The Trumpet.com – January 8, 2008
Americans must ready themselves for a massive devaluation in the dollar as international investors dump their U.S. assets, says a former Bank of England policymaker. Relying on the kindness of foreigners to finance our standard of living may be about to be revealed as irresponsible folly.
The assumption in modern economics that U.S. government bonds are virtually risk-free investments will soon be relegated to myth as investors lose patience with the world’s biggest economy, according to Willem Buiter.
Disenchanted foreign creditors may be about to head for the exits as proposed “borrow and spend your way out of recession” policies undermine the value of the dollar and faith in the U.S. financial system. The national debt is projected to jump by as much as $2 trillion this year—an unprecedented increase—according to the Washington Post
Professor Buiter, who is now at the London School of Economics, says Americans need to prepare for the onset of foreign capital flight as investors around the world dump U.S. assets.
“There will, before long (my best guess is between two and five years from now) be a global dumping of U.S. dollar assets, including U.S. government assets,” says Buiter. “Old habits die hard. The U.S. dollar and U.S. treasury bills and bonds are still viewed as a safe haven by many. But learning takes place.”
According to Buiter, recent U.S. debt additions and the trillions in banking-sector guarantees, coupled with the proposed future economic stimulus spending, means that there is no legitimate way in which the government will be able to meet its liabilities.
Buiter says the government will inevitably choose to create whatever money it deems necessary to cover its spending needs. “The only alternative is default on the federal debt,” he says. “There is little doubt, in my view, that the federal authorities will choose the inflation and currency depreciation route over the default route.”
But the government trying to inflate its way out of debt by electronically creating whatever money is necessary to pay the bills undermines the value of the national currency. U.S. government bond holders run the risk of being paid back in worthless dollars. Of course, any Americans who have savings will see the purchasing power of their dollars plummet too.
“If I can figure this out, so can anyone in the U.S. or abroad who follows recent economic developments,” said Buiter. “The dawning of the realization will lead to the dumping of the assets.”
The consequences of a society and economy structured around consumption and spending, as opposed to production and savings, may be about to wreak havoc on the dollar and America’s standard of living.
Last updated 12/01/2009