Ever so often the US Congress goes through the exercise of raising the debt limit "allowing" the government to borrow more money. Right now US debt is approaching $10 trillion thanks to President Bush having spent the US into more debt than all the preceding presidents combined, a distinction held heretofore only by Ronald Reagan. It's not hard to see why: endless wars and tax cuts for the rich. But the US may be reaching the point where Congressional raising of the debt limit is akin to pushing on a rope. What if nobody wants to buy any more US debt? Currency traders are dumping US dollars so fast that the dollar has already been overtaken by the euro and the Canadian "loonie," and it is soon to bow to other major currencies such as the Aussie dollar.
Ever so astute and perceptive, Alan Greenspan has made the following comments regarding the US debt ceiling which instead of being set by Congress may be approaching the point where it is set for the US by international market forces:
Former Federal Reserve Chairman Alan Greenspan said the dollar's depreciation may reflect growing unwillingness among foreigners to buy U.S. debt.
"Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington today. The dollar's decline to its lowest since 1997 may be "an indication America is approaching this limit.''
Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. financial assets in August. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July.
The dollar has declined about 8 percent against the euro this year and 4 percent against the yen.
China, the US' largest creditor, has recently threatened to dump US dollars, a move that would precipitate a meltdown of the international monetary system. However, the eventual devastation caused by a gradual sell-off of US dollars would be just as bad for the US, at least, if not for the rest of the world. Just at a time when there is pressure on the Treasury to lower interest rates to stave off a subprime mortgage induced recession, there is pressure to raise interest rates to attract more capital to assuage the US' voracious appetite for borrowed money. Just as the American people are charging up a storm on their credit cards, the US government is charging everything on its credit card with the willing compliance of China, Japan, Saudi Arabia and other enablers. But as the dollar falls in value, dollar denominated commodities, such as oil, will inevitably rise in price. This is because the purchasing power of oil producing countries based on their income in dollars is declining once those dollars are converted into their native currencies. This pushes up the price of oil for the American people, but not necesssarily for the rest of the world whose currencies are appreciatting vis a vis the dollar and who, therefore, can purchasse dollars, in order to buy oil, at relatively discounted prices.
And the enablers are getting less sanguine about buying US debt:
However, the big foreign buyers of US debt aren't buying this debt like they use to. According to information from the Treasury Department, the five largest holders of US debt (Japan, China, UK, Oil Exporters and Brazil) owned a combined total of $1.224 trillion in August 2006 and $1.459 trillion in August 2007. That's an increase of $235 billion. And over that same time, the really big purchases came from the UK ($189.4 billion) and Brazil ($63.6 billion.) China only increased their holdings by $13 billion and Japan decreased their holdings by $37.9 billion. In other words, Asian Central Banks -- who use to be reliable purchasers of US debt just aren't that interested in buying any more right now.
When push comes to shove and the Treasury is faced with the choice of lowering interest rates and, therefore, disccouraging foreign acquisition of US debt or raising interest rates and, therefore, plunging the US into recession, which will it be? The US government must meet its obligations, including large interest payments on its debt, so it must either borrow money or raise taxes or cut spending or a combination of all three. Therefore, it will raise interest rates to attract capital and to hell with the American people who will have to pay higher taxes and suffer through an interminable recesssion. Additionally, the American people will have to get used to the fact that social programs to help the poor and middle class will be cut back because war has a higher priority and a more powerful lobby. The Republicans would like nothing better than to have an excuse for doing away with social security and medicare altogether, two programs devised by Franklin D Roosevelt, their Democrat nemesis. As Rush Limbaugh said "We're working on that too" or words to that effect.
How about inflation? Couldn't the US just print dollars and inflate its way out of its debt. Inflation would only hasten the decline of the US dollar making it even less attractive to foreign investors. US government obligations could be met this way but the dollar would spiral downward, the price of oil would spiral upward, and there is no guarantee that wages would keep pace. As the cost of living for American citizens continues to rise, the lack of unionization and other factors are keeping American wages down while CEOs pocket excess profits. Thus the prospect for the American people in general isn't that bright. American corporations will continue to do well because they sell into a global market, not just into the American market. If American demand for their goods and services declines, foreign demand will only increase due to the devaluing dollar and the relative prosperity of the rest of the developed and developing world which is spending on infrastructure and commercial industry and not on war.
So -- why is the US dollar dropping? This is where Greenspan's comments come into play. Currency traders are obviously selling the dollar. While they have had ample reason to sell lately, the US economy wasn't slowing until the first quarter of this year -- hardly a reason to sell. One underlying reason may be a lack of confidence in the US' fiscal outlook and current situation. This would make sense, especially in light of the lack of interest from foreign central banks for US debt. Now -- no one is going to come out and say they have lost confidence in the US' financial situation. Instead they will simple go on quietly selling dollars.
And this may have even more sinister implications for the US than a precipitous crisis. A crisis can be handled by "fixing," an old American custom. But a slow almost imperceptible decline is like the frog in water whose temperature is slowly increasing. Unbeknownst to the frog, while he is relaxing in the warm bath, the temperature gets to the point, by imperceptible degrees, where it's impossible for him to get out and his goose is cooked, to mix a metaphor. This could well happen to the American economy!
The American penchant for war and weaponry will continue to increase demand and expenditures on products and services for the military-industrial complex, most of which are entirely wasteful and destructive. Continual expenditures on weapons procurements and the militarization of every aspect of American life will virtually guarantee the impoverishment of the American people not only in the public sphere but also in the private sphere as well, at least for the middle class and below. The rich and super rich will have no problem because, for all intents and purposes, they are global citizens and can live and port their capital anywhere in the world where circumstances are the most propitious.