We could use some common sense in examining our situation today. Take the dollar. Common sense—as well as that most enduring and unarguable of economic theories, the late, great Herbert Stein’s dictum that if something can’t go on forever, it won’t—tells us that the situation of the currency is parlous. Balance-of-payments deficits, inadequate domestic savings, government spending run amok, hideous levels of domestic debt creation at usurious consumer rates, a putative housing bubble, etc., etc. All true, all unarguable.

But set against this something else that common sense argues with equal power, but that we’re seldom told. Namely, that what underpins a fiat currency—and in this day and age, all major currencies are fiat currencies, whose reserves consist of holdings of other fiat currencies—is as much its political and cultural character as its statistical integrity. In our case, democracy American-style is the dollar’s hole card.

A while back, I was asked by an advisor to a philanthropic entity I’m mixed up with what event I would consider to be truly catastrophic for the dollar. My answer was: if OPEC and the world’s other major oil producers should decide to invoice substantially in currencies other than the dollar. Oil being the straw that stirs the drink of world commerce, this would be the tipping point that might incite a perfect-storm convergence of the other dire factors enumerated above.

I don’t think that’s going to happen, not for some time. The oil producers and outsourcees want a currency they can trust. Sure, if you’re the central bank of a country like China, like Russia, like Saudi Arabia, holding billions upon billions of the folding green, and you were beset by pundits warning you about balances of payments and so on, you might think of shifting out of the dollar. But where? Quo vadis? To which other central bank would you turn, on which could you rely? China? Who knows what’s going on there? India? Same problem. Unfledged capitalist systems are like teenagers: not to be entrusted with the food money. Russia? You’d entrust your hard-earned reserves to Putin the Confiscator? The Euro bloc? Yada, yada, yada. Japan? Been there, done that. Wherever you turn for an alternative, you find them too untransparent, politically uncertain or underdeveloped, internally riven, simply too small or, in social terms, potentially ill-disposed to capitalism and its fruit-pickers.

In this country, what you see is what you get, and common sense tells me this outweighs every other negative consideration the gloom-and-doom crowd can bring up. We’re always being told that we can get by as long as our overseas trading partners are “willing” to finance our abysmal savings rate, etc., by sending us back their dollars. Common sense tells me they will always be so willing as long as the only alternative is some inscrutable ministry in Beijing, Moscow or Delhi, or that crowd of first-class, chateau-bottled blitherers in Brussels.

In this connection, one other point should be made. Currencies are like salmon: Their instinct is to return to the tributary in which they were hatched. The stream called the United States can handle a whole bunch of finned creatures—which is just great as long as you can trust the folks who control the fishing rights.

The dollar has virtual monopoly status as a reserve currency, which is Walter Wriston’s great if unintended legacy. Back in the 1970’s, when the oil price shot up, he conceived the idea of “petrodollar recycling” and thus protected OPEC from eventually being obliged to sell its oil here and there for tender other than that bearing the stamp of the Federal Reserve Bank. I thought—and said at the time—that this would beggar the rest of the world, as it pretty well did, but that it would insulate us from the consequences of our own improvidence. And so it proved. In time, the dollar became essentially the only game in town. It still is—and I expect it will remain that way until something drastic happens to alter perceptions of this great Republic.

What might that be? Obviously, a significant alteration in the American political landscape, a sharp veer in the direction of class-war anti-capitalism led by a person on a white horse. Can’t happen here? Common sense tells me that the corollary of the Stein dictum has to be that if something’s never going to happen, it very well may.

What’s going to bring this about? In one word: corruption. Sure, we need to get our fiscal house tidied in the ways the pundits prescribe—higher savings rate and all that—but what my common sense tells me is that the great threat to our dollar hegemony, and thus to our economic comfort if not survival, is the corruption that has permeated Washington and Wall Street in the past decade. It’s the big ugly story of my lifetime. It comes in every form, flavor and strength, from the ethically dubious to the downright criminal, from Abramoff to Zero-coupon. Wherever one turns, the game’s afoot and it stinks: insider trading, Congressional budget payoffs, everybody on every side of every deal (hello, Goldman Sachs!), phony bookkeeping, obscene executive pay and income gaps, a mountain of pork taller than Everest, a hideously unfair tax system, hedge-fund rates of return that smack of hanky-panky, the system being gamed every which way—and all as far as the nose can smell. The market boys and politicians seem determined to see how far they can push it. The watchdogs have more or less rolled over, or are under stockholder fire themselves. Right now, this doesn’t particularly concern overseas dollar-holders; that’s generally how they do business themselves. But what about the citizenry here?

