Yeah, but I'm not sure how long the $ recovery will last. The administration has been trying to do the LBJ "guns and butters" thing, which has eliminated the surplus the administration inherited and created gaping deficits. Clearly the administration never expected the Iraq conflict to last this long.
Anyway, the higher deficits should require higher long term interest rates which means foreigners will have to be more supportive since Americans don't save. As the $ falls one would expect foreign investors to demand higher rates because of the likely real negative return, but so many factors are involved that foreign reserve banks will probably continue to invest no matter what. However, long-term rates will probably have to go up, at least some, to maintain deposits from central banks of countries where trade with the U.S. isn’t a big factor. This in turn should slow the housing market which has been the preferred investment medium for Americans since y2k.
One might think that the lowered $ would result in more U.S. jobs, and undoubtedly it will, but most of the jobs sent overseas are in labor intensive areas where U.S. labor costs are still no match for say Chinese/Indian labor costs. This also includes some technical jobs such as programmers. The jobs outflow problem isn’t going to get fixed any time soon and the best the U.S. can do is try to improve productivity in areas where it is still competitive. Which of course leads to fewer jobs at home, but is good for technology companies such as AMD.
So the U.S. can fix the deficit by either reducing government spending or by importing fewer goods. Since the war will continue to siphon off huge amounts, for way into the future, defense spending reductions are not an option. That means cuts will have to come in other areas. Entitlement programs such as SS and Medicare will probably have to take the biggest hits since their the biggest outflows. Of course that would probably prove to be political suicide if the republicans were to push the changes through without the democrats helping, which seems unlikely. So I see little headway being made in reducing the government deficits under the current administration. They will probably choose to blame the democrats for the deficits and leave the solution for another administration to deal with.
So the only real way I see to fix the deficit is to stop importing so many goods, something that would hurt everyone in the world, which probably means that the effects will be ameliorated some way, out of self interest. Most likely by continued foreign investments in U.S. long bonds. Long term though the $ is going to lose its' status as the worlds preferred reserve currency and that means a less valuable $. This will happen as the U.S. becomes less of a factor in global trade and tying currencies to the $ becomes less desirable as raw products(petroleum) will become more costly in $’s .
The thing that will be interesting is inflation. Personally, I think once the housing market cools off there will be decreased demand for goods, both foreign and domestic, such that inflation won't be much of a problem. A few years ago I read that something like half of consumer spending was being financed by home refinancing. While that has undoubtedly slowed down simply because rates have ceased to fall, housing inflation has still allowed lots of people to tap housing lines of credit. These lines of credit are mostly at a couple of points or so above prime which means that as the Fed continues to raise rates these loans will have higher monthly payments attached to them. We could be getting ready for another period of rising bankruptcies, which would also lower the value of real estate and slow down economic growth. Of course as inflation slows the Fed will have fewer reasons to raise rates.
Interesting times.
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