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17.02.2018

The dollar is under siege: China orders the US to stop

"The dollar is under siege," US financial news agency Bloomberg reports. They complain that the financial world began to notice the US budget deficit, the growing federal debt and the trade balance deficit. Translated into human, this means that the suspicions that the "American king" (he is a world hegemon) are actually naked, and his most vulnerable places are covered only with a green leaf with a portrait of the American president began to penetrate into the reality of the financial world.

After Trump and his enemies from the Democratic and Republican parties began to discuss the budget and increase the program of public borrowing, it became evident that a significant part of the establishment had reached a consensus on one of the key issues. Instead of the promised reduction of expenses and deficiencies in the election campaign, Trump decided to record a record increase in the budget deficit, budget expenditures and public debt. Instead of trying to snatch each other's important items of expenditure, US politicians from different parties and interest groups decided that raising the US national debt would allow them to "pay for everything" and allow them to earn money and score points for all participants in the political process. This unanimity was strongly disliked by financial markets, the economic media, and the few politicians who know what the consequences for the dollar and the economy as a whole will result from the strategy of "closing" the deficit with debt and a printing press. Even the influential conservative think tank of the Heritage Foundation stated: "Our country can not afford an irresponsible budget plan that accepts with open arms shortages of trillions of dollars." However, experts' opinions and market reaction did not stop politicians: they decided that long-term economic problems do not matter compared to their ability to solve their financial and political tasks here and now.

Agency Bloomberg quotes the opinion of Michael McCormick, chief currency expert at Toronto Dominion Bank, who believes that "the dollar's prospects are bleak" and points to rising budget and trade deficits. "If we combine the deficits, we get a lot of external vulnerabilities in terms of the exchange rate." From the point of view of cash flows, we are now in a situation where it is problematic to stop shortages, "McCormick said. It is easy to see that the fears of the banking analyst are well matched and almost coincide with the negative comments of the rating agency Moody, who recently issued a warning that the US could lose its high credit rating. Some fears for the future of the American economy began to penetrate even into the mainstream media, which usually prefer not to frighten their readers. However, against the backdrop of the consensus of the American political class, which decided that instead of making unpopular decisions to cut costs, it is simply necessary to increase debts even more, even journalists sometimes have an internal need to warn readers about the consequences of such irresponsible policies. "Just because the debate around the deficits is already boring everyone and it's messed up with unscrupulous arguments, it does not mean that their growth is good." Deficiencies are a real risk for the government, for what is happening now on Wall Street and for the health of the entire American economy, "writes the economic editorial office of Boston Globe.

It should be taken into account that the most acute and unpleasant in the short term for the United States may be the fact that the main external creditor of the USA, namely China, is showing greater nervousness about Washington's actions in its foreign policy and especially economic sphere.

In the main information mouthpiece of the Chinese leadership - the state agency Xinhua - there was a material under the heading "The American irresponsible deficiency in the size of a trillion dollars is worthy of attention." Despite the most polite wording of the Chinese officialdom, the text clearly shows the same concerns, pointed out by the US economic experts. For example, Xinhua writes: "Given that the public debt has already exceeded 20 trillion dollars, the US is going to the largest budget deficit in peacetime and are moving in the direction opposite to what the textbooks on economics teach."

The Chinese side has a serious point in this matter - China already owns a trillion-dollar portfolio of US government bonds. And also due to the fact that Beijing traditionally expects continued purchases of the country's debt obligations. More recently, financial markets have been shocked after rumor has been thrown in: China will cut or even stop buying US bonds. The shock took place only after the official refutation by the Chinese authorities. And then, and now the senators and congressmen talked about the fact that, if necessary, the debt obligations will be bought by someone else, hinting, apparently, on the banks that have access to the printing press. But such a maneuver will only increase the pressure on the dollar.

As Xinhua rightly notes in its commentary, "The budget deficit is like a promissory note that you will have to pay back sometime." There is no magic wand. "There is only a choice between raising taxes and reducing government debts, well, or finding some sane the balance between these methods.As long as investors still keep American bonds as "reliable" financial assets, Uncle Sam can not expect him to be able to endlessly postpone this problem. "

From the financial point of view, the situation looks quite unambiguous and does not bode well for the US economy and currency, however, unfortunately, these economic difficulties also have a geopolitical aspect. There are two traditional ways of writing off huge state debts - hyperinflation and war. The risk is that the closer the US approaches the hyperinflationary scenario, the more seductive politicians will look for is an alternative, that is, a forceful solution to economic problems.

That is why, by the way, Russian government investments in modernizing the army are a key factor that will not only allow Russia, but the entire world, to calmly survive the inevitable crisis of the dollar financial system.

A source: RIA News

Author: Ivan Danilov, author of the blog Crimson Alter

Tags: USA, Economics, Debt, Crisis, China, Analytics

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