Deficits DO Matter / Artikel mises.org, engl.

verfasst von - ELLI -, 27.02.2003, 17:09

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<font color="#002864" size="1" face="Verdana">http://www.mises.org/fullstory.asp?control=1171</font>
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<font face="Verdana" size="2"><font color="#002864" size="5"><strong>Deficits Do Matter</strong></font>
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<font size="4">by Hans Sennholz</font>




<font size="2">[Posted February 27, 2003]</font>




<font size="2"><img alt="The" src="http://www.mises.org/images2/fed.gif" align="right" border="0" Federal Reserve width="225" height="146">In
their election oratory politicians usually stress their love of fiscal
discipline and balanced budgets.&nbsp; But as soon as they are elected they
tend to discover a great number of exceptions that require more funding.
President Bush clearly made the election pledge to avoid budget deficits, but,
ever since September 11, 2001, his budget proposals built on exceptions
project a deficit of more than $300 billion for each of the next few years.
Yet, he also argues for prompt tax reduction, which signals a brand-new course
of action in the annals of fiscal policy.</font>




<font size="2">The prospect of soaring deficits and simultaneous tax
reductions alarms a few economists.&nbsp; On this new fiscal road they foresee
deficits of $500 billion or even $600 billion annually, which in time may cast
doubt on the credibility of the federal government as debtor.&nbsp; Every few
months the Congressional debt ceiling needs to be lifted by a few hundred
billion dollars. Congress last raised it by $450 billion to $6.4 trillion on
June 30, 2002; it needs to be lifted right now as the official Treasury debt
again has reached the ceiling.&nbsp; At the present rate of spending it will
need to be lifted in June or July of this year and, in case of war with Iraq,
even earlier.</font>




<font size="2">The federal deficits are compounded by the budget shortfalls
of most state governments, estimated at some $105 billion in 1992-1993.&nbsp;
State governments are required legally to balance their budgets, which forces
them either to raise taxes or cut expenditures.&nbsp; Undoubtedly, most prefer
to boost their fees and exactions; the proposed federal tax reduction, if and
when it finally passes the U.S. Congress, may even compound their&nbsp;problems
as many state systems are based on the federal tax structure.</font>




<font size="2">Both deficits, the federal and the state, constitute a heavy
burden on the capital market which keeps no idle savings amounting to hundreds
of billions of dollars.&nbsp; They force the Federal Reserve System to come to
the rescue; it can print any amount of money and create any volume of credit.&nbsp;
The Fed is the financier of last resort, the ultimate source of funds that
enables the federal government to finance any conceivable expenditure and
cover any possible deficit.&nbsp; Without the Fed, fiscal deficits of such
magnitude would soon depress the American economy and cause serious political
repercussions. Its ability to create dollars that enjoy world-wide
acceptability enables it to distribute the burden of U.S. Government deficits
to countless millions of dollar holders all over the globe.&nbsp; They pay for
the deficits through depreciation of the dollars in their pockets.&nbsp;
Japanese and Chinese, Arabs and Hindus, French and Germans, and all others
with dollar savings join Americans in bearing the burden of federal deficits.</font>




<font size="2">This ability to place the economic cost of government
spending on millions of trusting victims rests on the extraordinary position
of the U.S. dollar as the world's primary reserve currency. The dollar
acquired this distinction by international agreement reached at Bretton Woods
in New Hampshire in 1944 which committed the United States to provide an
anchor for world prices by pegging the dollar at $35 per ounce of gold and
envisioned a world economy linked by fixed dollar exchange rates.&nbsp; When
the United States suffered chronic gold losses and finally faced inability to
make payments in gold, President Nixon severed the dollar's gold link in
August 1971, devalued the dollar against major foreign currencies in December
1971, and finally floated it in March 1973.&nbsp; The world has been on a
floating dollar standard ever since.&nbsp; It is a fiat standard, unbacked and
irredeemable, which can be inflated and depreciated at will.&nbsp; Managed by
the Federal Reserve System, it is a useful standard in the financial service
of the U.S. Government.</font>




