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Sunday, May 01, 2005

A Little Concern

I have previously postulated that Bush plans to create a fiscal crisis and force down spending. There are several factors, exacerbated by his policies, that I have examined.

1) The weak dollar policy decreases demand for our treasury bonds. He claims he has a strong dollar policy, but... no.

2) In 2004, Social Security had a surplus of $137.8 billion, most or all of which was used to buy treasury bonds and thus finance our debt. If Bush succeeds in diverting these funds to the stock market, it will significantly reduce the government's ability to raise funds.

3) Spending money on defense initiatives like a drunken admiral is increasing the government's demand for loans, even while the supply is being reduced.

4) Tax cuts do the same thing.

Here's my concern. The dollar is currently propped up by Asian countries who hold large amounts of dollars. They want to run their economic growth on exports, so they hold onto our currency and prop up its value. The money must eventually be repatriated. When this happens, it will reduce demand for the dollar, causing the dollar to weaken and possibly causing a collapse of the dollar market as China, India et al. rush to sell off their dollars.

A fiscal crisis like the one developing may initiate this crash by weakening the dollar past a critical threshhold. Hopefully, the weakening of the dollar will be balanced by the increasing interest rates paid on treasury bonds, making any selloff unprofitable. However, such an increase in interest rates will also decrease the capital available for our own economic growth as investors shift towards bonds. It will also accelerate the growth of the national debt.

Just a little concern of mine.

[Edit: I was inspired by an article in the latest issue of The New Libertarian addressing Asian support of the dollar, although the issue isn't exactly a new one. You can subscribe at qando.net, that mightiest of all hit-whorers.]

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