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As election 2008 nears, it is clear voters want protection. Protection of American jobs. Protection of Social Security. Protection of Medicaid, and Medicare. Protection of the borders. And, protection of their wallets from further tax increases.
We also want to protect our position as the unrivaled super power.

What is clear though is that you cannot have any of these protections unless you protect your currency. Unfortunately the rub is this: protecting America's super-power status and the voter's wish-list are now in direct conflict…and the flash point is the dollar.
The US is now in a position the demographers warned us about as far back as the 1970's. An aging population coupled with expanded social programs and international security requirements have over-taxed both the Treasury and the taxpayer.

Thus, the government is facing the same choices every other democracy in history has faced when it has over-promised: 1. Raise taxes, 2. Cut spending or 3. Debase the currency.
Raising taxes sufficiently to cover obligations without crushing the economy is no longer an option. The debts are too big. Despite the rhetoric, cutting spending is never seriously discussed - much less implemented. That leaves option 3…print money. And that is exactly what we are doing.

Of course this imposes the hidden tax of inflation on holders of dollars…both Americans and foreigners.
Americans have no choice; we have to hold on to our ever-shrinking dollars to pay our bills. As the dollar shrinks, Americans work longer and harder just to keep up.
Retirees continue to receive their social security payments, but they do not go very far. Medicaid and Medicare are still offered, but the quality of care suffers. After all, as a health care provider, if you get paid in a diluted currency, why not offer a diluted product?
Foreigners, however, have options. They are free to dump greenbacks in the currency markets, and that is exactly what they are doing.

Russia wants payment for its oil in rubles or euros. OPEC is openly discussing switching from dollar payments to Euro payments. Iran is requiring Japan to pay for oil in Yen and is opening its own oil exchange to avoid dollar exchanges. Even drug runners reportedly now prefer euros over dollars.

Thus, if worldwide demand for dollars declines while supply of dollars increases (due to the aforementioned printing press), the result is a predicable decline in the value of the currency and rapidly rising prices at home. So while it is easy to blame China, OPEC, or Exxon for rising costs, the fact is debauching the currency lies at the root of the stagflation we are now facing.

Now if stagflation were our only problem, we could chart a course to recovery as we did after the President Carter era. The facts, however, are not the same as then.
In the early 80's we were still a manufacturing nation. Our balance of payments with other nations was under control. Americans still had savings, and debt levels were significantly lower than they are now. None of that is true today.

The situation has now risen to that of a national security issue.

Recently the Director of National Intelligence, Michael McConnell, briefed Congress on the risks facing the United States. Terrorism, nuclear proliferation, rogue nations, and oil embargoes made up the usual list of suspects. What surprised most was that Mr. McConnell listed the declining dollar as a threat to national security…and with good reason.
The strength of the dollar is the most potent non-military asset the United States possesses.
The fact is 85% of the world's known oil reserves lie in countries at least somewhat hostile to the US. It has been the strength of our dollar that has cut through that hostility. When profits are to be had, even suspicious trading partners will trade. Our energy security rests on dollar acceptance and it is at our peril that we treat that acceptance as if it were a permanent birth right.

Beyond this, the dollar was a powerful negotiating tool for peace. During the Cold War, dollars trumped rubles, so economic aid and dollar diplomacy offered a far better solution than armed conflict. Today the roles are reversing. The US is the largest debtor nation in the world, while the Russians are a net creditor nation with $484 billion in gold and foreign currency reserves.
Mr. Putin, however, seems to have a different view of currency power. He is flexing his new-found muscle by re-building the Russian military, breaching Japanese airspace, and ordering his bombers to fly boldly over US Aircraft Carriers.