The Record Deficit and Dollar Meltdown

A direct result of Barack Obama being elected President and the Democrats take over of Congress is that the U.S. the deficit has grown to a record $1.4 Trillion. From AP:

The federal budget deficit tripled to a record $1.4 trillion for the 2009 fiscal year that ended last week, congressional analysts said Wednesday.

The Congressional Budget Office estimate, while expected, is bad news for the White House and its allies in Congress as they press ahead with health care overhaul legislation that could cost $900 billion over the next decade.

The unprecedented flood of red ink flows from several factors, including a big drop in tax revenues due to the recession, $245 billion in emergency spending on the Wall Street bailout and the takeover of mortgage giants Fannie Mae and Freddie Mac. Then there is almost $200 billion in costs from President Barack Obama’s economic stimulus bill, as well as increases in programs such as unemployment benefits and food stamps.

And the combined plans by Obama to spend a trillion on health care reform, in the face of the highest deficit ever recorded, record gold prices, tanking U.S. tax receipts, and high unemployment has caused, as the Financial Times reports:

Angst about the dollar – which has fallen 11.5 per cent on a trade-weighted basis over the past six months…Last week, Robert Zoellick, president of the World Bank, warned that “the United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency.”

All indications from the market are that the record gold price is not causing profit taking and selling. In fact, the market is expecting further gold buying for one simple reason: the market is betting on the continued decline of the U.S. dollar, and these bets are not being made by individuals who favor gold, but as the Financial Times reports:

gold buying was more widespread than in the past, with “institutional investors, such as pension funds and insurance companies, joining the traditional gold players such as macro hedge funds and bullion banks”.

The decline of the U.S. dollar can be halted by three possible actions by the U.S. government: 1) stop printing currency to buy our own T-bills; 2) cut government spending; or 3) lower the deficit. None of these three options will happen under President Obama and a Democratic Congress bent on spending a trillion dollars on health care. If nations believe any of these three options will occur, they will hold onto their U.S. dollars. If nations believe there is no chance of any of these three things happening, they will sell their U.S. dollars and convert them into gold or other currency.

The nations of earth have no faith in President Obama’s fiscal restraint and given the massive levels at which the U.S. is printing currency — may believe that it is the President’s policy to lower the dollar’s value to pay off the U.S. debts lower value dollars.

It is a logical conclusion, since it would explain why the U.S. government is doing what it is doing. Once the global market place concludes that this is Obama’s policy — despite the Treasury Secretary claiming the U.S. wants a strong dollar — the drop in value of the dollar will be fast and significant as countries do not want to be caught holding huge dollar reserves.

If deliberately pursuing policies to lower the dollar value, so that the U.S. can pay off its debts with lower value dollars sounds like not paying your debts — that is exactly how the country’s that lent us the money feel. They are not happy. Look for plenty more implications than the lowest vote getter at the Olympic city selection election.

We owe, and countries who are lent us money or put their currency reserves in the U.S. dollar, are being burned by the low dollar — and one way or another, will be looking to make the U.S. pay.