The coming financial crisis

darkbeaver

the universe is electric
Jan 26, 2006
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The Coming Financial Crises?
by Dr. Abbas Bakhtiar
www.dissidentvoice.org
May 22, 2006


On Wednesday 17 May, the Dow Jones plunged 214 points to 11,206 -- its worst point drop since March 2003. The downward trend started a week ago and is a warning sign of troubles ahead. This sudden drop has come as a complete surprise to the unfortunate small investors and speculators. The so-called “experts” point at the sudden threat of inflation as the main cause of the recent reversals in the markets.



What is actually surprising is the surprise of the “experts”. A cursory look at the United States’ finances will reveal the amount of pressure that its economy is under.



When Bush became president in 2001, US public debt was $5.8 trillion. Today the public debt stands at $8.3 trillion. [1] Of this debt, over $2.2 trillion are held by foreigners. [2] The United States has a GDP of $12.4 trillion. This gives the US a Debt/GDP ratio of 66%, placing it in 35th place (out of 113) on the ranking of the Debtor Nations. [3] The current account deficit of over 7 percent has long passed its danger levels of 4-5 percent. In 2005, the US government paid $325 billion only in interest payments alone.



Then there are the future obligations such as Medicare, Social Security and government pensions. These obligations amount to $54 trillion dollars. This huge problem worried the former Federal Reserve Chairman Alan Greenspan. He told congress: “As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill.” [4]



One would think that this amount of debt would worry the president and the congress. But apparently it does not. The United States’ Congress recently (March 2006) voted to increase the Federal debt limit to $9 trillion. Any other nation in similar circumstances would have had to approach the IMF for help. The IMF would then have forced that nation to cut spending and devalue its currency. But the US does not need to do this. The US can just print some more dollars. But how long can this continue before the world loses faith in the greenback, sending it crashing to unimaginable levels?



The Asian Lender



The Asian countries such as Japan, China and others that hold most of the US debts have been happy to indulge the American deficit spending. This has been a two-way Street; America has kept its market open to their products and they have financed the Americans’ spending.



The value of the US dollar so far has been kept artificially high by Japan, China and oil-exporting countries. These countries, by buying US debts, have kept interests rates relatively low in the United States and allowed Americans to keep spending even as their debts mount.



But there is only so much risk these lenders (Asian and oil-exporting countries) are willing to take.