Eventually, there will be a moral and political convulsion, helped along by $4 gasoline, 25 percent credit-card interest rates, mortgage principal coming due. The public will come to its senses on its own or be brought to them demagogically. The wrath of the electorate may then be unlovely to behold, and that will give pause to the big external dollar creditors. Overnight, Beijing won’t seem a dubious safe haven; suddenly, it will seem possible to overlook the quarrels and arcane social policies that encumber the Euro bloc.

Abraham Lincoln invoked the better angels of our nature to bind up the nation. If we’re going to keep on having the fun we’ve been having, we need to do something about the worser ones. That task will have to start at the top, and it’ll take more than talk and symposiums and think-tank studies to do it. Let’s just hope it will take something less than heads on pikes.

We could use some common sense in examining our situation today. Take the dollar. Common sense—as well as that most enduring and unarguable of economic theories, the late, great Herbert Stein’s dictum that if something can’t go on forever, it won’t—tells us that the situation of the currency is parlous. Balance-of-payments deficits, inadequate domestic savings, government spending run amok, hideous levels of domestic debt creation at usurious consumer rates, a putative housing bubble, etc., etc. All true, all unarguable.

But set against this something else that common sense argues with equal power, but that we’re seldom told. Namely, that what underpins a fiat currency—and in this day and age, all major currencies are fiat currencies, whose reserves consist of holdings of other fiat currencies—is as much its political and cultural character as its statistical integrity. In our case, democracy American-style is the dollar’s hole card.

A while back, I was asked by an advisor to a philanthropic entity I’m mixed up with what event I would consider to be truly catastrophic for the dollar. My answer was: if OPEC and the world’s other major oil producers should decide to invoice substantially in currencies other than the dollar. Oil being the straw that stirs the drink of world commerce, this would be the tipping point that might incite a perfect-storm convergence of the other dire factors enumerated above.

I don’t think that’s going to happen, not for some time. The oil producers and outsourcees want a currency they can trust. Sure, if you’re the central bank of a country like China, like Russia, like Saudi Arabia, holding billions upon billions of the folding green, and you were beset by pundits warning you about balances of payments and so on, you might think of shifting out of the dollar. But where? Quo vadis? To which other central bank would you turn, on which could you rely? China? Who knows what’s going on there? India? Same problem. Unfledged capitalist systems are like teenagers: not to be entrusted with the food money. Russia? You’d entrust your hard-earned reserves to Putin the Confiscator? The Euro bloc? Yada, yada, yada. Japan? Been there, done that. Wherever you turn for an alternative, you find them too untransparent, politically uncertain or underdeveloped, internally riven, simply too small or, in social terms, potentially ill-disposed to capitalism and its fruit-pickers.

In this country, what you see is what you get, and common sense tells me this outweighs every other negative consideration the gloom-and-doom crowd can bring up. We’re always being told that we can get by as long as our overseas trading partners are “willing” to finance our abysmal savings rate, etc., by sending us back their dollars. Common sense tells me they will always be so willing as long as the only alternative is some inscrutable ministry in Beijing, Moscow or Delhi, or that crowd of first-class, chateau-bottled blitherers in Brussels.

In this connection, one other point should be made. Currencies are like salmon: Their instinct is to return to the tributary in which they were hatched. The stream called the United States can handle a whole bunch of finned creatures—which is just great as long as you can trust the folks who control the fishing rights.

The dollar has virtual monopoly status as a reserve currency, which is Walter Wriston’s great if unintended legacy. Back in the 1970’s, when the oil price shot up, he conceived the idea of “petrodollar recycling” and thus protected OPEC from eventually being obliged to sell its oil here and there for tender other than that bearing the stamp of the Federal Reserve Bank. I thought—and said at the time—that this would beggar the rest of the world, as it pretty well did, but that it would insulate us from the consequences of our own improvidence. And so it proved. In time, the dollar became essentially the only game in town. It still is—and I expect it will remain that way until something drastic happens to alter perceptions of this great Republic.

What might that be? Obviously, a significant alteration in the American political landscape, a sharp veer in the direction of class-war anti-capitalism led by a person on a white horse. Can’t happen here? Common sense tells me that the corollary of the Stein dictum has to be that if something’s never going to happen, it very well may.

