200 billion in liquidity into the banks via new approaches.

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All this has amounted to the Fed changing its business model, bringing onto its books not only obligations of the United States treasury, which had been its main asset in recent years, but various collateral that once was held by commercial banks. Some of that collateral is extraordinarily complex, including, according to the Fed's own Web site, collateralized debt obligations, also known as CDOs; residential mortgage-backed securities, a.k.a. RMBS; and commercial mortgage-backed securities, i.e., CMBS — in other words, mortgages refashioned into bonds of varying degrees of creditworthiness and complexity. The Fed denies it is putting itself at any additional risk, because it can reject such mortgage securities as it deems unfit. But these securities are uncommonly hard to analyze. Our friends at Grant's Interest Rate Observer tell us that they looked at CDOs of such complexity that 150,000 pages of legal documentation is necessary to describe them.

This strategy has come at a time when the Democrats control Congress and are resisting calls to extend the Bush tax cuts and are abjuring other supply-side fiscal measures of the kind that created the incentives for growth under President Reagan. Those were incentives that powered a boom that continued through the Clinton years and rolled on into the 21st century. The thing to take from the years that Reagan was president and Paul Volcker was chairing the Fed is that it is not impossible to have a strengthening dollar and economic growth. Not only not impossible, we'd argue. It's even necessary to have a sound dollar. Once the Democrats have their nominee, it'll be the moment for Mr. McCain to confront them with the fact that the Congress they have controlled has given us a dollar worth but a thousandth of an ounce of gold and warn of its further collapse without the right leadership.