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US Budget Deficit and Global Power

Some interesting issues emerged in the recent discussions about the US budget:

Deficits May Alter U.S. Politics and Global Power
- The projected deficit in 2011 will be near 11 percent of the country’s GDP.
- American deficits will not return to sustainable levels over the next 10 years.
- Unless miraculous growth, or miraculous political compromises, there is virtually no room ......
- “How long can the world’s biggest borrower remain the world’s biggest power?”
- the problem has to be worse,to lower unemployment before deficits can come down.
- the political warnings are contradicted by the market signals. The Treasury has borrowed money to finance the government’s deficits at remarkably low rates, the strongest indicator that the markets believe they will be paid back on time and in full.

This last point is very important.  How long can this continue? What are the implications for the role of the US as a global power? In this discussion, trade deficits and the value of the dollar come into play.

Moody's Sees US Rating Under Pressure After $3.8 Trillion Budget
Moody's in the report released today:

The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries.
If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure. The trend and the outlook would be more important than any particular level of debt.

Can you imagine what it would happen if interest rates were to rise in the next ten years?
There are serious risks. The US is in good company because several European countries are not doing better.  Global power is shifting at an accelerated speed unless something happens. This kind of change cannot happen gradually, smoothly and with no pain.  Implications have to be fully understood in all various aspects.   

In this regard, I think, we have to look at the interest of investors on gold and precious metals in general. As the possibility of a serious crisis appears on the horizon, this is one of the way to diversify from fiat currencies (both Euros and Dollars).   

Disclosure: no positions