Deficit Spending, President Bush’s economic policy and the demise of the doller i.e. Greenback

Most agree that the value of our national debt is astronomical and should be dealt with. The debt is increase by both interest and deficit spending. So when most all people would agree that debt should be dealt with many less are concerned about deficit spending. The following are my thoughts on deficit spending.

First I would like to ask how the US can afford to run such high deficits? A deficit means the US has spent more then the revenues (taxes) it takes in. How is this possible? Well the US funds it’s deficit spending by borrowing from you the public. It does so though bonds. So for every year of those large deficits there has been large years of bond issues. A bond is an IOU which eventually has to be paid. Now if you had a friend or even a bank that was continuously lending more money than it was taking in people would begin to question the stability of that institution. Is it possible that the stability of the US economy as an institution could start to be questioned? Well for the most part that has not been an issue.

Why is there such trust in the stability of US economy? The American greenback is the foundation not only of our economy but most of the world. Many foreign countries back their currency with American greenbacks and when they maintain their exchange rates they do so with greenbacks. This adds a lot of backing to the United States economy.

So how and why is the greenback the foreign reserve currency of choice? Simple, it is because of the foreseen security in the US economy. It is the largest and most trusted economy in the world.

But has anyone caught on to the problem? This is a circle. The more we deficit spend the more we throw doubt into the strength of our economy. If we start losing that strength and hence the perceived security could the world stop using the greenback as the backing of their own economy? Well guess what:
http://www.rense.com/general27/rec.htm
http://www.eubusiness.com/imported/2003/06/111858
http://www.marginalrevolution.com/marginalrevolution/2004/12/could_the_euro_.html

This is the first signs of trouble. Never before has the US Greenback been in decline as the foreign reserve currency.

As the US losses its standing as the reserve currency and hence its perceived strength and security the circle will come full circle. We won’t be able to enjoy deficit spending like we have. But now we have a large national debt to pay without the luxury of deficit spending. Could this downward spiral continue until the US couldn’t afford to pay it bonds? Fortunately I don’t have any links to post on that question. We are still far away from that situation. But the warning is there and the trends are in place. Fiscal responsibility is a must. It is atrocious to me to think that in 4 years this country has gone from a surplus budget to a one year – half of a trillion dollar deficit (http://usinfo.state.gov/ei/Archive/2004/Feb/02-225146.html). Not to mention a 2.75 Trillion dollar deficit projection for the next decade (http://www.msnbc.msn.com/id/4401126/). The largest ever! Even in times or war and there have been many other much longer and harder times of war.

This isn’t doom and gloom. The US economy has plenty of strength and is still the majority of the world’s reserve currency. However the next time a politician sells the idea that deficit spending will help the economy, increase jobs, have limited negative effect etc. tell them to shove it. They just can’t manage their finances.

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This entry was posted on January 28th, 2005 and is filed under Economics, Political. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.