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
As Budget Deficit Grows, So Do Doubts on Dollar
Time to Stop Digging
From Heritage.org
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.
With Debt Increasing so Rapidly, Americans Will Likely be Paying Higher Taxes
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.
Doubling the national debt
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.
Look at patterns: Entitlements are in deep debt
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?
U.S. deficit poses potential systemic risk: Taylor
"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.
White House Adds $2 Trillion to Deficit Forecasts
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
U.S. Deficit Projection Trimmed for 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's warning of 'ominous' debt may be understated
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.
Buffett Says Federal Debt Poses Risks to Economy
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.
