It's a given that despite the trillions of dollars in government spending, the U.S. economy is continuing to limp along instead of growing rapidly as is normally the case after bad recessions. So spending isn't the best way to stimulate a flagging economy.
Besides the future debt problem, there's another one that the free-spending is causing America: the possibility that the dollar will lose its status as the world's de facto reserve currency, something upon which our country's economy relies on very heavily:
How bad is the US problem? Former Treasury official Lawrence Goodman recently pointed out that investors are shunning US bonds and notes; the lack of other buyers forced the Federal Reserve to buy “a stunning . . . 61 percent of the total net issuance of US government debt” last year. Like many others, he warns that ballooning debt puts the US economy at risk for a sharp correction.
But the even larger risk is the potential loss of the dollar’s “reserve currency” status — a key support of the world economy for the last four decades.
It started with the 1973 Saudi commitment to accept only US dollars as payment for oil, followed by OPEC’s 1975 agreement to trade only in dollars. Trading of other commodities came to be priced in dollars, reinforcing the dollar’s “reserve” status.
As a result, central banks worldwide have held onto large reserves of dollars to facilitate trade. That, in turn, has enabled the US to print much larger amounts of its currency, with seemingly little inflationary consequences. It’s also made it easier for Americans to import more than they export, to consume more than they produce, and to spend more than they earn.
But all that is changing rapidly.
A number of countries are abandoning the dollar for the Chinese yuan. Last December, Japan and China agreed to trade in yen and yuan. In January, the 10 nations of the Association of Southeast Asian Nations finalized a non-dollar credit agreement equivalent to $240 billion, strengthening their economies’ links with China, Japan and South Korea.
Ironically, one of the side effects of too much stimulus spending is that it will make it harder to engage in future stimulus spending.
