by Gregory Hietala

Created on: January 25, 2009

Ever since the removal of the "Gold Standard" in the 1970s, the United States dollar has been running on just one thing, confidence. When international investors are looking for a sound investment, they will usually check to see how the company or country is doing fiscally. Now I am not a certified foreign investment broker, but I cant imagine the $11 Trillion dollar debt of the United States Government to come across as flattering. If the United States was a business, it would have filled chapter 7 bankruptcy a long time ago. When it comes to the question of whether governmental deficits matter, the answer would be yes, and the reasoning for this is demonstrated through the US Dollar, and Foreign Investment.

The United States dollar runs on the consumers confidence in the dollar. The moment the confidence in the dollar is diminished, is the moment the US dollar weakens. In the past, the US dollar was back by gold, meaning the US dollar could actually be exchanged for the exact amount of gold that the dollar was worth. This prevented rapid fluctuations and stabilized the dollar. However, with the removal of the gold standard the dollar has been more perceptible to outside threats to confidence. When investors look to a currency, they also take a look at the economic power of the government. Unfortunately, a $400 billion dollar deficit is not a confidence booster, and is also a burden to consumer confidence. With less consumer confidence, the dollar weakens, meaning that a larger federal deficit will inherently lead to a weaker dollar.

The United States economy needs close to two billion dollars of foreign investment every day to stay afloat. With the global recession in full swing, investors are becoming much more stingy with their investments. When investors take a careful look at the United States, they see that investing in the United States is a risky business, one that gets riskier every year. The ballooning federal deficit says one thing to a timid foreign investor, it says the country does not have the necessary fiscal stability to merit their investment. A larger federal deficit will lead to less foreign investment, which could potentially sink the United States Economy.

Overall, the Federal Government should cut back on its spending, or should find a source of income that can compensate for the deficit. As the deficit grows, the damage it does to the every day American will become ever more appearent, and dangerous. A lack of consumer confidence in an already weak dollar, and a lack of foreign investment in a time of global despair, would spell doom for the United States Economy. Therefore, more political action against the deficit should also be taken, before too much damage is done.

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