American Deficits Questioned By Lenders

All is not well for the American financial house. Although retail sales are rising, corporate profits rebounding, and the stock market enjoying a more than 30% recovery, there are other statistics which give cause for serious concern. For instance, the US Dollar has fallen 15 - 20% against the Yen, Euro and the Canadian Dollar although their central banks tried to stop the alarming fall of the Dollar.

More clear evidence of this is the dramatic 50% rise in gold during the past year, which overshadows the 30% rise of the S & P 500. Governments and banks around the world have lost their faith in the American Dollar. What is more, it is becoming increasingly difficult for America to finance its multi-trillion deficits. Although the budget deficit is merely a trillion dollars, the amounts poured into the financial system by the Federal Reserve to bail out big banks, investment firms and other corporations is closer to $10 Trillion. The amount is so immense that the global system may be unwilling to finance the American Government for borrowing. China is the largest lender, but it speaks for most other creditors. See the following N Y Times article on November 14.

China’s Role as Lender Alters Obama’s Visit
By HELENE COOPER, MICHAEL WINES and DAVID E. SANGER

"When President Obama visits China for the first time on Sunday, he will, in many ways, be assuming the role of profligate spender coming to pay his respects to his banker.

"That stark fact — China is the largest foreign lender to the United States — has changed the core of the relationship between the United States and the only country with a reasonable chance of challenging its status as the world’s sole superpower.

"The result: unlike his immediate predecessors, who publicly pushed and prodded China to follow the Western model and become more open politically and economically, Mr. Obama will be spending less time exhorting Beijing and more time reassuring it.

"In a July meeting, Chinese officials asked their American counterparts detailed questions about the health care legislation making its way through Congress. The president’s budget director, Peter R. Orszag, answered most of their questions. But the Chinese were not particularly interested in the public option or universal care for all Americans.

“They wanted to know, in painstaking detail, how the health care plan would affect the deficit,” one participant in the conversation recalled. Chinese officials expect that they will help finance whatever Congress and the White House settle on, mostly through buying Treasury debt, and like any banker, they wanted evidence that the United States had a plan to pay them back."

I have great sympathy for the American Government in its attempts to deal with the financial crisis, which had looked like a looming depression. Unfortunately however, there are very real limits in trying to buy a recovery through fiscal and monetary stimulus. I have mentioned this theme in several past blogs.

I hope America doesn't turn this financial challenge into a political drama of hurling blame at opponents. Everyone has helped to create this problem: government, banks, corporations and individuals, both rich and poor. Everyone needs to work together to rebuild the American economy. I believe the Obama administration is finally realizing the magnitude of the problem. They should be given support, at least until the 2012 election.

I wonder if a moderate depression would have been any worse than the likely prospect of stagflation (no growth, but with inflation) for a number of years ahead.