Treasury Secretary to cut deficit -- Via dollar decline

June 28,2006

Henry Paulson, the new candidate for Treasury Secretary, was selected to signify President Bush’s commitment to reducing the dangerous budget deficit, and restore foreign investors’ confidence in the American economy. Paulson was the Chairman and CEO of Goldman Sachs since 1998, and was a strong advocate of corporate accountability and disciplined spending. He made over 70 trips to China during his tenure, and is on the Advisory Board of the Tsinghua University School of Economics and Management, as well as the Co-Chair of the Asia/Pacific Council of The Nature Conservancy.

He stated the following specific measures to meet the Administration’s goal of cutting the budget deficit in half by 2009:

• Address the long-term unfunded obligations of Social Security and Medicare.
• Expand opportunities for American businesses to compete globally -- which means continue pressure on China to develop a flexible exchange rate.
• Keep taxes low and collect them in a simpler and fairer manner -- some think only taxes on dividends, that is.
• Reduce regulation on foreign capital investment.

What It Means:
As China allows their currency to appreciate against the dollar, the dollar will decline in value. The Administration favors this because it will reduce the current account deficit (the debt we owe other countries) by paying them back in dollars that are worth less relative to their currency. A cheaper dollar will also increase our exports, by making them less expensive relative to other currencies. Increased exports will further reduce our current account deficit by reducing the trade deficit.

While it is a good sign that Paulson is committed to reducing the budget deficit, there is not much to cut other than Social Security and other entitlements, and Defense. He said that we should grow out of the budget deficit, rather than raising taxes, but was not specific on how he hopes to influence that.

Action Steps:
Continue to invest in overseas funds and commodities to protect your portfolio against a declining dollar. Do not count on Social Security, Medicare or any other entitlement to be part of your income in retirement.

Source: U.S. Treasury Dept., “Paulson Statement before the Senate Finance Committee”; Goldman Sachs web site