The U.S. economy may be showing signs of recovering from the financial crisis, but the jury is still out on the future of the U.S. dollar.
While many analysts expect the dollar to strengthen in coming months as the crisis fades and the U.S. economy turns toward growth, a growing chorus of investors is expressing concern about the longer-term outlook for the greenback.
In a new twist to an old refrain among economists, who have long worried about the effects of growing U.S. debt, they say that the huge liabilities the U.S. is taking on to dig its way out of crisis could ultimately undermine faith in the dollar.
"There has been a lot of disappointment with the way the U.S. credit crisis was handled," says Claire Dissaux, managing director of global economics and strategy for Millennium Global Investments Ltd., a London investment firm specializing in currencies. "The dollar's loss of influence is a steady and long-term trend."
On Tuesday, the Obama administration added fuel to concerns about the dollar, saying the U.S. will run a cumulative budget deficit of $9 trillion over the next 10 years, $2 trillion more than it had previously projected.
"That's going to be negative for the dollar," says Adam Boyton, a currency analyst at Deutsche Bank AG in New York. President Barack Obama also reappointed Federal Reserve Chairman Ben Bernanke, whose efforts to rescue the economy have won praise, but have also entailed pumping large amounts of freshly created dollars into the financial system.
Investors and economists have long harbored concerns about the dollar's decline, especially in the beginning of this decade as the federal government and consumers ran up their debtloads to finance everything from foreign wars to flat-screen TVs. Last fall's financial crash suggested that such fears may be overblown: As markets plunged in the wake of the collapse of Lehman Brothers Holdings Inc., investors scrambled to stash their cash in U.S. Treasury bills, perceiving them to be the safest investments. That boosted the value of the U.S. dollar against many of its major counterparts.
Thursday, August 27, 2009
The new budget spending estimates are alarming and absolutely unsustainable--and are the true cause of these appalling levels of deficit and debt. President Obama has proposed massive tax increases that still cannot keep up with the historic spending increases he has proposed. The result will be highest level of spending--and debt--in American history. Within a decade, Washington would have to spend nearly $800 billion annually just to pay the interest on the national debt.
In this budget context, the President's and Congress's brazen proposals to create a $1 trillion health care entitlement are reckless and unaffordable. Lawmakers should focus on capping federal spending, restraining entitlements, and eliminating wasteful and lower-priority programs.
The U.S. is still a $14 trillion economy. But the nation's debt is now more than 50 percent of the country's economic output - the first time that's happened since World War II.
"The debt of the United States is growing so rapidly, we are viewed by the rest of the world as profligate, imprudent and incapable of managing our own affairs," said Peter Morici, an economist with the University of Maryland.
The government has been spending borrowed money to fight the recession and to finance wars in Iraq and Afghanistan. The deficit is expected to continue to grow $9 trillion over the next decade as we face the swelling cost of entitlement programs like Social Security and Medicare.
The Obama administration late last week, in classic late Friday afternoon attention-dodging mode, released its midsession budget review. The good news: the federal deficit for this year will be only $1,600,000,000,000 rather than $1,800,000,000,000. The bad news, which will be released officially Tuesday: the projected federal deficit for the next ten years is projected to increase to $9,000,000,000,000 from $7,000,000,000,000.
That’s an extra $547,000 per day every day for the next 10 years.
As Harvard economist Greg Mankiw points out, this means that the national debt is on it way to more than doubling over the next ten years.
The Social Security Act was signed into law by President Roosevelt on Aug. 14, 1935.
The Social Security "trust" fund has $10.662 trillion in unfunded obligations as of Aug. 1.
Both Medicare and Medicaid (Title XIX of the Social Security Act) were signed into law by President Johnson on July 30, 1965.
Combined, Medicare and Medicaid have unfunded obligations of $39.612 trillion as of Aug. 1.
The prescription drug entitlement program was signed by President Bush on Dec. 8, 2003. In a brief six years, it already has $8.520 trillion in unfunded obligations.
See a pattern?
"We have a huge deficit. ... The stimulus package is generating a lot more debt, and there are systemic issues there," Stanford University economics professor John Taylor told Reuters Television on the sidelines of the Federal Reserve's annual Jackson Hole conference.
