Shrinking Dollar Supply Signals Trouble Ahead for Government Spending Plans

Zhu Min, the deputy governor of  the People's Bank of China, made some comments recently that should put the US Treasury and the legislative branch on notice. In a discussion regarding the global dollar supply, Zhu noted that the decreasing availability of dollars in the world currency markets is going to make it increasingly difficult for other nations to continue purchasing dollar-denominated US treasury securities. This is logical and predictable, but is unfotunately still probably news to most of our elected representatives.

In a recessionary economy, spending declines as people save for potential future job losses, reduced commissions, lower bonuses and other unexpected circumstances. Companies also spend less on inputs and foreign investment, such as plant development and research. These factors, inter alia, lead to higher savings, decreased trade, and therefore, fewer dollars circulating in the global economy. These trade dollars provide the foundation for the pool of money that nations with trade surpluses over the US, such as China and Saudi Arabia, use to purchase billions of dollars in US treasuries. These asset purchases in turn fund much of the spending of the government, who can't balance the budget with tax dollars alone, particularly in a down economy and its resulting decrease to corporate taxes.

All of this is bad news for a President and legislature who plan on further expenditures in the new year, including a possible new stimulus plan and a health care plan, which will cost the government money. All one needs to do is note the recent increase in the debt ceiling to realize that, despite protestations to the contrary, those in charge realize that the plans being discussed are going to require serious funding. However, increasing the debt ceiling presupposes that there will be spare global demand for the debt being authorized. Based on the comments of the Chinese, who are always careful about discussing the dollar in light of their massive positions in the currency, this could be a dangerous assumption.