With oil approaching $100 a barrell and gold prices surging past the $800 mark it is time to look at some of the underlying problems of the economy and start wondering if the incessant doomsayers have not been right all along. One of those vocal economic critics has been Patrick Buchanan, whose views on trade (as well as many other subjects) are in sharp contrast to Bush Republican orthodoxy. Buchanan has written an interesting column that deals with the sinking dollar, and has made some very interesting observations.

The dollar is plunging because America has been living beyond her means, borrowing $2 billion a day from foreign nations to maintain her standard of living and to sustain the American Imperium.

The prime suspect in the death of the dollar is the massive trade deficits America has run up, some $5 trillion in total since the passage of NAFTA and the creation of the World Trade Organization in 1994.

In 2006, that U.S. trade deficit hit $764 billion. The current account deficit, which includes the trade deficit, plus the net outflow of interest, dividends, capital gains and foreign aid, hit $857 billion, 6.5 percent of GDP. As some of us have been writing for years, such deficits are unsustainable and must lead to a decline of the dollar.

A sinking dollar means a poorer nation, and a sinking currency has historically been the mark of a sinking country. And a superpower with a sinking currency is a contradiction in terms.

While it is true that Buchanan and others have been citing both the trade deficit and the fiscal deficit as potential disasters the Bush Administration and other conservative theorists (in particular the Wall Street Journal Editorial Page and Dick Cheney) have minimized both, citing the positive aspects of the economy as proof that “deficits don’t matter”. It appears to me that such glossing over of economic fundamentals has been a tremendous mistake, and one that needs to be reversed immediately. The facts cited by Buchanan are alarming.

The euro, worth 83 cents in the early George W. Bush years, is at $1.45.

The British pound is back up over $2, the highest level since the Carter era. The Canadian dollar, which used to be worth 65 cents, is worth more than the U.S. dollar for the first time in half a century.

Oil is over $90 a barrel. Gold, down to $260 an ounce not so long ago, has hit $800.

While the dollar plummets Buchanan points to the obvious ramifications.

Other nations that have kept cash reserves in U.S. Treasury bonds and T-bills are watching the value of these assets sink. Not fools, they will begin, as many already have, to divest and diversify, taking in fewer dollars and more euros and yen. As more nations abandon the dollar, its decline will continue.

The oil-producing and exporting nations, with trade surpluses, like China, have also begun to take the stash of dollars they have and stuff them into sovereign wealth funds, and use these immense and growing funds to buy up real assets in the United States — investment banks and American companies.

I realize that these alarms have gone off before (I remember Japan, Inc.) but I just don’t believe that violation of what we have all understood to be fundamental economic tenets can continue forever without severe ramifications. Buchanan is against the free trade agenda, and his column uses the dollar fall to validate his prior criticisms, but notwithstanding that I believe he makes some critical points. Washington better wake up before the fiscal insanity creates more harm than we can fix. Read the Buchanan column at this link.