What’s going to bring this about? In one word: corruption. Sure, we need to get our fiscal house tidied in the ways the pundits prescribe—higher savings rate and all that—but what my common sense tells me is that the great threat to our dollar hegemony, and thus to our economic comfort if not survival, is the corruption that has permeated Washington and Wall Street in the past decade. It’s the big ugly story of my lifetime. It comes in every form, flavor and strength, from the ethically dubious to the downright criminal, from Abramoff to Zero-coupon. Wherever one turns, the game’s afoot and it stinks: insider trading, Congressional budget payoffs, everybody on every side of every deal (hello, Goldman Sachs!), phony bookkeeping, obscene executive pay and income gaps, a mountain of pork taller than Everest, a hideously unfair tax system, hedge-fund rates of return that smack of hanky-panky, the system being gamed every which way—and all as far as the nose can smell. The market boys and politicians seem determined to see how far they can push it. The watchdogs have more or less rolled over, or are under stockholder fire themselves. Right now, this doesn’t particularly concern overseas dollar-holders; that’s generally how they do business themselves. But what about the citizenry here?

Eventually, there will be a moral and political convulsion, helped along by $4 gasoline, 25 percent credit-card interest rates, mortgage principal coming due. The public will come to its senses on its own or be brought to them demagogically. The wrath of the electorate may then be unlovely to behold, and that will give pause to the big external dollar creditors. Overnight, Beijing won’t seem a dubious safe haven; suddenly, it will seem possible to overlook the quarrels and arcane social policies that encumber the Euro bloc.

Abraham Lincoln invoked the better angels of our nature to bind up the nation. If we’re going to keep on having the fun we’ve been having, we need to do something about the worser ones. That task will have to start at the top, and it’ll take more than talk and symposiums and think-tank studies to do it. Let’s just hope it will take something less than heads on pikes.

will find himself with a very full plate. I'm not concerned about his cabinet

choices. John Ashcroft may well have been chosen to forward a judicial

ideology; I find no surprise in that and small cause for outrage, despite being

completely pro-choice myself (I also have no problem with posting the Ten

Commandments in courtrooms). Just as I found no surprise, although somewhat

more cause for outrage, in the departing administration's choice of an Attorney

General whose principal task would be to keep the Clintons, their friends and

their campaign contributors out of the sneezer. This is politics, after all. I'm sorry not to see Linda Chavez take

office; she sounds very bright and practical, and has firsthand experience of

the difficulties faced by the "illegals" who do most of the work in this

country that the "legals" are unwilling or too stoned to do.

It's the business and economic situation that I find

troubling. The chickens coming home to roost-some the size of that new Airbus

A380-may not quite blot out the sun, but they do cast a definite shadow. Let's

look at some of these.

What to do about the

stock market ? What is a good rule of thumb for stock traders is also a good

rule for administrations and central banks: You can't fight the tape. Another

good rule reminds one of that old Lampoon

joke about elephants and fellatio: Everything will work once . I don't think there will be any more Mexican bailouts.

This is a market awash in uncertainty, in which fools are

still listened to as they try to cover their tails. Until the practitioners of

what I call "The Og Oggilby School of Security Analysis"-the prime example

being Henry Blodget at Merrill Lynch, whose "analysis" is mainly conceptual-are

driven from the Street, confusion will continue to reign. By way of

nomenclatural explanation, veteran readers

will recognize Og Oggilby (played by the incomparable Grady Sutton) as

the would-be son-in-law of Egbert P. Sousé (played by W.C. Fields) in The Bank Dick, a film which, along with Animal House , is as full of revealed

truth about this country as anything in de Tocqueville. In the movie, Og allows

himself to be persuaded by Sousé to invest the funds of the bank of which he is

cashier in shares of the Great Beefsteak Mine. Sousé's projection of the riches

that will flow from this fraudulent Golconda reads like a Blodget "analysis"

of, say, Amazon.

The market has not really been helped by clear signs of

panic at the Fed. Neither in this country nor globally are capital markets so

finely calibrated that a one-half-point rate reduction, even leveraged (as was

the case with the infamous Alan Greenspan "carry trade" of the early 90's:

borrow from Uncle Sam at 3 percent, lend back to Uncle Sam at about 6 percent),

will turn around the psychology of investors accustomed to thinking in terms of

internal rates of return of 30 percent or better. What the Fed needs to do is

worry about the possible effect of credit liquidations on stock prices. Worry

about what things cost relative to the spending power of the people. Wall

Street will do just fine; it generally has.

The dollar .