The Obama administration expects the deficit to hit a record $1.58 trillion this year, and sees a cumulative $9 trillion of additional red ink in 2010-1019.
"If that gets out of control, if interest rates start to rise because people are reluctant to buy all that debt then that can slow the economy down. So, that's the more systemic concern I have," Taylor said.
With an estimated $400 billion in commercial real estate debt set to mature this year and another $300 billion due in 2010, the sector is facing an acute crisis.
But Taylor said it was not clear the sector's woes pose a systemic risk.
"It's a risk for commercial real estate that's for sure, but the question is what kind of risk it is for the rest of the economy, and it seems to be there isn't as much of a concern there as there has been for housing for such a length of time," he said.
The nation would be forced to borrow more than $9 trillion over the next decade under President Obama's policies, the White House acknowledged late Friday, bringing their long-term budget forecast in line with independent estimates.
The new projections add approximately $2 trillion to budget deficits through 2019. Earlier this year, the administration had predicted that Obama's policies would require the government to spend $7.108 trillion more than it collects in tax revenue over the next decade.
Critics called the administration overly optimistic, charging that Obama's figures masked the depth of the nation's fiscal crisis and falsely suggested that his policies would stabilize the nation's growing debt to China and other foreign creditors.
Thursday, August 20, 2009
The Obama administration next week will project a federal budget deficit for fiscal 2009 of about $1.58 trillion, slightly less than previously predicted, a senior administration official said.
The change reflects improvements in the financial industry since the beginning of the year that have somewhat lessened the government's expected bailout burden. But the federal budget deficit still would exceed any since World War II as a percentage of the economy, the measure economists prefer.
The large deficit and the grim longer-term fiscal outlook also will continue to play a big role in the debate over domestic priorities, such as health-care overhaul.
The White House budget office and Congress will update their fiscal projections Tuesday. The administration earlier this year predicted the deficit for fiscal 2009 -- which ends Sept. 30 -- would be about $1.84 trillion.
The improvement since then reflects the lowered cost of the financial-sector bailout, officials said. In particular, the Obama administration is dropping the $250 billion cost of additional aid for the financial industry.
The administration's forecast also is benefiting from a somewhat improved outlook for expenditures related to bank failures.
A Republican aide complained late Wednesday that the administration's latest forecast actually masks a slight deterioration in the fiscal situation this year, because of lower-than-expected revenue collections.
Buffett noted that fiscally the country is in "uncharted territory," pointing out that the deficit is $1.8 trillion. Buffett commented that the country’s "net debt," the amount held publicly, has climbed to about 56 percent of GDP from 41 percent. After recovery is gained, he urges that Congress must end the rise in the debt-to-GDP ratio and keep the growth in obligations in line with the growth in resources.
Those words are easier said than done.
According to David Walker, former U.S. Comptroller and President and CEO of the Peter G Peterson Foundation, the real national debt is about five times worse than advertised at more than $56 trillion. Between Medicare’s three programs (hospital insurance, outpatient, and prescription drug), current and future promised Medicare benefits are more than $36 trillion.
The larger numbers are calculated using what is known as the accrual method of accounting. The IRS requires companies with sales exceeding $5 million to use the accrual method, but the government is not bound by its own rules and it instead uses the cash method.
The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency, billionaire Warren Buffett said.
The “gusher of federal money” has rescued the financial system and the U.S. economy is now on a slow path to recovery, Buffett wrote in a New York Times commentary yesterday. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the U.S. is fiscally in “uncharted territory.”
The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and the Fed have spent billions more on separate programs to rescue financial institutions and resuscitate the banking system. The U.S. budget deficit is forecast to reach a record $1.841 trillion in the year that ends Sept. 30.
“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, said. “For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”
The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year, while net debt will increase to 56 percent of GDP, Buffett said.
Foreigners renewed purchases of American financial assets in June, as investors sought safe haven in Treasuries amid concerns about the timing of a recovery in financial markets and economies worldwide.
Total net purchases of long-term equities, notes and bonds were a net $90.7 billion, more than forecast and compared with net sales of $19.4 billion in May, the Treasury said today in Washington. Net buying of U.S. government notes and bonds totaled $100.5 billion, the most since records began in 1977, after net selling of $22.6 billion in May.
