Saturday, October 23, 2004

The Bush Budget Deficit Death Spiral: "These “twin deficits”—trade and budget—combine to well over $1 trillion a year of borrowing. Their effect is to bury the world’s economy in dollar debts, dollars that increasingly buy less and less. As mentioned above, no one knows when the world will say, “enough.” Japan holds a reported $1 trillion supply of dollars, China, more than half a trillion. Both have bought dollars—in effect loaning equivalent sums to the U.S.—in order to keep the value of their own currencies low and therefore make their own goods cheaper in American markets.

"The Bush administration claims that both countries will continue to buy dollars so that their own currencies will not rise. But the danger is that once one major player declares it doesn’t want any more dollars there will be a rush for the exits. Demand for dollars, and with it, the dollar’s price, will plummet. The last player holding dollars will be stuck with the bag, a multi-trillion dollar stash of dollar holdings that are worth only a fraction of what they were just a month before."

"The only way the U.S. government can prevent a stampede is to raise interest rates—the return for holding dollars. And Alan Greenspan has begun this process. But this, of course, increases the carrying costs of the national debt. As if a $7 trillion national debt funded at 4% isn’t bad enough, envision a $15 trillion debt at 10%. Instead of $300 billion a year in interest costs, think of $1.5 trillion. Instead of interest amounting to 3% of GDP, imagine the carnage as it approaches 10%."

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