Starting back with OPEC in the 70's, the world was flooded with dollars, a

torrent that was exponentially increased in size and power by the trade

deficits of the 20-year boom. It is axiomatic that the only way for holders of

a currency in oversupply to protect themselves against exchange losses is to

invest that currency in the country of its birth. One problem we had was that

many of the dollars that flooded the U.S. beginning in the mid-70's weren't

born here; they were created offshore, without the Fed's by-your-leave, by the

"petrodollar recycling" Ponzi scheme. I believe that down the line this will

come to be seen as the most grossly irresponsible management of a nation's money

since Spain in the 17th century. As my friend Martin Mayer wrote at the time, a

nation that can't control its currency won't be able to control much else about

itself.

This dollar inflow forced a massive upward pricing

readjustment of the two "fuels" that drive the U.S. economy, energy and credit,

leading to a ripple effect that reached the checkout counter and eventuated as

the inflation of 1977-81, which Paul Volcker ended by squeezing its neck until

dead. A huge liquidity pool remained, however; as this began to be pumped into

circulation, the economy took off. After all, the only sure way to grow an

economy is to put money into the hands of more and more people. It didn't hurt

that the population grew dramatically during this period.

The situation is different now. For one thing, the euro's

out there, lurking in the underbrush, tail swishing back and forth.

What happens if OPEC

decides to accept euros as well as dollars in payment for oil transfers ? As

a store of value alternative to the greenback, the euro seems, culturally and

demographically, infinitely preferable to the yen. If the dollar bloc that

stretches from Point Barrow to Cape Horn is weakening economically, why

wouldn't OPEC hedge by billing its E.U. and satellite customers in euros? My bet

is that it will. What this will mean I simply cannot predict, but my guess is

that the odds would be on the order of 60-40 favoring worse  rather than better for us.

The global problem .

Frequent readers of this column are aware that, over and over again, I have

expressed my concern that the U.S. has represented too great a share of world

demand to be ultimately healthy for anyone, including ourselves. We have become

the consumer of first, middle and last resort, especially for finished goods

with high overseas technological and/or labor content. A dollar convulsion that

reduced U.S. imports could lead, overseas, to political convulsions that might

find their retributive way to these shores.

I don't think we properly appreciate how thoroughly we are

disliked by grown-ups around the world. We may point to McDonalds, Hollywood

and rap as symbols of our cultural hegemony, our command of values, but we tend

to overlook that the appeal of these is largely to post-adolescents-especially

to young people who feel themselves incarcerated in tradition, or in

religion-based social orders where the rules are laid down by village elders

who feel challenged by the anarchic youth culture. The world is aging, and the

ambition and envy (along with greed, the two drives that animate both the

zealots of capitalism and its enemies) felt by older folk is more to be feared

than that felt by the young, who don't really know what they're fighting

against, only that it's cool and the alternatives are less so.

In 1992, I voted for Bill Clinton. Saturday, I will be glad

to see him go, because he takes with him what I now recognize to be an illusion

on my part: that young people are fit to govern. If nothing else proved this,

the dot-com boom/bust, in all its aspects, did. It was a virtual catalog of

youthful mistakes, starting with No. 1: the belief of young people ("I vas

dere, Charlie") that what is happening to them is happening for the first

time-ever.

Obviously there are exceptions: men and women made grown-up

before their time by combat, or by the kind

of high-level competition in which there is only win or lose, in which

there are no second chances, repechages, bail-outs, spin-doctoring,

Presidential pardons. There are others-I think J.F.K. was one-who never grow

up, on whom war confers a kind of eternal youth of outlook. The incoming

President worries me; he sometimes comes across as callow. But I take comfort

in the lines on the faces of the men and women he has chosen to surround

himself with. This is going to be a bumpy ride. There's going to be a need for:

been there, seen that.

What this will mean to Amazon's bottom line or cash-flow survival, I can't say. We could be talking very big numbers. My guess is that Wall Street has taken quiet notice, since the stock is nicely off its midsummer low (back to almost $45 from $30, a 50 percent pop).

This had to have been the business model all along: give away the store with cut prices and super service until the place is squeezed absolutely jam-packed full, then lock the door on the customers, so to speak, and raise the prices-counting on the likelihood that few will choose to break the windows and flee into the street, and that most will go along. Call it the "Herman Hickman Theory of Retailing," after the late Yale football coach who told reporters he would produce an Eli team good enough to keep the alumni "sullen but not mutinous."

Whatever this means for Amazon in particular, what it spells generally is I-N-F-L-A-T-I-O-N. As readers know, this column has for years been plumping for its own definition of what Alan Greenspan fears even more than the sight of his wife without makeup. Namely, that inflation means an increase in price without a commensurate increase in "output value." The latter can equate with effort, or utility, or simply enjoyment. Harry Potter No. 4 presumably offers readers the same pleasure at $20.76 or $18.17, so the $2.59 bump is purely inflationary. Artie Gimlet's SUV gets 13 m.p.g. whether he's paying $1.97 at the pump or $1.35. The difference is inflation.

