Monday, October 5, 2009

Investors in Treasuries, Dollars Defy Common Sense

by David Pauly

The U.S. should lose its golden credit rating. Bankers and investors around the world should dump dollars. Read any economics textbook and you come to that conclusion.

Massive government spending and money creation to rescue the nation from the Great Recession have deluged the U.S. Treasury market with new securities -- exacerbating the country’s already massive debt load.

Chronic U.S. trade deficits have led to the accumulation of vast stores of dollars in foreign bank accounts.

Classic economics theory says supply should overwhelm demand in both markets. Treasuries should no longer be considered free of risk. The dollar should no longer be the key global currency.

The U.S. has balanced its budget only five times in the past 50 years. The four straight years of surpluses starting with 1998 now look like a statistical error.

Total government debt at the end of 2008 was $10.7 trillion, compared with $5.53 trillion 10 years earlier. A bit of nostalgia: In 1978, the debt was $789 billion, with a “b.”

Investors in Treasuries, Dollars Defy Common Sense

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