When President Barack Obama revealed his latest budget last week, it was greeted with a lukewarm reception from fellow Democrat and Montana’s longtime Sen. Max Baucus, who said he was “disappointed” in some of the entitlement cuts. Meanwhile, the U.S. debt continues to rise, although at a slower pace than previous years, and is nearing $17 trillion.
So, if entitlements won’t be cut and raising revenues appears a nonstarter with Republicans, the infamous deficit clock will continue ticking upward. Economists argue over whether this is a crisis, whether deeper cuts are called for, or whether austerity measures, such as sequester, are actually hurting the recovery.
What is clear is that as economies have collapsed abroad coupled with a steady stream of reports about the budget crisis at home, faith in the greenback and other government-back currencies has waned. And that only intensified when another Euro-zone country – this time, the small island of Cyprus – said it needed a bailout.
But what made this meltdown different than the others is that the country has an outsized banking sector. And to help reach the terms of the bailout deal, it had to come up with 13 billion euros. Thus, it agreed to close Laiki Bank, Cyprus’ second largest, and use some of its deposits to pay international lenders. This confirmed the worst fears for many: Depositors’ money isn’t safe.
Cyprus’ fall also coincided with an alternative currency’s gain – the Bitcoin. Whether the two are related is subject to debate. What’s not is this online currency (basically a sophisticated code) created in 2009 with no government backing exploded in value over the last few months – from about $20 to more than $250.
Recently, news organizations began covering this phenomenon and arguing over Bitcoin’s viability as an investment. Then late last week the currency’s value fell off a cliff.
That means two of its most famous investors, the Winklevoss twins, made famous as adversaries of Facebook founder Mark Zuckerberg in the movie “The Social Network,” recently lost a lot of real money. The twins, when the New York Times published a story on them on April 11, said they owned $11 million worth of Bitcoins when the currency was trading at $120. The next day, the online currency was trading as low as $70. Over a two-day period Bitcoins lost $2 billion of their combined value.
The currency may rebound, but its devaluation does lay bare the risk of doubting the dollar. As Joe Weisenthal at Business Insider wrote, “the U.S. dollar isn’t just important because other people think it is. The U.S. dollar is important, because the world’s strongest entity, with the full force of the U.S. Army, the FBI, the CIA, the NSA, and various local authorities with guns demands that you pay them in U.S. dollars.”
It’s reasonable to worry about the U.S. economy. As the president and Congress fail to reach an agreement on how to reduce the deficit, the government has been told that the country’s credit rating is in jeopardy. Smart people are putting more money in presumably safer investments, such as gold.
Except on April 15, gold was on pace for its biggest two-day drop since 1983. Investors, many worried about government economic policies, watched as their savings dwindled. And companies that sprouted up to capitalize on the gold rush following the recession have begun to make cuts. The price of is still far higher than it was several years ago.
But an investment in gold is often based on concerns of inflation, which have proved mostly unfounded even as faith in the dollar has declined. And as Neil Irwin wrote in the Washington Post: “You may not like putting that faith in a powerful, independent central bank imbued with power from the state, but the alternatives may just be a lot worse.”