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Economists Fear Coming Tsunami of Government Debt

By    |   Thursday, 15 Oct 2009 10:02 AM

With U.S. debt heading toward the stratosphere, America's financial future is in peril and the dollar is, understandably, under pressure as a result.

Projected federal budget numbers indicate that the national debt will reach 100 percent of GDP in 2011, writes economist and author Judy Shelton in a recent op-ed essay in The Wall Street Journal.

This year's federal budget is on track to hit 90.4 percent.

"Unprecedented spending, unending fiscal deficits, unconscionable accumulation of government debt: These are the trends that are shaping America's future," Shelton writes.

Yet, "it may be too soon to dismiss the dollar as an utterly debauched currency."

For the time being, the U.S. dollar is still the currency of choice for international business dealings, and accounts for over 60 percent of official foreign-exchange reserves in foreign government central banks.

Yet the U.S. buck, once seen as the most dependable and strongest of international currencies, has lately been taking a beating. And with good reason, Shelton writes.

The dollar is now "perceived as the default mechanism for out-of-control government spending," Shelton warns.

International economies are sending the U.S. this message says Shelton: "Issuing more promissory notes is not the way to renew America's promise."

On international currency markets, the dollar recently sank to a 14-month low against other currencies, while the Canadian dollar and the Australian dollar hit new highs, and the euro also advanced, reflecting a lack of confidence in the U.S. economy.

Some emerging economies, fearing for their own exports, are buying up dollars, but constantly bailing a sinking ship might well turn out to be impossible.

How did we get here?

The tax cuts of the last decade, combined with this year’s tremendous federal spending binge, are creating a “fearsome” fiscal crisis, the worst budget deficit that that U.S. has faced in 75 years, says former Clinton administration Deputy Treasury Secretary Roger Altman.

Writing in The Financial Times, Altman, who was also an economic advisor to the presidential campaigns of Hillary Clinton and John Kerry and is an investment banker with Evercore Partners, said the government’s fiscal crisis has been exacerbated by recession.

“America's fiscal dilemma is unprecedented,” writes Altman.

“All the data are signaling weakness. Consumer spending, which represents 70 percent of gross domestic product, and employment are especially downbeat. Joblessness, having hit a 26-year high, will not improve much through 2010. The pace of recovery, therefore, will be painfully slow.”

Through 2019, private forecasts predict deficits averaging approximately $1 trillion a year. Then, the federal deficit will represent 6.5 percent of GDP.

The national debt will also hit “nearly 85 percent of GDP,” writes Altman. “Annual interest costs on it would exceed the U.S. defense budget and the whole category of discretionary spending.”

Despite this dire warning, Altman believes more spending is necessary now. There should be a “stimulative” policy by the federal government, Altman writes.

The Federal Reserve should maintain a zero interest rate and the $787 billion stimulus from last February should be “expanded,” he said.

The economic climate of today is starting to resemble the late 1970s, he added.

“President Obama and Congress should not risk a replay of the Carter experience,” said Altman.

Other G-20 nations are facing government big budget problems too. A report in The New York Times indicates that Britain's budget deficit is expected to reach £175 billion next year.

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With U.S. debt heading toward the stratosphere, America's financial future is in peril and the dollar is, understandably, under pressure as a result. Projected federal budget numbers indicate that the national debt will reach 100 percent of GDP in 2011, writes economist and...
government,debt
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2009-02-15
Thursday, 15 Oct 2009 10:02 AM
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