February 05, 2004

Selling Dollars

Two important facts from taxfoundation.org regarding the FY 2005 budget....even non defense discretionary spending is on the rise under Bush...and two, the part of the non-discretionary part of the budget keeps getting larger as a percentage of total spending...making even a reduction in discretionary spending less helpful to reducing overall deficits. Conclusion: the government is blowing out the budget...and it has no intention of actually paying off this debt. When will the bond holders realize the danger to their dollars? Hint, they already have. They just dont want to spark a rush to the exits with panic selling. This from today's WSJ (emphasis added is mine): "A number of Asian central banks, among the biggest investors in U.S. government debt, are looking at alternative targets for their vast dollar holdings... "The percentage of U.S. government debt owned by foreigners stood at 37.3% last year, compared with 33.9% in 2002 and less than 4.7% in 1965. Foreign central banks hold more than $800 billion in Treasurys -- $1 of every $5 the U.S. government owes. "Asia's bigger central banks face a difficult task. They want to reduce dollar risk and shift reserves to better returns, but they have to trim dollar holdings without spooking the U.S. debt market or currency markets -- and potentially fueling the dollar's downward momentum. That in turn would undercut another goal of Asian governments: to slow the rise of their currencies against the dollar, which makes their exports more expensive and threatens Asian jobs. "Although Bush administration and Federal Reserve officials acknowledge that the rest of the world won't lend ever-increasing amounts of money to the U.S. forever, they insist they don't see any imminent threat of a crisis. "Reliance on borrowed funds may not be sustainable," Fed Chairman Alan Greenspan said in a speech last month, but then added that "there is, for the moment, little evidence of stress." The dollar's declining value is a sign of waning foreign appetite for dollar-denominated assets, he said, "yet inflation, the typical symptom of a weak currency, appears quiescent." And from the Tax Foundation (my emphasis added) Non-Defense Discretionary Spending: The administration proposes $466 billion for non-defense discretionary programs, an increase of $123 billion, or 36 percent, above President Clinton's final fiscal year. Despite the fact that the administration would effectively freeze discretionary spending in real terms in FY 2005, discretionary spending has grown by an average of 6.0 percent during the term. This is a faster rate of real growth in discretionary programs than at any period over the past 25 years. Entitlements (excluding net interest): Entitlement spending will top $1.3 trillion in FY 2005, an increase of $300 billion -- or 30 percent -- above President Clinton's final fiscal year. After adjusting for inflation, entitlement spending is set to grow by an average of 4.8 percent per year during this term, a growth rate only exceeded during the G.H.W. Bush administration. As a share of the budget, entitlement spending will top 57 of total federal spending. This means entitlements are consuming 11 percent more of the budget than they did during President Reagan's last fiscal year in 1989.


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