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Alarming US Budget Deficit Causes Russia to Shift Assets from US Dollars
06.27.09

Global trend could quickly reduce US standard of living

by Penny Wise
 
For decades, Russia’s reserve currency has been the US dollar, but the dollar has recently fallen out of favor. The Russian government is now aggressively moving assets into other currencies, and the US dollar is no longer Russia’s majority reserve currency. This action is part of a profound global trend that will quickly, and perhaps permanently, reduce the standard of living of all US citizens. The cause of this is simple: accelerating federal budget deficit spending by the United States.
 
The total federal budget deficit for the first eight months of the federal fiscal year that ends in September was $991.9 billion, with a deficit for May alone that was $189.7 billion. The Obama administration estimates that the total federal budget deficit for the fiscal year ending in September will be $1.84 trillion. This compares to a total federal budget deficit of $455 billion for fiscal year 2008.
 
If the Obama administration estimates are correct, and its estimates have been on the low side, the US federal budget deficit will have increased a whopping 304% in just one year. No matter who is at fault for the deficit, one thing is clear, the federal budget deficit is growing at an alarming rate.
 
To illustrate how financially disastrous this could be, the US federal government is like a person who decides to run up credit card debt and take out a second mortgage after receiving a pay cut. This leads to a lower credit rating, which leads to higher interest rates, which leads to a further deterioration of financial health. This is a financial death spiral.
 
In fact, US government bond prices are dropping, pushing interest rates higher because of “the need of the US government to print more money to meet its massive borrowing needs,” according to the Wall Street Journal MarketBeat. Russia, along with Brazil, India, and China, is concerned the US cannot be trusted to repay its debt. Unfortunately, the US desperately needs these countries to continue to finance its massive debt.
 
The solution for the US government is no more complex than it is for a person receiving a pay cut: stop additional borrowing immediately and reduce expenses now. The only hope for restoring income lost following a pay cut is from increasing productivity, not increasing borrowing. Running up additional debt at an ever-accelerating pace will lead to unstoppable total financial disaster.
 
The US is in a difficult situation, but the solution is clear. Even though most American political leaders are unwilling to face the truth and make hard choices, the American people must resolve as a society to protect the health of the nation. This will include hard work and significant sacrifices on their part, but every generation of Americans has made whatever sacrifices were required. It is our turn now.
 
Politicians, however, often let politics get in the way of solutions that require sacrifice and hard work.
 
President Obama understands the difficulty of asking the voters who elected him to make the sacrifices needed to save the nation. As Derek Thompson writes at TheAtlantic.com, “Obama might be a revolutionary, but he's not a masochist. So more likely we'll continue to kick the can down the road. The deficit will continue to be the next next issue. And we'll see not the return, but the continuation of America's grand debt-payment tradition: Delay-as-you-go.
 
Kicking the can down the road, delay-as-you-go, will only lead to the continued destruction of the American standard of living. It’s time to face facts and make tough decisions, before it’s too late.

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