Tags: Stanford | Professor | Deficit | Dollar | Collapse

Professor: Huge Deficit Will Cause Dollar to 'Collapse'

Wednesday, 31 Mar 2010 08:29 AM

The federal deficit may soon cause a “collapse” of the dollar, Stanford University economics professor Scott S. Powell writes.

In an opinion piece in The New York Post, Powell notes that the ratings agency Fitch just cut Portugal's bond rating to AA negative — a clear sign that the insolvency crisis that began in Greece is far from over.

“And don't think it's merely a problem for the European Union. In fact, a debt-driven collapse of the dollar may be closer than most Americans realize,” he writes.

Before the government bank bailouts, gross federal debt was 70 percent of gross domestic product (GDP).

“It's now estimated at about 90 percent of GDP. Add in the $1.6 trillion debt liability of Fannie Mae and Freddie Mac, and we're already at that 100 percent debt-to-GDP tipping point,” writes Powell.

“No, the United States isn't Greece: For a host of reasons, we can probably get away with higher debt. But our problem is about to grow worse.”

Right now, low interest rates make federal borrowing seem cheaper than it actually is — because those interest rates won't stay at zero forever.

“And when rates head back to normal, Uncle Sam's borrowing costs could easily double. We spend 11 percent of the current budget — $382 billion — on debt service; that could rise two- or three-fold to more than $800 billion, warns the CBO,” says Powell.

Adding to the pressure on the dollar — inflation related to new job creation once the economy really starts to expand, reports CNNMoney.

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