Source: Diane Rehm Show

The Obama administration's recent budget forecast calls for the federal government to borrow $3.7 trillion in the next two years—prompting growing concerns over the willingness and ability of global investors, especially China, to finance the burgeoning debt of the United States.  To discuss those concerns, Albert Keidel joined Robert Hormats, vice chairman of Goldman Sachs, International, and John B. Taylor, professor of economics at Stanford University, on WAMU’s The Diane Rehm Show.  

Keidel noted that several years ago the dollar weakened relative to other currencies because other economies seemed reasonably healthy.  With the  rapid decline in the global economy, investors now recognize that the dollar is the safest currency in uncertain times.  Despite short-term difficulties, he noted, the U.S. economy is still the largest and most sophisticated in the world, and its government has a long track record of responsible financial and fiscal policies to avoid the kind of inflation that damages investor confidence.  Hence, foreign and domestic investors have increased their purchases of U.S. dollar denominated instruments, especially U.S. Treasury bonds.  

History suggests that the only effective time to reduce a country’s debt is during a period of healthy economic growth, as the United States did in the late 1990s.  If, as many experts argue, today's recession is worse than a common “every-ten-year” decline, Keidel explains that reducing budget deficits by constraining spending would be a misplaced priority.  In such circumstances, failure to spend smartly and decisively to turn around the global economy will amount to "inter-generational theft."  Cutting deficits now and failing to achieve a lasting recovery would burden the next generation with years of stagnant growth, unpaid debt, and reduced opportunities.