Not a good thing:

“The government’s credibility is extremely important, and I assume therefore, so is the president’s, especially considering how much of the debt is being financed by foreign capital,” said Edward McKelvey, a senior economist at the investment banking firm Goldman Sachs. “There’s been an element of realization that this is a gigantic problem for the U.S., and certainly when you talk to investors, this is on their minds.”

[Secretary of the Treasury John] Snow will stress Bush’s plan to cut the deficit significantly over five years, aides said. The White House projects that this year’s $521 billion deficit will fall steadily to $237 billion by 2006, the final year of the administration’s forecast. White House budget director Joshua B. Bolten said he believed that the deficit would continue to fall after that.

This is a very distinct danger — when you are the world’s largest debtor nation, losing credibility amongst your creditors is not at all desirable:

“I don’t believe too many people believe those numbers will work out,” said Sung Won Sohn, chief economist at Wells Fargo Bank. “The risk is that deficits will get larger, not smaller.”

The administration’s $364 billion deficit forecast for fiscal 2005, which begins in October, assumes that no money will be spent next year in Iraq and Afghanistan, even though Bolten conceded that Bush will seek up to $50 billion this fall to cover those costs.

The White House’s entire five-year budget includes no money at all for the ongoing wars in Afghanistan, Iraq and against terrorism in general, but it does assume the extension of the president’s tax cuts.”

The blame for this should not all fall on the President: Congress controls the purse strings, so a lot of theonus lies with them. Fed Chief “Easy Al” Greenspan deserves a hefty share of responsibility.

In terms of credibility, however, the biggest lack of accountability regarding U.S. credibility is Secretary of the Treasury John Snow. His laughable pronunciations on the U.S. “Strong Dollar Policy” garners guffaws overseas. Its one thing to stretch the truth, or to offer a different spin or perception; But to stand up in front of the entire international financial community and just outright lie seems foolish.

What makes it worse is not only does he know he’s lying, all the other participants do too. When playing poker, it may be a strategem to declare “I’m bluffing” with a wink and a nod. Its something else entirely to bluff and raise, while showing everyone your hand.

That’s a losing strategy.

Source:
Greenspan and the greenback
Currency traders found the Fed chief’s message remarkably clear: Let the dollar drop.
Justin Lahart
CNN/Money, February 12, 2004: 9:10 AM EST

http://money.cnn.com/2004/02/12/commentary/bidask/bidask/

Much of World Skeptical of Bush’s Budget G-7 Partners to Hear Administration’s Defense
Jonathan Weisman and Paul Blustein
Washington Post, Friday, February 6, 2004; Page E01

http://www.washingtonpost.com/ac2/wp-dyn/A17271-2004Feb5?language=printer

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Category: Finance

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