D.B. in Plano Texas links two major sources of worry. "I am a recipient of both Social Security and Medicare. I remember the Nixon era economic panics. Would you hazard a guess as to when, in your judgment, we can reasonably expect a devaluation of the dollar as a fix for the current economic dilemma?"

History is a lot more meaningful than my judgment. The devaluation of the dollar isn't something that happens on a particular day. It is something that happens every day. In the last 50 years the dollar has lost 86 percent of its purchasing power, reflecting an annual inflation rate of 4.0 percent.

Just as we shouldn't think of the devaluation of the dollar as a single event, we shouldn't think of problems with Social Security and Medicare as a single event. Neither Social Security nor Medicare is going to go over a cliff. They won't be here today and gone tomorrow.

Instead, we a heading toward an environment of ever increasing pressure as the costs of these programs soar. Benefits won't end. There will be increasing pressure on health care providers and recipients. It will be ugly. There will also be an increasing mismatch between official inflation and experienced inflation.

People seem to think about both programs in "all-or-none" terms, as though they will simply disappear. The reality will be gradual but painful change.

Since the reforms of 1983, payroll tax collections have exceeded the benefits promised and paid out. That surplus is ending. Payroll taxes will fail to cover promised benefits sometime between 2010 and 2015. This isn't a personal guess. It is according to the "Intermediate" and "High Cost" estimates made by the Social Security and Medicare Trustees. It will probably be closer to 2010 than 2015 because our experience has been closer to the high cost estimates than the intermediate estimates.

When benefit payments exceed payroll tax collections, our government will have to redeem the Treasury obligations in the Trust funds. It will probably do this by trying to borrow the redeemed amounts from the global lending markets. By then, foreign lenders may want to exchange their dollars for harder assets than I.O.U.s from the U.S. Treasury.

The primary reason for the devaluation of the dollar---as measured by exchange rates, inflation, or the price of gold--- is our debt. A secondary reason may be foreign worries that they will be stuck with our paper money, noting that some foreign purchases of U.S. assets have been difficult or impossible. To the extent that our politicians make it difficult to buy U.S. hard assets, foreigners will worry about the real value of their dollars.

One of the most telling things I've read in recent weeks is a comparison of our finances in the 60s with our finances today. It appeared in the May 19 edition of Grant's Interest Rate Observer.

"As they did in the mid- and late 1960s, war and deficits will push the gold price higher, we believe. It's not that the United States can't afford Iraq and Afghanistan. It's rather that we can't afford ourselves. In the 1960s, some 40 percent of the federal budget was earmarked for defense; today, it's only 19 percent. But, in 1964 (the year of the Tonkin Gulf affair and the resumption of the bear bond market), health and human services and debt service absorbed 4 percent and 9 percent of the federal budget, respectively. That compares to 23.5 percent and 16.5 percent, respectively, today.

"In 1964, the United States showed a current account surplus of 1 percent of GDP, on its way to a deficit of 0.5 percent of GDP in 1972. The current account deficit was 3.6 percent of GDP in September 2001, subsequently widening to almost 7 percent of GDP.

"Federal indebtedness increased by only 16 percent between 1964 and 1969, but by more than 40 percent since 2001. In short, this country financed the guns and butter of the 1960s with taxes. It is financing the guns and butter of today with rising indebtedness, much of it foreign. The tax Americans will ultimately pay is that of a lower dollar exchange rate. A heavy tax it will be, though the gold bulls will find it bearable."

From 1962 to 1971 inflation rose at an annualized rate of 3.2 percent. From 1972 through 1981, inflation rose at a compound rate of 8.6 percent. (The figures are from Ibbotson Associates.) Many would like to blame the inflation of the 70s on OPEC. But the reality is more complicated. When Richard Nixon ended the convertibility of the dollar into gold in 1971, oil producers had no assurance their dollars had any value.

That's where we are today, in spades.

On the web:

Grants Interest Rate Observer

Tuesday, May 16, 2006: Colliding worlds on a fast track

Sunday, May 14, 2006: New government reports could cause nightmares

Social Security, Medicare and Generational Storm Reader