The US Treasury's March figures came as an unpleasant surprise given, that in February the Congressional Budget Office (CBO) projected a federal budget deficit of $1.4 trillion for fiscal year 2023, prompting concerns that the real number for FY23 will mount over $2 trillion. Still, it's not something unprecedented given that in FY21, the US budget deficit totaled a whopping $2.8 trillion, equal to 12.4% of gross domestic product. Is there a reason to worry?
Back in February, Senator Chuck Grassley recalled how he and then-Senator Joe Biden raised the alarm over the budget deficit in 1984:
"In 1984, when faced with $200 billion deficits and a national debt nearing $2 trillion, an emphatic Democrat Sen. Joe Biden warned of 'economic disaster' unless Congress took 'dramatic actions on deficits right now.' He was advocating for a government-wide spending freeze – a bipartisan proposal that he and I led to restore fiscal restraint to the federal government."
However, now the US budget deficits routinely climb over $1 trillion, total national debt has surpassed $31 trillion (15 times larger than in1984) and nobody in the government seems to be freaking out.
Why Nobody in US Seemed Concerned About Deficits for Decades
"The US budget deficit is an old story," said Dr. Paul Craig Roberts, a US economist and ex-assistant secretary of the Treasury under Ronald Reagan, speaking to Sputnik in September 2022. US citizens do not appear concerned by the mounting numbers since they have been hearing about large and growing budget deficits all their lives and nothing yet had happened, he noted. Indeed, in February 2022, Pew Research's list of top priorities saw the budget deficit issue ranking only 11th with around 45% feeling somewhat concerned about rallying figures.
A budget deficit occurs when spending exceeds revenues during a defined period. For instance, in fiscal year 2022, the federal government spent $6.27 trillion while collecting just $4.90 trillion in revenue, resulting in a $1.38 trillion deficit. For comparison's sake a budget surplus occurs when the federal government collects more money than it spends which happened five times in the last 50 years, most recently in 2000 and 2001, when the federal government had budget surpluses of $236 billion and $128 billion, respectively.
"As long as the dollar is the reserve currency and is used to settle most international payments, the US deficits are financed by countries holding their foreign reserves in US dollar securities," Dr. Roberts explained. "So foreigners finance the US deficit and the Federal Reserve itself buys any overhang. This is why the deficit has not been a problem."
Dr. Roberts warned that if the demand for the dollar abruptly shrank and the greenback no longer is the world's dominant reserve currency, Washington's budget deficit and soaring gross federal debt will become a real problem.
The size of the national deficit largely depends on the health of the country's economy and spending policies approved by US lawmakers and implemented by the president. If the nation's population and its businesses are making less money, the government gets lesser revenues. The federal government's spending policies also matter: if it is going on a spending spree, the odds of the country ending up with a budget deficit are getting higher.
To make the picture more complete, the Peter G. Peterson Foundation has drawn attention to the fact that the "debt held by the public" at the end of March 2023 amounted to $24.6 trillion, $0.7 trillion higher than a year ago. According to the NYC-based foundation, since the global financial crisis in 2008, debt held by the public has almost tripled relative to the size of the economy. Meanwhile, the US gross federal debt – which is the sum of debt held by the public and intragovernmental debt – has already gone through the roof and now amounts to $31.46 trillion.
While the US Treasury admits that debt and deficits are on an "unsustainable" upward trajectory, a longtime steady demand for the greenback across the world has lulled US financial officials into believing that the country has all the time in the world to balance the budget.
Why Shrinking Dollar Use is Big Problem for US
While the GOP is pointing the finger of blame at the Obama and the Biden administrations for excessive money-printing and soaring debt, the crux of the matter is that both parties stopped caring about deficits over the past 30 years, as per US historians. According to them, since the 1990s the GOP has become consumed with cutting taxes over balanced budgets, while the Dems placed emphasis on social spending.
However, Mikhail Khazin, a Russian economist and publicist, who served in the Working Center for Economic Reforms under the Boris Yeltsin government in the 1990s, predicted the demise of the US dollar dominance roughly 20 years ago. In his book titled "The Decline of the Dollar Empire and the End of Pax Americana" Khazin and his co-author Andrey Kobyakov explained why the investment process which has long been fundamentally dollar-based is unsustainable and why "it is absolutely necessary that the dollar be replaced by other investment currencies."
28 January 2023, 13:38 GMT
Speaking to Sputnik in January 2023, Khazin explained that there is a process underway of the creation of several new currency zones. The trend, which, according to the economist, was inevitable, has been facilitated by Washington's sweeping sanctions against big global players, including Russia, and the use of the dollar as a "punishing" mechanism. By arresting Russia's central bank assets, severing the nation from SWIFT and prohibiting exports of US dollar-denominated banknotes to the country, Washington sent an ominous signal to the other world players.
Russia, China, India and other countries accelerated their shift to settlements in national currencies including for energy deals which have long been settled in greenbacks. BRICS, an acronym for Brazil, Russia, India, China and South Africa – started to consider the creation of common currency. The Association of Southeast Asian Nations (ASEAN) has gone even further by seeking to reduce dependence not only on the greenback but also on euros, yens, and British pounds in financial transactions. Earlier this year, President of Brazil Luiz Inacio Lula da Silva touched upon the issue of the creation of a common currency for Mercosur, a South American trade bloc, with his Argentine counterpart Alberto Fernandez.
The emerging trend means reduced demand for the US dollar and shrinking dollar area, exactly what Dr. Roberts warned about over the past few years.
"[The US] could print money because the dollar was the world reserve currency and everyone used the dollar for its own international transactions," Dr. Roberts told Sputnik's Dimitri Simes, Jr. on April 13. "But if the dollar starts losing this role and fewer and fewer countries use it for international transactions, how's the Fed going or the government going to print dollars to pay its bills, if it's not the reserve currency, is not in universal demand? So what happens if the dollar would – poof! – go down? That would mean a massive US inflation. It'd be a kind of inflation that results from currency collapse. There’s nothing monetary authorities can do about that. Those kinds of inflations are the real inflations, the real deadly ones (…) How long will the dollar hold on? How long will it survive? How quick will the transition be away from the dollar? (…) So, it means the demise of the dollar as the world reserve currency, which means the demise of American power, because American power is based on the ability to pay bills by printing money."
It appears that the GOP and the Dems should hurry up to reconcile themselves to rapidly changing global economic reality – they definitely don't have all the time in the world.