the us debt & more

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    from the daily reckoning

    Wednesday, 16 July 2003


    *** Budget deficit doubles since February...

    *** As bonds fall, the housing bubble approaches a pin...

    *** A green sarong and terrycloth slippers...and how to have the best summer vacation ever...


    We are in the 32nd year of the Dollar Standard period, in which dollars have replaced gold in the coffers of central banks and the hearts of investors.

    We are late in the period, we think.

    "U.S. budget deficit put at $455 billion," says the headline in today's Herald Tribune. Seems expenses - notably the occupation of Iraq - have been running ahead of income; the deficit is now 50% higher than February's estimate, very near to our guess of $500 billion.

    The cost of maintaining U.S. troops in Iraq has risen to $4.6 billion a month, not to mention the soldiers who are killed every day. The poor grunts have been left in a hot and hostile place, where their only role seems to be to help desert malcontents to improve their aim.

    But that is not our subject for today. Today, we follow the money and wonder how late in the Dollar Standard period we really are.

    When a study was made of how much the federal government is likely to need to pay for all its promises, reduced by what it is likely to collect in taxes, the calculation must have sent sparks flying from the economists' computers. As it turns out, the shortfall comes to $44 trillion...or about half a million dollars per family.

    That doesn't count the private debt in America - estimated to be another quarter of a million per family.

    There is also the trade deficit, which - at about $500 billion annually - deserves at least a dishonorable mention. It is another animal altogether, of course, but one which drinks from the same watering hole.

    Now, imagine that you are the chief financial officer of this that already has net debts and liabilities far beyond its ability to pay. Even if the entire world pitched in to help, debts of this magnitude could never be honestly settled. And yet, the enterprise is still living way above its means; every day, the federal government spends about $1.5 billion more than it takes in...and so do consumers!

    Yet, Alan Greenspan is shown in today's paper with a smile on his face, like a foolish poker player with a winning hand. Mr. Greenspan knows he has an ace up his sleeve...or rather, a printing press in the basement. He is prepared, he told Congress, to keep rates low "as long as necessary"...or even to cut order to get the economy moving. What else can he do? That is the only game he knows...providing the world with trillions in dollar credits. It is what made the players think Mr. Greenspan wise...and themselves rich.

    But it is a game that cannot go on forever. There is an endgame to the Dollar Standard period. Bond investors seemed to see it coming yesterday; they dumped bonds even while Mr. Greenspan was talking. But gold investors saw something different. They sold off gold, bringing the price down $5.60. What did they see? Japan before Argentina? A long period of falling prices and economic slump, before the printing press money finally destroys itself?

    Which of the players will be right? Those dumping bonds...or those dumping gold? We can hardly wait to find out...

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