Economists Fear Coming Tsunami of Government Debt

Thursday, October 15, 2009 10:02 AM

By: Marc Davis and Gene Koprowski

With U.S. debt heading toward the stratosphere, America's financial future is in peril and the dollar is, understandably, under pressure as a result.

Projected federal budget numbers indicate that the national debt will reach 100 percent of GDP in 2011, writes economist and author Judy Shelton in a recent op-ed essay in The Wall Street Journal.

This year's federal budget is on track to hit 90.4 percent.

"Unprecedented spending, unending fiscal deficits, unconscionable accumulation of government debt: These are the trends that are shaping America's future," Shelton writes.

Yet, "it may be too soon to dismiss the dollar as an utterly debauched currency."

For the time being, the U.S. dollar is still the currency of choice for international business dealings, and accounts for over 60 percent of official foreign-exchange reserves in foreign government central banks.

Yet the U.S. buck, once seen as the most dependable and strongest of international currencies, has lately been taking a beating. And with good reason, Shelton writes.

The dollar is now "perceived as the default mechanism for out-of-control government spending," Shelton warns.

International economies are sending the U.S. this message says Shelton: "Issuing more promissory notes is not the way to renew America's promise."

On international currency markets, the dollar recently sank to a 14-month low against other currencies, while the Canadian dollar and the Australian dollar hit new highs, and the euro also advanced, reflecting a lack of confidence in the U.S. economy.

Some emerging economies, fearing for their own exports, are buying up dollars, but constantly bailing a sinking ship might well turn out to be impossible.

How did we get here?

The tax cuts of the last decade, combined with this year’s tremendous federal spending binge, are creating a “fearsomeâ€