In other words, the economic bugbear is alive and well and out there among us. Not that you would know it from the numbers put out by the Propaganda Ministry (a.k.a. the Labor and Commerce departments), unless you have been keeping up with John Crudele in the Post, or with the devastating analyses of Clintonian "hedonic" price-adjusting that James Grant and his colleagues have been putting out. The Washington statistics-mongers have shown themselves to be perfect Stanislavskians: adepts without peer at the great Russian director's insistence that his actors must be able to imagine that there's no white bear over there in the corner. And all this time we thought the boys and girls in the Pennsylvania Avenue chanceries were boning up on Von Mises and Hayek.

It's probably very Hegelian to assert that what's going to cause the economic ungluing of an era that proudly calls itself the "Information Age" will be a gross misuse of information, but that's the way I'm coming to see it. What goes around comes around, in other words, and just now what's coming 'round the corner is OPEC, whose name properly should be (and, by future historians, very likely will be) the label attached to the unprecedented continuum of prosperity that this country has enjoyed since 1982.

OPEC, in my view, made it all possible-with considerable help at the time from economic war criminals like Paul Volcker, Henry Kissinger and Walter Wriston. I realize this isn't the conventional wisdom, but let me take you through it one more time.

The OPEC price increases of 1973-79, which ended up increasing the price of a barrel of crude tenfold, were only part of the story. Equally important was the oil producers' insistence that oil transactions be denominated in dollars. This we gladly acquiesced in. Since most nations didn't have dollar-generating resources, they were required to borrow, which they did overseas, where dollar credits and debits could be created willy-nilly outside the oversight of the Federal Reserve. By the end of the 1970's, I recall reading in the reliable Bank Credit Analyst , no one in or out of Washington had a clear idea, within $350 billion (which in those days was real money), how many dollars were out there.

The result was the dollarization of the world economy. More importantly, it is an axiom of exchange finance that currencies gravitate toward the flag printed on them. Ordinarily, a holder of Jamaican dollars would have had a Hobson's Choice: a) invest them in Jamaica and take a possible future business risk, or b) convert them into U.S. dollars and take a financial hit now. The neat trick, which took Hobson out of play altogether, was to make the Jamaicans pay in U.S. dollars, and thus avoid the a) and b) scenarios altogether.

At which point, Dame Fortune stepped in and threw her arms around our shoulders, because unlike any other country, we could absorb not only the consequences of OPEC's insistence on dollar payments, but our own subsequent balance-of-payments profligacy. The mirror image of a trade deficit is a currency surplus, and if everything else breaks a certain way, as it did for us thanks initially to the beggaring policies of OPEC, that need not be a bad thing. Because what went out came back, and in the process financed 10,000 points on the Dow and a hell of a lot besides. Why? Because there was no longer an alternative. Readers below a certain age are going to find this hard to believe, but I can remember trying to travel abroad at a time when nobody wanted dollars!

Obviously OPEC wasn't the whole story; it simply got the dollar ball rolling big-time, helping it attain a velocity that no power on earth dared get in the way of. Thanks to the baby boom coming of age, and our open borders, and the 1960's financial boom, we had everything it took to absorb the kind of currency surplus that, on the other side of the world, would sink the Japanese economy, which rested on too small a physical base. It's interesting to think how things might have turned out if Japan had changed places, physically, with China. I think the Japanese know.

Anyway, the United States had a growing, diverse, huge consumer market, serviced by a high-flying credit mechanism-the physical and financial space capable of absorbing all the dollars that could be printed. Only a world awash in dollars to the extent this is could tolerate the absolute absence of prudence that has characterized so much dot-com investment. Indeed, much dot-com investment simulates the dollar boom of the past 20 years, in which what could not be earned could always be borrowed, and could thus still be spent.

Sooner or later, however, the propensity to spend without earning runs up against a wall. Prices are raised. People begin to get that feeling of paying more for less. They become, first, economically resentful, and then politically so. We live in violent times; civil war is endemic, driven by tribal passions, by cultural differences, by the wish to possess. There is only one truth under the sun, which is that inflation is always trouble.

That Harry Potter now costs $2.59 more at Amazon is not what I regard as a good omen. I wonder how they regard it in Baghdad, or Hanoi, or for that matter Paris, or in any of the thousands of other places around the world that have been dollar-bullied into hating this country.