With record debt levels, deficits still climbing, unemployment levels twice the level of what it was not so long ago and the US economy still suffering – the US Dollar is at the same level today as it was about two years ago. If it were not for a so called “flight to quality” the greenback would very likely be much lower against most major global currencies. Hmm, doesn’t look to promising for the greenback’s future.
US dollar – a currency in decline
“Foreigners own roughly half of the US government’s publicly traded debt, or $3.47-trillion, representing nearly 25% of the size of the US economy - the highest level in history. If foreign lenders were to significantly reduce their purchases of US Treasury notes, without even dumping their current holdings, US long-term interest rates could zoom higher and the US dollar could crumble.
That would be a double whammy for the US economy. Higher yields on Treasury debt could translate into higher mortgage borrowing rates for homebuyers, which would weigh on the housing market, while a weaker US dollar could lift the price of crude oil to above $70 per barrel, resulting in an “oil shock” to the world economy. This nightmare scenario has been relegated to the den of doomsayers and fear mongers, yet is starting to become an increasingly realistic proposition.
Some of the biggest foreign lenders to the US Treasury, such as Brazil, China, India, Russia and Qatar, are grumbling aloud about the endless string of trillion dollar US budget deficits projected in the years ahead. Lenders are crying foul over the Federal Reserve’s radical experiment with “quantitative easing” (QE) - the printing of vast quantities of US dollars, and monetizing the US government’s debt.
The CBO sees the US deficits between 2010 and 2019 totalling $9.1 trillion, thereby raising doubts about America’s ability to finance its debt at low interest rates, and whether it can maintain its top-tier AAA credit rating.”
Source: Peter Greene, Fusion IQ, July 15, 2009.
Saverio Manzo
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