Investors in Japan and the U.K. increased their holdings of U.S. assets as the Obama administration sold debt to finance a record budget deficit and fund economic stimulus spending. Recent signs of stabilization may further boost the flow of foreign funds into the U.S. in coming months, even as emerging powers such as China and Russia question the U.S. dollar’s dominance in the global economy.
“As we have increased issuance, overseas holdings of our assets have gone nowhere but up,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “Despite all the worries regarding the potential of foreigners to rotate out of U.S. dollar-denominated assets, which will eventually cause a collapse in the dollar, no such action has been witnessed.”
Tuesday, August 18, 2009
Treasury Secretary Timothy Geithner met with the heads of several business trade associations earlier this week, asking for their support as he pushes Congress to raise the cap on how much the nation can borrow.
The meeting shows that the Obama administration is worried that the perennial task of raising the limit on the national debt could become a real political problem — especially since lawmakers have gotten an earful from angry constituents about government spending this August. Raising the debt limit has become a fairly routine task in recent history — under both Republican and Democratic administrations — but with polls showing Americans increasingly concerned about deficits, the vote is a little trickier right now.
Geithner sent a letter to congressional leaders last week asking them to quickly raise the current $12.1 trillion debt limit, warning that it could be hit as early as October. Congress last upped the debt limit in February when it passed the $787 billion stimulus package.
Wednesday, August 12, 2009
To bring the budget under some semblance of control, what’s needed are iron-clad restraints on the annual growth of expenditures. I call it “cap and save,” and here’s how it would work:
Each year federal expenditures (except interest on the national debt) would be limited to the rate of population growth plus the previous year’s inflation rate. U.S. population grows at about 1% per year, so if the rate of increase in the consumer price index were 3%, overall federal spending growth would be capped at an annual 4% rate. Only in years of a declared war or during a recession would Congress have the authority to suspend the cap.
The savings would be modest in the short term but would magnify over time, generating small, but manageable deficits. I calculated the savings from a spending cap relative to the current trajectory of spending anticipated by the CBO. A cap would reduce aggregate outlays through 2019 by $750 billion and by 2030 by $3 trillion. An added bonus: With lower deficits, we would also have to borrow less from the Chinese and other foreigners and save on interest payments as well.
To enforce a spending cap, Congress will need to authorize an automatic spending reduction formula. This means reviving a spending sequestration formula such as the one used under the Gramm-Rudman-Hollings Act of 1985 to help reduce the deficit in the late 1980s. (The law was repealed in 1990.)
Thus, if the CBO determined that federal spending was running above the spending limit at the mid-term of a fiscal year, every nonentitlement program in the budget would be cut by an equal percentage to bring outlays back under the cap. This would force Congress and the administration to prioritize spending and programs.
Thursday, August 6, 2009
At President Obama's daily economic briefing this morning, the president took the time to re-educate two of his administration's top economic officials on his campaign promise that he would not raise taxes on the middle class. Over the weekend, when pressed on whether the president would raise taxes on middle-class Americans to bring down the record-breaking deficit, two of his closest economic advisers dodged the question. "We're going to have to do what's necessary,"
Sunday, August 2, 2009
A simple question, that headline. And, if you boast a passing acquaintance with the news of late, a simple answer. But not as simple as our natural assumptions of a generation ago. Back then, the rhetorical question and concomitant retort would have been: “Who owns our debt? Why, we (the American people) do, of course.”
Not so today. Estimates from a year ago (June 2008) indicated that nearly half of all U.S. Treasury securities (49.37 percent) were held either intergovernmentally, or by the Federal Reserve. Another 23-plus percent were owned by a melange of private individuals and entities (insurance firms, pensioners, holders of U.S. savings bonds) and public-sector bodies (principally, state and local governments).
The other nearly 28 percent? Foreign investors. Of that portion, the Chinese hold nearly a quarter (24.07 percent), with the Japanese (whom you don’t hear about quite as much) a relatively close second at 20.66 percent. From there, the percentages drop dramatically to the 6.06 percent owned by oil exporters and the 5.75 percent held by Caribbean banking centers.
