Opinion of the court, delivered by Nicole Adams, signed by David Lamb:
Three decades ago, Alfred Kahn, then an economic advisor to President Carter, warned Americans that double-digit inflation and a stagnant economy might give rise to “the worst banana in forty-five years.” Although Mr Kahn’s word choice was humorous—Mr Carter had instructed him to avoid the word “depression”—his message was entirely sincere; inflation can be a sign of waning faith in the domestic economy and a trigger to further erosion of faith in the economy and its currency.
The recent stock market rally of the past four months—only now beginning to falter—and results from the Federal Reserve’s bank “stress tests” in May have persuaded Treasury Secretary Geithner and Reserve Chairman Bernanke that America has avoided the worst banana since the Great Depression. Before passing such judgments, Mr Geithner ought to examine President Obama’s 2010 budget.
The budget resolutions currently in both houses of Congress are unlikely to reduce the $1.17 trillion deficit that Mr Obama’s plan forecasts. If that federal deficit—the second largest nominal deficit ever—remains, it will be all but impossible to finance.
When the House and Senate settle differences in their budget resolutions and approve an identical plan, the budget will come into effect for the fiscal year that starts on the first of October and the Treasury will be responsible for bridging the gap between federal revenue and federal spending. During normal times, faith in the U.S. government and an international need for secure investment allow the Treasury to finance the national debt through Treasury securities and government bonds with low interest rates. This, however, will prove difficult if China isn’t a returning customer.
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