Obamanomics – The Demise Of The Once Mighty Dollar
Now that Standard and Poor’s has cut its outlook on the U.K.’s AAA credit rating, can the U.S. be far behind. We’re headed down the same primrose path, according to Bill Gross co-chief investment officer of PIMCO, who predicts that the U.S. “will eventually loose its top rating”. How did we get to this sorry state of affairs?
Unbridled spending and borrowing - The U.S. is boosting its debt sales to $3.25 trillion for the fiscal years ending Sept 30th pushing the nation’s “marketable debt” to an unprecedented $6.36 trillion. The Federal Reserve’s custodial holdings of Treasuries for foreign accounts have already risen to $1.9 trillion.
But the past is only prelude to the Obama fiscal future. Further deterioration of the dollar and our credit rating is a virtual certainty as the Obama spending plans and resulting deficits kick in. The projected deficit in the Obama Budget is $7.0 trillion for the decade 2010 to 2019. That’s the good news!
The Congressional Budget Office (CBO) has concluded that, if the Obama budget were approved, the federal government would actually run even larger deficits averaging nearly $1 trillion a year over the next decade. The cumulative deficit from 2010-19 would be $9.3 trillion, according to the report - $2.3 trillion more than the Obama administration’s forecast. The main reason for the difference in budget estimates is a difference in economic growth, with congressional views of long-term growth less optimistic than those of the White House.
Take no comfort in Secretary Geithner’s promise to lower the deficit from its current 12.9% of Gross Domestic Product (GDP) to a more sustainable 3% of GDP. Neither the Obama budget nor the Congressional Budget Office’s analysis supports his rosy prediction. Specifically, the deficit will be a minimum of 8.2% in fiscal 2010 and is very unlikely to fall below 5% by 2019, even under the best of circumstances.
How can the United States wind up on the brink of insolvency; it’s unthinkable? Think again, just add the Obamanomics deficits, as laid out in the President’s ten-year plan, to the existing $11 trillion national debt and it will not be long before the U.S. may be unable to meet its financial obligations. The road to insolvency is always paved with red ink.
Obamanomics represents change with unconscionable deficits leading us to the brink. In a recent speech Richard Fisher, President of the Dallas Federal Reserve Bank, laid out the staggering scope of the problem, “the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations” that “we at the Dallas Fed believe total over $99 trillion”.
Even the normally supportive New York Times has been forced to acknowledge the problems we may be facing if the Obama spending plans are implemented - “The Federal Reserve is printing money from thin air, and the government is issuing trillions of dollars in new debt as it tries to spend its way out of the recession with a huge stimulus package, new lending programs, health care overhauls and automotive rescues. Experts warn there might not be enough demand to sop up all those new dollars and dollar-denominated Treasury securities“.
There has been a steady deterioration in the value of the dollar versus the euro since March 18th when the Fed announced plans to buy up to $300 billion in U.S. government debt to keep interest rates near zero and help stimulate the economy. Given that the European economy is in much worse shape than the U.S., this must have come as a rather unpleasant surprise to the Fed. This money-printing scheme has clearly caused alarm all over the world as foreign buyers of U.S. debt have begun to worry that the value of their holdings may be deteriorating. If China and other foreign creditors lose their appetite for US debt, the result will be catastrophic for the dollar, US interest payments to service our debt and the economy.
The signs are all there! The 10-year Treasury yield is rising as foreign central banks are increasingly cutting their holdings of long-dated Treasury debt and shifting to short-dated maturities in an attempt to safeguard the value of their holdings. Dollar denominated oil prices continue to climb even though demand is tepid. Combined with the recent deterioration of the dollar, the market alarm bells are sounding - double-digit inflation is on the way in the next 24 months.
But alas, recession fever has dulled our senses and we hear nothing but white noise. Some have even been heard to say a little inflation will help solve the housing problem and reduce our debt burden.
“Inflation is the one form of taxation that can be imposed without legislation.” - Milton Friedman
Well America could not continue her murderous regime in destroying other countries so now she is paying for it big times.The world knows that she is in a twenty year depression except its population, and eventual devaluation of the dollar with an emerging world currency.It did not take long……….
May 27th, 2009 at 4:55 pm