Tags: Jeffrey | Garten | dollar

Garten: U.S. Debt to Permanently Sink Dollar

Tuesday, 01 Dec 2009 02:53 PM

By Dan Weil

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Yale finance professor Jeffrey Garten says the dollar will drop substantially and permanently, thanks to the United States’ bulging debt burden.

“The two most significant structural consequences of the recent financial debacle are the massive deficits and debts of the U.S. and the shift of economic power from West to East,” the former Wall Street executive wrote in the Financial Times.

“There is only one effective way for governments to address the combined impact of both: press for a sea change in currency relationships, especially a permanently and greatly weakened dollar.”

The budget deficit exploded to $1.4 trillion in the year ended Sept. 30, or 10 percent of GDP. And the debt burden tripled to $3.5 trillion.

In addition, baby boomers will soon strain the Social Security and Medicare systems.

“Washington will therefore have little choice but to take the time-honored course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks,” Garten writes.

“In other words, the U.S. will have to camouflage a slow-motion default because politically it is the easiest way out.”

The United States also will need a weak dollar to boost exports to compensate for sluggish domestic consumer demand, Garten says.

Options trading points to continued declines by the dollar against the yen, Bloomberg reports.

Options contracts to buy yen for dollars have risen to a 2.1 percentage-point premium over options to sell the yen.

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