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Not the time to worry about a run on the dollar

In response to pundits who argue that the US public debt is out of control, I’d like to make six quick points:

1) Massive expenditures today are not “stimulus spending.” They are sustenance spending to keep people alive in a country with the flimsiest of safety nets. Countries with stronger safety nets paid for with higher value-added tax are faring much better. The US tax code is simply idiotic.  

2) Debt is not borrowing against the future. As long as there is economic growth, debt growth can continue and, on occasion, exceed GDP growth. Debt could exceed not 108% but 120% of GDP within a couple of years. But inflation could remain just as low as today if velocity remained low; witness Japan.  

3) Preserving the dollar’s status as a reserve currency requires ever-growing holdings of dollar assets – whether Manhattan buildings or Treasury securities – by foreigners. That means the United States should sustain trade deficit and that in turn suggests the US can sustain federal deficit in line with global demand for dollar assets.  

4) At a time when all the countries in the world will be forced into heavy deficit spending (can you name one country that will not, over the next two years?) this is not the time to be worrying about “a run on the dollar.”  

5) The national debt is NOT out of control as long as there is demand for the dollar in the financial markets. We will know when the demand has decreased: when the dollar weakens and inflation runs up to 18%. That happened in the 1970s and 1980s, caused not so much by US deficit spending as by (a) the re-emergence of European and Asian economies relative to the American and (b) the heightened demand for global resources, especially oil.  

6) We have been doodling around with incomplete concepts like the GDP for less than 80 years and equating national debt with personal debt when in fact perpetual debts have been around for decades. So we need to be careful especially about jumping to conclusions that threaten family lives during a pandemic.

Former longtime Tokyo-based Merrill Lynch analyst Matt Aizawa currently watches world news and markets, and continues to crunch numbers, beside a lake north of the city.


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