Who's deficit is it anyway ? Why bombing Iraq keeps the deficit going and the dollar strong

Do these two news make economic sense ?

US Fiscal Deficit to touch a record 1.6 Trillion (that's Trillion with a T) in 2010

Dollar Strengthens as sentiment shifts towards safety.

Common sense would dictate otherwise. Would you invest your money with someone who is neck deep in debt and is borrowing as if there is no tomorrow. Would you loan a pauper and consider your money to be "safe".. and apparently "Risk Averse" investors are shifting their investments back into dollar.

Yet why are folks doing it ??

Behavioral economics (branch of economics that studies economic events as a consequence of human behavior) could probably have explained irrational behavior (had it been done by a few investors) but here we are talking about the entirety of collective humanity.

Why is the dollar not crashing through the roof. Why do investors(and we are talking about the reserve banks of almost all the countries here and not the "retail" types of investors) still consider US a "safe bet" ?

The answer i believe lies in a combination of economics, psychology and history (what has history to do with economics)

A] Economics
==> Too big to Fail. Collective faith that the dollar is too big to fail and so putting money back there is the safest bet.

==> The TINA factor. There is no alternative. If not the Euro and not Gold where would you go to keep your money. After all isn't the known devil is better than the unknown angel.

B] Psychology
==> The fear of "what if"
What if the dollar crashes ? That fear in the collective hearts of the reserve banks is sufficient to drive strategies designed to make sure that nothing radically goes wrong.

While both Economics and Psychology do play a role. I feel that the real answer to this lies in lessons from history. "Might is Right" or so they say..

A lesson in history:
The Soviet Union was successful in proping up their currency, not due to the strength of their economy but by the strength of their military. Arguably "Star Wars" program during the Reagan years was not aimed at missiles in space but at "spending USSR to the ground". Soviet defence budget increased to 27% of their GDP however the currency was still strong (artificially) and India still continued to buy Soviet Arms at artificially high currency conversions.

What sunk the soviet union was not just the imbalance in finances but the openness that the "Glasnost" years brought. That led to the loss of "fear factor" that the Soviet Union once had and hence the "fear premium" on Soviet Union vanished. This led to the economic fundamentals (and not the military firepower) dictating the value of the soviet currency. Hyperinflation set in and the rest is history...

Similar parallels can be drawn with current US might, especially the strength of the dollar in face of continuing weakening of the US Economic fundamentals. The dollar is not propped up by "Risk Aversion" but by "Fear Aversion". The fear premium is asserted by occupying oil rich countries like IRAQ for no good reason and propping up unpopular monarchies in many others.

I have a hunch that Obama may be to US what Gorbachev was to the USSR. A new era of peace loving US that pulls out from occupying foreign lands may soon reduce the "Fear Premium" that props up the currency and hence the economy. When that happens only time will tell but happen it will.