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Recession: As federal spending and debt soar to new highs, many economists have alarmingly concluded that the dollar will soon collapse and take the economy with it. But that scenario is far from inevitable.
You don't have to look far to see the red flags flapping. Most recently, the respected 24-member Committee On the Fiscal Future of the United States warned the U.S. must cut its debt or face a dollar crisis.
"It has got to be done," said Rudolph Penner, formerly head of the nonpartisan Congressional Budget Office and the group's co-chair. "It will be done some day. It may be done with enormous pain. Or it may be done more rationally."
In the same vein, commentator Patrick Buchanan wondered in his latest column, "Is America's Financial Collapse Coming?" And these concerns are far from isolated. A Google search of "dollar" and "crisis" yielded 57.5 million hits.
We too have said the government's massive spending and debt pose real dangers. Average federal spending from World War II through 2008 was about 20% of gross domestic product. Today, it's 26% — and climbing. Worse, just one year ago total U.S. public debt was $5.8 trillion. Today it's $12 trillion, and rising literally by the minute.
Even so, we believe a full-blown dollar crisis — involving a collapse in our currency and an inability to pay our debts — is unlikely.
Fears over the dollar often surface during times of fiscal stress, only to fade when conditions ease. As a Goldman Sachs report recently noted, "fears over demise of the U.S. dollar seem to resurface every 10-15 years." And here they are again.
Indeed, we've been hearing for years the dollar is already in crisis. But as the chart shows, the trade-weighted dollar index shows the greenback is actually higher than during the 1990s Internet boom.
Foreign investors hold trillions of dollars in U.S. debt. They could decide to dump them, putting severe pressure on our currency. But that would also do damage to their own balance sheets.
Moreover, roughly two-thirds of the total $857 billion in U.S. currency in circulation is held overseas — a de facto global currency. Foreign countries won't give up their dollars easily, especially with no real replacement available.
Finally, believe it or not, debt woes are worse elsewhere. In Japan, debt has now reached 190% of GDP — a level unheard of for a modern industrial democracy.
And in a recent piece focused on the OECD, and Europe in particular, the Financial Times of London noted that "there is no peacetime precedent for the current speed and scale of public debt accumulation, and it is difficult to assess the social tolerance for high debt levels, and for the pain of protracted fiscal restraint."
Among OECD nations, government debt has shot from 25% of GDP to over 100% just since 2007. That's higher than our current level of about 90%, though we're gaining fast.
Dollar bears are right about one thing: Over the long run, nothing, not even the dollar, is immune to economic forces. To get the economy moving and reduce our debt load, we need major spending cuts and, at minimum, a government pledge not to raise taxes.
A dollar crisis? We doubt it. But why take the risk?
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Posted By: cosmos110(115) on 1/16/2010 | 5:09 AM ET
The World already has a "One World" currency, it's called Gold & Silver. We could easily jerk the rug out from under our District of Criminals by switching our wealth to precious metals right now and leave our Fed holding the bag. We're headed there rather we know it or not, so why not win the race.
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