Economics

The position of the United States of America as the world’s super power rests upon two pillars; the military and the power of the dollar in the economy of the entire world. The U.S dollar serves the role of being the world’s reserve currency (Engdahl). In spite of the recent problems in the U.S economy, the dollar still remains the strongest currency in the world economy. These problems have been associated with the recent borrowings by the U.S government placing the economy of the country in a serious crisis. The U.S entered a critical financial phase since the collapse of the stock market in 2001. The question is whether the dollar is still achieving its limits as the world’s reserve currency since for the last thirty years; the dollar system has been building on debts. The U.S domestic burdens on debts have reached startling levels especially in the last decade (Engdahl 1).

This paper will address the value of the US dollar in the light of the current economical crisis facing the nation as well as the entire world economy. It will aim at finding out the future of the U.S economy, considering the impact of the global economic crisis on the value of the dollar as well as the debts owed by US to the foreign lenders. This paper will also try to find out how the U.S government got itself fixed in serious debts and what can be done to ensure that the economy regains its global financial position and clears up its debts both internally and externally (to the foreign lenders). It will try to find out a viable solution to the US economy that will be applicable both in the short run and the long run. Such a solution will ensure that the US dollar remains viable as the world’s reserve currency as well as that the levels of alarming unemployment and crippling inflation are reduced, at least back to the situation that it was a decade ago (Engdahl 1)

Why the US Debt and Dollar?
What most people (including the U.S citizens) do not understand, is how the function of US deficits and Dollar System are related. The United States has been pursuing a deliberate trade deficits policy and budget deficits mostly on the past two decades. It has been with the proper understanding of the consequences of debt funding and deficit financing that the U.S government chose to adopt the borrowing policy (Engdahl 1). This therefore means that there must be benefits tied to deficits and borrowing over operating on equity and internal funding. What then are these advantages? Can they be adapted by the private investment sector and the business people to improve profitability and sustainability in the crowded business environments? In addition, how will the private sector and the taxpayer affected by the deficit funding that has been a deliberate action by the government? Could it be at the expense of the citizens or for their benefits?

The understanding of the above questions will improve the course work by bringing into light the operations of the US economy, the private investment sector and business environment. Such information relates directly to management, business and economics and is very crucial to this course. In addition this study will enable the reader to be in a position to predict the situation of the economy in the near future and hence make informed decisions or recommendations where it applies.

The dollar and the debt crisis over the recent years is a topic that has filled the headlines and news bulleting and needs to be studied, analyzed and understood in a precise manner. This issue cannot be overlooked since it does not only affect the Americans but the world as a whole. How the dollar crisis will be resolved will determine the position and the direction of the world’s economy in the future.

The Facts and Information
The Current Level of Debts
Without doubt, American overseas debt and borrowing has increased extensively, but consequently has individual earnings and wealth. The entire domestic liability has risen evidently over the past decade, but consequently have output and revenue (Will). This fiscal harmony nonetheless is burdened by substantial risk of worldwide imbalances which may cause disturbance and confusion in future. The “debt-and-credit differences” of the huge national financial systems continue to rise; the “balance-of-payment deficits” of the United States exceed every national surplus. During 2005 the deficits were $790 billion, which compared to gross national product (GDP), exceeded 6%. This year, it is likely go beyond $800 billion, or 6.5% of Gross Domestic Product. Furthermore, the federal government goes on to suffering enormous budget deficits which expand the state debt and increase weight to the global concern. (Will).

Currently the United States is borrowing an estimate of $700 billion per annum from overseas lenders to be able to fund the existing gap between payments to and receipts from other parts of the world. This amount equals to approximately $5500 per household. This borrowing involves severe costs to the United States government and economy. Statistics have predicted that if there will be no improvement on the current account deficit, the U.S eternal debt will have raised to 64 percent of the total GDP(gross domestic product) by the end of 2014.the U.S dollar is seriously shrinking and the seriousness of this financial crisis is being overlooked. In the beginning of October,2009(as the new fiscal year begun) there was more than $200 billion dollar cushion connecting debts that the united states owed and the maximum credit limit imposed by the law (Bivens 14)

The process of generating debt both domestic and foreign, so as to maintain the US economy has gathered a lot of momentum such that it risks demolishing what still remains of the US economy and especially in the manufacturing and technology base. Henry Kissinger cautioned that the United States risked wiping out its middle class, its key tactical industries through outsourcing to India, China and other inexpensive areas. At present, only eleven percent of the whole workforce is remaining in the manufacturing. The US economy is caught inside its own trap: American jobs, technical professions and factory jobs have been vanishing permanently in the process of US factories sourcing to India, China and other poor areas. If Washington dares to pressure China and other countries involved to cut their exports they will be risking killing the goose which lays blonde dollar eggs. Who will purchase the growing dollar debt? (Lachman).

Private union traders have desperately been attempting to sell their bonds. However, in adopting the borrowing system, the US government aimed at ensuring that they maintain dominance. The U.S entered a critical financial phase since the collapse of the stock market in 2001 so as to lock the world into reliance on a US money system. As long as the world acknowledged US dollars as money worth, the US enjoys exclusive advantage of being the only printer of these dollars (Will). The trick was to make world accept. Unfortunately, this has been blown back to America itself. The government has recently been engaging in agreements and activities to ensure that the rest of the world will continue to accept the US dollar as the standardizing currency of money worth. Such countries are for example china, Dubai and Japan. Engdahl suggests that the reason for this turnover of events is because the world economy is said to have achieved a growth of five percent regardless of the global crisis. This growth is predominated by the Asiatic countries (such as Japan and china) explaining the reason why they have become a threat to the power of the US dollar (Will).

