The Financial Crisis And It’s Long Term Effects On The Dollar
It has become clear that in order to avoid a severe financial catastrophe, the U.S. government is going to have to spend an unprecedented amount of tax payer dollars.
The U.S. Treasury Department is working through the weekend with Congress to craft a plan to spend as much as $700 billion to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing.
The Treasury plan, which follows a new federal guarantee for money market fund holdings, would push Washington’s potential bailout tab to $1.8 trillion.
When added to the $300 billion housing bill that entailed the Fannie and Freddie rescue plan, the economic stimulus package, the previous bailout of Bear Stearns, the Fed’s loan to AIG and so forth, you get the picture. Considering that the existing national debt of the U.S. government is roughly $9 trillion, that’s an additional 20% that could potentially be added to it and with the fact that the financial crisis is far from over, that number could rise even further.
The long term repercussions to the U.S. dollar could be staggering, that’s a considerable amount of additional Treasury Securities the government will have to issue in order to fund that debt. Added to the fact that the U.S. hasn’t had a government surplus in decades could potentially degrade the credit worthiness of Treasuries in the eyes of foreign investors.
All this taken together spells bad news for the long term standing of the dollar. Some of it’s effects can already be seen with the slight rebound in the price of oil after the latest bailout was announced.
What we already thought were high commodity prices over the past year could balloon out of control if the dollar hits new record lows as some currency experts are predicting. The inflationary pressures which have abated somewhat since the middle of summer could quickly return with a bang.
The recession that many economists have long predicted may now be unavoidable and it’s uncertain if the U.S. government will be able to spend it’s way out of this mess.
