Those who trade forex are in budget mode these days. Barack Obama’s blueprint for this year’s federal spending includes $100 billion in additional stimulus for the economy, and a massive $800 billion in taxes on high income earners. The blueprint also includes banks that benefited from the bailout, as well as the oil and gas industries, in order to trim the deficit in the future. The balance of the budget is expected to reach $3.8 trillion.
In order to finance this huge gap between federal income and spending, the Obama administration will for the most part follow the path of the previous administrations, and it is expected that outstanding public debt will reach some $18.5 trillion by 2020, essentially doubling in a decade, which equates to more than 100% of GDP by the numbers of today. This approaches the astronomical values registered in Japan since the aftermath of the 1989 stock market crash.
Can such a high ratio of debt to GDP, such a large and ballooning fiscal deficit be sustained in the long term? Online and offline commentary would have us believe that the U.S. is running a grave danger by becoming so heavily indebted to the rest of the world, that, as in the case of the trade deficit, it is only a matter of time before the spending habits of the government make the healthy development of the American economy an impossible task for future generations. Funding wars, extending social security, bailing out and taking over private companies, enabling space programs are just some of the jobs that the federal government is tasks to undertake, all the while presenting the façade of financial soundness and reliability to the rest of the world in order to uphold the value of the USD. Many argue that this is an unrealistic and irrational mission.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Yet these prognostications have been made during the major part of this decade. In fact, complaints about fiscal irresponsibility are nothing new. Ever since the days of President Reagan, American people and the government have been subscribing to the notion that it is possible to spend other people’s money, with barely perceptible negative effects. We should recall that the U.S. is still the dominant economy of the world, the vanguard of capitalism, and that the dollar is still the trade and reserve unit of central banks around the world.
It seems unlikely that the bad numbers that the government keeps printing will lead to a collapse of trust in the American economy any time soon, as long as the global framework of economic cooperation and international alliances built by successive American governments remains in existence. The real danger is not that investors will suddenly grow tired of bailing out the American economy; indeed, the crisis of 2007-2009 has shown that they are even more willing to do so when the American economy is doing terribly. The real peril is that at some point some kind of geostrategic problem, such as that observed in Taiwan, in the Middle East, or some kind of issue between Japan and China, or some matter that we cannot predict today will disrupt economic confidence so much that the financial system will cease to function in a normal manner, resulting in collapse in emerging economies first, before leading to a severe crisis for American investors and the government. Otherwise, there is no sign that investors will abandon the U.S. simply because the government is printing numbers that are too big for adequate comprehension.
Perhaps the forex trader is the only being that is well-placed to derive significant advantages from the chaotic state of the world economy. This may well be the time when the best lessons are learned and the most valuable experiences obtained in forex trading, and elsewhere, for the beginning trader.