The Looming Risk
Despite the fact that the world economy registered some growth, it is still exposed to a great looming risk due to the economic international imbalance portrayed by the balance of payments shortfall of United States and the equivalent surpluses of creditor nations. Americans alone consume seventy percent of world's reserves, whilst Japan, China and the other developing states are funding the deficits and building up American IOUs (Will).

Although the borrowing by the US government involves grave costs to its economy, these costs remained hidden for a number of past years, mainly by the past low rates of interests. The low interest rates resulted from an attempt by the Federal government to stimulate economic recovery following the recession in 2001 and downturn of domestic investments. However, the risk lays in the fact that this good scenario cannot last indefinitely because once the rate of interests rises, then the cost of borrowing by the US will create grave consequences in the economy. In addition the treasury has increased the money that is in circulation due to declined velocity. Although the US treasury has managed to increase the money in circulation without inflation, the risk is that incase the velocity of distribution of the money is unexpectedly increased, this huge rise in monetary base might interpret into an extremely high inflation. (Will 1)
The Evidence of the Dollar -Debt Crisis

The evidence of the dollar-debt crisis is all around us and no one can hide from it. It is invading the daily lives of all Americans, in any corner of life. Turning on the radio and every other medium there is news about the hundreds of people losing jobs, the retirement funds being decimated, increasing numbers of people on the streets as well as the advanced levels of insecurity. The dollar is seriously shrinking! And there are factors pulling the dollar down, foreign debts being on the top list (Sennoholz 2)

At the beginning of the fiscal year in October this year, the debt ceiling of the United States (self imposed) stood at $12.104 trillion dollars. At this rate, it has been reputed that by December this year the debt will get to the roof. However, like it has done in the past, the US government is expected to raise the debt ceiling through the lawmakers so that it can prevent financial insecurity for the people around the world who have invested greatly in the US strength. The lack of a renewed credit boundary would cause a decline in credibility of U.S. Bonds thus creating financial insecurity for many people. (Sennoholz  2)

The Response
The appetite for gold like an investment alternative is growing. This is pure indicator of the loss of value of the dollar. The investors are arguing that the only commodity whose value will never be zero is gold. In addition, in the last decade statistics show that there has been an inclination by the Americans and non Americans to hold back liquid cash instead of investing. Unlike in the past the level of both domestic and foreign investments in the US bonds has reduced to a noticeable figure. In addition, there has also been a reduction in the purchasing power by the general public since people prefer to hold more cash. There has been a raise in the demand for dollar holdings as a security against depression and the falling of currencies (Eicher).

Analysis of Data
This section will analyze the facts and information previously gathered about the dollar and the debts in the US to come up with an overview of the meaning, implications and consequences of the data as well as the course of action needed.

The Current Level of Debts
From the data gathered on this information, it is clear that the US government has adapted a deficit funding for approximately a decade ago and the debts levels from overseas countries have been building up for almost every fiscal year. This implies that the government has failed to strike a balance between receipts from and payments to the overseas lenders and hence the debt continues to build up gradually. The current debt levels and dollar value are a clear evidence of the financial trap facing the United States.

The Looming Risk
The event of the American government failure to pay its debt is not only likely, but also unavoidable and imminent. The narrow dark holes into which sense and reason vanish on an every day basis are quickly going to crumple under the accumulation of their absolute size. One amongst the pointer favoring this situation is what has been happening in the U.S. Treasuries auction market as was seen in the previous section. Taking an example of what happened recently $30 billion public sale in 5-year notes did not succeed to stir the attention of traditional principal dealers. The public sale was saved by an unidentified “indirect” bid (Eicher).

Much as the US government has managed to maintain the inflation rates low and still pump more money into the economy, it will not be able to continue with this trend indefinitely because in the event that the circulation of the money increases unexpectedly, then it might create very high inflation and make the situation worse. Therefore, this policy will only serve the economy for a short duration before a permanent and more viable plan of action is engaged.

The Evidence of the Dollar -Debt Crisis
The United States Federal Reserve recommended recently it would step up the treasury-buying business (Eicher). This has been interpreted as a form of market supportive action. However, it is an evidence of increasing worry and anxiety on federal government as the understanding dawns that the demand for treasuries is increasingly evaporating. The raising order for gold as form of investment that has been witnessed recently which has put gold to a four month high is an additional proof that investors across board are gravitating more to gold and further from United States dollar.

Despite the evidence of a fall in the expected value of the dollar, the US dollar still remains the strongest currency in the world. Therefore, majority of what is happening right now is not entirely because the dollar has lost its value-it is still the most valued in the world! Nonetheless, the joblessness and decimation of retirement plans can be seen as more of a multiplier effect that has resulted from the inability of the government to settle debts and sustain international standard. The response has been heavily felt from the investors in American bonds who now prefer to invest in gold as a form of investment in the place of the US dollar (Eicher). This is a direct response which shows a lack of confidence by the investors in the dollar.