"It's The Economy Stupid" Revisited

The US dollar is facing unprecedented resistance to its primacy as the standard currency for global trade and the drivers for this let us know what is still wrong with the US Economy and Fiscal Policy.

Mind numbing debt with more debt on the horizon for the Federal Budget is taking its toll on those who invest in the US Dollar and those institutions and nations that loan money to the US Government. The Congress is now preparing not to bring spending in line with projected revenues but rather to increase the amount of debt allowed by law.

In order to consume more than we are earning, in this case more than taxes on our earnings are generating, we are essentially putting ourselves in a position where we are working for the government of the People's Republic of China and the foreign investment banks. Our lenders are getting nervous because our ambitions to grow government services are unchecked along with our appetite for debt. It is one thing to borrow money to build a bridge that will last 50 years, it is quite another to borrow money to give a benefit that is immediately consumed or hire an employee to deliver a service. In 10 years we will have a bridge to show for our debt and to continue to benefit from, whereas the consumed service and cost of delivering it will be long gone.

Our current largest lender, the Chinese have pegged the Yuan (RMB) to the US dollar at a rate of 6.83 Y to 1 USD and the consequence of this was their cost for imported and exchange purchased oil rose nearly 100% as did ours from December of 2008 through September of 2009. If the Chinese had pegged their currency to the Euro, they would have seen only a 75% increase in fuel oil price. They paid a premium for sticking with the dollar, how long will they pay it?

The oil exporting nations receive dollar based payments for their oil and they are concerned about the devaluation of the dollar, which is why they are quietly exploring alternative currency options. The US dollar will be devalued if the value produced by our economy can not out grow this federal debt and the interest payments.

We are currently at the brink of a long-term downward and self reinforcing cycle. Unless we limit government debt and shore up confidence in US fiscal policy, the US dollar will be discounted and eventually abandoned as the global standard. The Euro has presented itself as convenient and disciplined option.

As we shop more debt with a devalued currency, we will need to pay higher and higher interest rates to attract fewer and fewer investors. We will also need to generate more tax revenues by levying higher taxation rates on an economy that must produce more to just to break even. There will also be less money to fuel and reinvest in the economy due to the double trap of less income after taxes and the added cost of buying energy and other imported goods with deflated dollars.

Who would take us over this brink? This is the economic policy of a third world debtor nation not a western democracy.