Dark clouds on the horizon.

An article by bonddad at The Agonist argues that even if the Democrats take back Congress this fall, they will be facing an economy in shambles within six months, with no ability to pump money into it to help cushion the downturn.

Increased government spending is the standard method of ameliorating an economic downturn. However, the Republicans have seriously hampered this ability. Although they are claiming they will halve the deficit by 2009, total debt issuance from the Bureau of Public Debt tells a far different story:

In 2002, the total deficit was $157 billion. Yet total debt outstanding increased from $5.807 trillion to $6.228 trillion, or $421 billion.

In 2003, the total deficit was $377 billion, yet total debt outstanding increased from $6.228 trillion to $6.783 trillion, or $555 billion.

In 2004, the total deficit was $412 billion, yet total debt outstanding increased from $6.783 trillion to $7.379 trillion, or $596 billion.

In 2005, the total deficit was $318 billion, yet total debt outstanding increased from $7.379 trillion to $7.932 trillion or $553 billion.

The US has already issued $568 billion in new debt for fiscal 2006.

In other words, the amount of debt the US Treasury is issuing indicates THE DEFICIT IS NOT UNDER CONTROL IN ANY MEANINGFUL WAY.

Suppose a Democratic majority in the House wants to increase federal domestic spending to either stimulate the economy or mitigate the negative impact of an economic downturn. There isn't any money to do this. The debt/GDP ratio has increased from the upper 50s percent range to the lower 60's over the last 5 years. Currently international interest rate arbitrage is the only major factor preventing the currency traders from selling dollars because of fiscal mismanagement. However, the Federal Reserve is near the end of its interest rate increases while other central banks are increasing their respective rates (although the jury is still out on Japan's current policy direction). These two factors - the US halting its interest rate increases plus other countries increasing their interest rates - will make the dollar vulnerable. An increase in deficit spending will increase the possibility of a dollar sell-off because currency traders will wonder if the US will ever get its fiscal house in order. A dollar sell-off will increase inflationary import pressures, forcing the Federal Reserve to raise interest rates to protect the dollar. Increasing interest rates will slow the economy at a time while it needs economic stimulus.

Increasing the dollars vulnerability is the composition of international purchases of US Treasury debt. Over the last few years, foreign individuals are responsible for the bulk of US Treasury purchases; foreign official institutions (such as central banks) have backed away from the US Treasury market. Foreign central banks are less prone to sell assets in bulk; they are more likely to by "buy and hold" investors. Not so with individuals. If the investment isn't returning a certain amount each year, individuals will seek higher return elsewhere. Considering China, India and Russia are all growing faster than the US and have a far better international account position, moving assets to these countries is a strong possibility. In addition, all three of these countries will probably be willing to cut very beneficial deals for new foreign inflows. In short, an increase in deficit spending may spook foreign private money away from the US market, sending US market-based interest rates higher, adding to downward economic pressure.

There's quite a bit more at the link, if you can stomach it.