House of Cards
Even the Bush-lovers at the Washington Post editorial board are getting nervous about the dollar:
The dollar may fall gently, as it has over the past year or so, or a renewed appetite for U.S. assets among private investors could even stabilize its value. But the risk of a currency crash grows every day. In 2003, the United States had to attract $530 billion of foreign capital to finance its purchases of foreign stuff; in 2004 it had to attract $650 billion; this year, it may have to pull in as much as $800 billion. Every year of vast borrowing increases borrowing in later years; as Brad Setser of Oxford University notes, just paying interest on the $800 billion borrowed in 2005 might add $40 billion to the overall 2006 deficit.Actually, they could just cut the Pentagon budget by about two-thirds, and we'd all be a lot safer in many ways.
To stabilize this house of cards, Congress and the administration should pull the one lever they have: They should reduce the nation's reliance on foreign capital by cutting government borrowing. This isn't going to be possible through spending cuts alone. It's going to take higher taxes.