<font size="2">Other countries are narrowly limited in their ability to
inflate and create credit; if they indulge in expansion rates greater than
those of their neighbors and trade partners, they soon face payment
difficulties as imports increase and exports decline.&nbsp; They then&nbsp;have
to reduce the expansion rates and fall in line with their neighbors and
partners.&nbsp; The Federal Reserve System as the manager of the world dollar
standard has no such narrow limits.&nbsp; It can inflate and create credit as
long as its expansion does not exceed the world-wide demand for its currency.&nbsp;
It may generate trade deficits year after year and aggravate its
maladjustments as long as foreign banks and investors hoard the dollars or
invest them in American obligations.&nbsp; It is bound to cause world-wide
financial upheavals, however, when it depreciates the dollar at excessive
rates and thereby inflicts painful losses on those foreign investors.</font>




<font size="2">The floating system based on the U.S. dollar has been a
precarious structure ever since its inception.&nbsp; During the 1970s the
country suffered the worst inflation in decades.&nbsp; By the end of the
decade the inflation rate stood at 13 percent, the Federal Reserve discount
rate at 12 percent, and the prime lending rate at 15.75 percent, the highest
of the century.&nbsp; The dollar had fallen notably in relation to the
currencies of other trading countries and especially to gold.</font>




<font size="2">The 1980s saw some economic recovery but also brought new
difficulties and more maladjustments.&nbsp; They led to an explosion of
personal, business, and government debt which cast a shadow on the future of
the financial structure.&nbsp; Federal government debt soared from
approximately $950 billion to nearly $3 trillion.&nbsp; A growing share of
this debt was acquired by foreign banks and investors who used the widening
imbalance of American imports over exports to invest their earnings in the
United States.</font>




<font size="2">The 1990s, finally, seemed to defy all rules of economic
behavior.&nbsp; Easy money and credit spurred the most explosive stock market
boom in U.S. history, creating enormous speculative&nbsp;wealth and spawning
new companies. With financial markets booming, the federal government even
reported a budget surplus, borrowing from Social Security trust accounts.&nbsp;
The balance-of-payment deficit became a major concern as imports soared and
exports stagnated, which further raised the mountain of debt.</font>




<font size="2">Toward the end of the decade, in 1998, the floating dollar
standard suffered a number of financial shocks that began in Asia and
eventually struck fragile economies around the world. American equity markets
continued to surge until 2000 when an economic slowdown became evident also in
the United States.&nbsp; In 2001, finally, the American economy slipped into
recession for the first time in ten years.&nbsp; The Federal Reserve
immediately cut interest rates, a record eleven times in one year; the U.S.
Congress passed a large multi-year tax cut, and the U.S. Treasury even sent
out tax rebates to boost consumer spending. Yet, the markets continued to
plunge following the terrorist attacks on September 11, 2001.</font>




<font size="2">According to various market analyses, foreign investors now
own some $7 trillion of U.S. assets, 13 percent of American corporate stock,
35 percent of U.S. Treasury obligations, 23 percent of corporate bonds, and 14
percent of ownership in American companies.&nbsp; They obviously do not take
kindly to Federal Reserve policies that depreciate the dollar and depress its
exchange rate.&nbsp; Last year alone, European investors in the S&amp;P 500
lost 38 percent on their property compared to just 24 percent suffered by U.S.
investors because of the fall of the dollar versus the euro.&nbsp; Suffering
such losses, their interest in American investments is bound to decline.&nbsp;
They may even liquidate and withdraw their holdings, which could lead to a
crushing stampede to the exits.</font>




<font size="2">We now face a situation that resembles the late 1970s when
the world began to abandon the dollar and liquidate American investments.&nbsp;
It took two years of Federal Reserve inactivity and 20 percent interest rates
to restore foreign confidence and lure foreigner investors and creditors back.&nbsp;
Today, the Fed is doing the opposite; it is making every effort to stimulate
the economy by flooding the money market while the U.S. Treasury is
accelerating its deficit spending.&nbsp; Both point towards monetary upheavals
and deep global recession straight ahead, and both cast a shadow on the future
of the floating dollar standard.</font>


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<font size="2">Hans F. Sennholz, emeritus professor of economics at Grove
City College, is an adjunct scholar of the Mises Institute. Send him&nbsp;MAIL.
See also his Mises.org&nbsp;Articles
Archive&nbsp;and his&nbsp;Personal
Website.


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• Deficits DO Matter / Artikel mises.org, engl. - - ELLI -, 27.02.2003, 17:09