America in deficit danger - a country running on IOUs.
11/12/2006

The Terror of the Twin Deficits The U.S. government is massively in debt--to the tune of $337 billion--and simply plugs it by issuing major IOUs to the rest of the world. Spending on Medicare and Medicaid, housing, social security, and the war on terrorism is at record levels, coming at taxpayers expense. And taxes aren't going up ... in fact they're going down. The deficit gets bigger and the number of years it will take to repay grows by the day. Not to mention that additional spending on the war in Iraq and federal flood insurance claims from hurricanes Katrina and Rita not counted in the Congressional Budget Offices original 2006 projections will push the deficit up an estimated $23 billion to $360 billion or 2.8 percent of the GDP. And according to projections in the CBO's report, the budget deficit will keep going up--especially if President Bush's tax cuts become permanent. Let's face it ... ongoing partisan politics will keep lawmakers from reaching an agreement on cutting spending and raising taxes quickly enough to address the budget problem. And in a very short period of time, our nation will face a financial crisis because the federal government has made commitments to retiring baby boomers that threaten to overwhelm the whole economy ... ultimately decreasing the purchasing power of the dollar. And, if the cavernous budget deficit wasn't enough ... to quote Warren Buffett, the nearly $700 billion trade deficit is becoming "like turning around an ocean liner by dipping a teaspoon in the water." Buffett blames the mushrooming trade deficit -- which is forcing foreign central banks to ingest U.S. currency at a rate approaching $2 billion a day -- on bad policy, coming from both the White House and Congress. Buffett goes on to say that: "Fifteen years ago, the U.S. had no trade deficit with China. Now it's $200 billion. If we don't change the course, the world could own $15 trillion of us. That's equal to the value of all American stock." Poor free trade policy from Washington proliferates ... America continues to be the #1 importer of oil and America's voracious appetite for cheap imported goods is not waning. With the current trade deficit hovering at 7% of gross domestic product, analysts fear the defiic could sharply unwind. And that translates into a much lower value for the dollar. The Global Savings Glut The U.S. trade deficit is being financed by foreign investment. Many politicians in Washington place the blame on the undervalued currencies and the cheap labor of the Asian economies -- especially emerging superpower China. But, looking at the world as a whole, Asia no longer boasts the biggest current-account surplus. Rather it is the oil exporters -- where high oil prices have brought an incredible windfall. And it's these Petrodollars from the OPEC nations that are playing a huge role in propping up the greenback. Consider this: While the U.S. runs a nearly $700 billion trade deficit -- importing far more than it exports -- OPEC nations are expected to have an estimated $400 billion surplus from their oil exports in 2005--more than double the estimated $188 billion combined surplus from China and other Asian economies. That's a whopping $588 billion surplus between the lot. So where does all this surplus money end up? A large percentage ends up being recycled right back into the U.S. economy through the purchase of U.S. treasury bonds -- with the aim of maximizing returns--thus plugging the trade deficit and ultimately propping the dollar. Will this global savings glut -- from which the U.S. dollar has tremendously benefited -- end anytime soon? Yes and here's why: Traditional theory counters that you can't run a current-account deficit for long. Ultimately the U.S. will suffer. And while the Dow declined last year ... the Nikkei was up 40%, the FTSE was up 17%, Australia's ASX 200 was up 17% ... as were France, Germany and Switzerland. So as the returns on US investments and value of the dollar falls ... it will make more sense to overseas investors to begin investing in their own markets thus promoting growth at home ...or in another major currency -- such as the Euro ... leading to a further downward spiral to the dollar.

 
 
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'And call no man your father upon the earth; for one is your Father, which is in heaven.' (In defiance or perhaps ignorance of this, Catholic and Anglican priests are addressed as 'Father' and the pope is called 'Holy Father.')
Matthew 23:9

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