Money Quote:
This debt surge comes against a fragile backdrop. The national savings rate is essentially zero. Net borrowings are being supplied entirely by foreigners. Foreigners already hold half the national debt. Not only do we know, empirically, that massive deficits raise interest rates, cut private investment and depress standards of living. But there is no precedent for financial markets lending such amounts, over 10 years, at anywhere near current interest rates and exchange rates. Indeed, does anyone think that once recovery takes hold and private demand for capital strengthens, the Treasury will raise $4,000bn a year at below 4 per cent, as it is doing today?
The acute threat is the foreign exchange market. When markets lose confidence in a nation’s financial policy, a sharp and often panicky decline in its currency follows. This has happened before to the dollar and this dire fiscal outlook risks triggering it again.
We saw this in the 1978-79 dollar crisis that shook Jimmy Carter’s administration, in whose Treasury I served. Then, rising inflation and perceived indifference to the dollar’s stability eroded nearly half its value against the yen. Global anxiety rose and an emergency rescue was arranged. It required that the deficit be halved and the Fed raise rates. This was costly to growth and the administration’s goals.
In recent weeks, the dollar has lost 15 per cent against the euro and gold has soared above $1,000 per ounce. There are technical factors involved, too, but these signs are not healthy. They suggest concern over currency stability – and the recovery, with its inflation and financing pressures, has not even begun yet. President Barack Obama and Congress should not risk a replay of the Carter experience. The scale is so much larger now that the impact of a dollar stabilisation programme would be more punitive. It would jeopardise the entire recovery. This is why an overt commitment to deficit reduction should be made now.
No comments:
Post a Comment