Monday, July 10, 2006

More on the dollar and deficits

One reason the Bush deficits are so alarming is because they are so heavily financed by foreigners. Since 2001, 73% of new government borrowing has been through the kindness of foreigners. In fact, today 43% of the US publicly held debt of $4.8 trillion is in foreign hands. This compares with only 14% at the peak of the Reagan deficits in 1983 -- rising to 30% in 2001.

If the dollar starts to swoon, what's to happen to that $4.8 trillion that is held by our foreign "friends"? Will they sit on their fannies while the dollar (their dollars) head south? Hardly likely, they'll unload part of their holdings and drive US interest rates through the roof.

A collapse in the dollar would be too horrendous to contemplate. The whole world lives, saves, operates, trades on dollars. Yet ironically, the dollar is backed by the greatest debtor nation the world has ever seen. What's the trade-off? There must be a trade-off. You can't print perpetual prosperity!

Today the Dollar Index rallied a bit. The trend seems to be down. I'm wondering whether the Dollar will test its 84 low. I think it will.


Blogger Jim Cosgrove said...

Hey! It's 2006! What does the chart look like now?

10:33 PM  

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