The debt, now measuring $11.61 trillion as shown by the U.S. National Debt Clock, is hardly our own. Which, needless to say, renders our economic situation more precarious than it ever has been.
"When we have recovery established, led by the private sector, then we have to bring these deficits down very dramatically," he told ABC's "This Week" in an interview broadcast Sunday. "And that's going to require some very hard choices. And we're going to have to do that in a way that does not add unfairly to the burdens that the average American already faces."
Geithner also said private economists generally expect to see growth later this year and unemployment to ease in the second half of next year.
Any sustained recovery must rely on business investment and hiring, he said. Geithner said the administration will stick with its economic efforts until there a strong private sector-led recovery is in place.
When the stimulus package was passed by Congress this past February, President Barack Obama assured Americans that this huge unfunded spending proposal was necessary to keep unemployment from rising and would restore growth to the recessionary economy.
On July 11, President Obama said the stimulus package “worked as intended.”
“The recovery plan was not designed to work over four months. It is designed to work over two years,” he said.
Unfortunately this is not how the stimulus package was sold to the American people. In his Jan. 24 radio address, the President said the purpose of the stimulus plan is “to immediately jumpstart job creation as well as long-term economic growth.” Immediately is not two years.
In fairness to President Obama, he also told the American people “this is not just a short-term program to boost employment. It’s one that will invest in our most important priorities like energy and education; health care and a new infrastructure.” In other words, the real purpose of the stimulus package was to substantially increase government spending using economic stimulus and job recovery as a smoke screen to sell the American people.
Unfortunately, at the time, mainstream media was too intoxicated with “Obama mania” to point out the real purpose of the stimulus package to the American people.
Looking into the future, it ain't pretty
The real problem is the medium- and long-term outlook.
Analysts have long emphasized that the country faces a long-term budget problem as a consequence of our rapidly growing old-age entitlement programs.
But now even the 10-year outlook is unsustainable. By 2019, even if everything goes the way the Obama administration wants, and the economy recovers and grows steadily over the next decade, the deficit will be 5.5% of GDP, an extremely high figure in good times, and the debt-to-GDP ratio will hit 82%, its highest level since just after World War II, and will keep rising.
And things aren't as likely to go as well as President Obama hopes. The economy has already performed worse than was assumed in the budget projections, and the projections are based on heroically optimistic assumptions about the political discipline Congress will impose on itself. And, of course, the problem will deepen, continually and inexorably, after 2019, as spending on Medicare, Medicaid and Social Security will grow rapidly.
Large chronic deficits are a serious economic problem. While much attention is given to the effect of deficits on interest rates, that effect is a symptom of a problem, not the problem itself.
If they are financed domestically, deficits will gradually divert capital from productive domestic uses, through a rise in interest rates. This diversion reduces the amount of capital available to U.S. workers, lowering their wages and hence their living standards. If our deficits are financed from abroad, interest rates may not rise as much, but interest payments on these deficits will flow back abroad.
In either case, the future national income of the United States and its citizens is reduced, businesses will find it harder to expand and homeowners will find it tougher to get credit.
Deficits can also affect the economy more suddenly. The prospect of large or out-of-control deficits can spark investors' fears and cause a run on the dollar and a sharp rise in interest rates.
Top Obama administration officials sought to reassure their Chinese counterparts that the U.S. was committed to reducing its ballooning deficit and sought assurances from China that it would retool its economy to be less dependent on exports.
Speaking at the start of the U.S.-China Strategic and Economic Dialogue here, President Obama said Monday that the two countries had a "mutual interest in a lasting economic recovery" and that their partnership was "as important as any bilateral relationship in the world."
"The current crisis has made it clear that the choices made within our borders reverberate across the global economy — and this is true not just of New York and Seattle, but Shanghai and Shenzhen as well," Obama said.
"And that is the example we have set by acting aggressively to restore growth, prevent a deeper recession and save jobs for our people," he said.
But those actions have fueled concerns in China about the value of its large holdings in U.S. bonds, which would be eroded by increased inflation caused by large budget deficits.
Chinese officials had "serious questions" Monday about Obama-administration plans for pulling back its economic stimulus and financial rescue programs, said David Loevinger, the Treasury Department's senior coordinator for China affairs and the summit.