2009-03-26

Thoughts on the impending collapse of the US Dollar

Of all countries in the world, none has the same knee jerk, reds-under-the-bed, the sky is falling attitude towards raising taxes as America does.

Some might argue - and with good reason - that raising taxes during a recession is a bad idea. However, when you consider that current estimates of the budget deficit exceed 10% of GDP, what else can you do?

It's all very well to say that Roosevelt ran deficits back in the 30s that helped stimulate the economy - but back then budget deficits were hovering around 3-5% of GDP.

According to "Historical Tables of the FY 2009 Budget", there was only one time since 1930 in which the US government ran budget deficits in excess of 10% of GDP, and that was between 1942 and 1945.

With the budget deficit likely to exceed 10% of GDP, the United States is embarking on a fiscal situation that rivals the Second World War, and exceeds that of any year of the Great Depression.

According to recent stats from The Economist magazine, four nations are expected to have budget deficits in excess of 10% this year. They are the United States (13.7%), Britain (11.3%), Ireland (12.4%) and Iceland (12.6%).

Huge deficits of the size being predicted cause international investors to baulk. In the case of Iceland, investors pulled out and caused the Krona to crash. This has resulted in inflation nearing 20% in Iceland.

The Pound is already taking a pounding over Britain's increasingly unstable economy, while Ireland's financial troubles are fortunately subsumed by their adoption of the Euro.

In short, the huge budget deficit that the US is running will end not in a boost to the economy but result in the ruin of the US Dollar.

4 comments:

apodeictic said...

"Ireland's financial troubles are fortunately subsumed by their adoption of the Euro."

Many would argue (myself included) that Ireland's problems have been *compounded* by adoption of the Euro.

BLBeamer said...

However, when you consider that current estimates of the budget deficit exceed 10% of GDP, what else can you do?

Gosh, I don't know. Maybe: cut spending in real terms and stop the rhetoric that gives the productive sector of the economy the heebie-jeebies???

It also would help if they acted as if they actually cared more about resolving the crisis than they did about covering their asses (do they have that term in Australia?).

One Salient Oversight said...

A reasonable tax increase wouldn't really hurt... however, NOT spending large amounts of money on a doomed stimulus program would help too. So I'm on the page with you there.

We cover our Donkeys here.

BLBeamer said...

I heard Milton Friedman once say that he felt tax reductions were always preferred because they acted as some limit on government spending.

I'm sure he's spinning in his grave, now, but if I thought that new tax revenues would be used to reduce debt or pay for already committed spending, I might favor them. But it is obvious this Congress has no interest in doing anything but spending regardless of how much revenue they have.