America's Debt Time Bomb
By John F. Ince, AlterNet
America's exploding debt is a ticking time-bomb. No one can say for sure what might trigger a crisis and when the bomb might explode, but this much is for sure: America's current level of borrowing is unsustainable.
America's debt crisis is reflected both in our exploding national debt and our astounding level of borrowing from foreigners, as measured in the current account trade deficit. Every day we fail to address these problems, we increase the chances that the country will be facing an economic crisis of major proportions. Yet few Americans are aware that anything is amiss. The mainstream media covers the issue intermittently, but because the debt increases incrementally, the issue lacks the sort of "crisis" banner that motivates editors and reporters. The lessons of history are clear: a nation's heavy borrowing from abroad is usually a precursor to decline. America's debt is also a moral issue, because we are in effect stealing from future generations. By borrowing so heavily today, we are hollowing out the foundation of America's economic future.
There are two components of America's debt time-bomb: the national debt and the current accounts trade deficit.
The national debt: When President Bush took office in 2000, the projected surplus for the U.S. government for the next decade was approximately $5 trillion. By fiscal year 2005 the surplus was entirely gone and the annual domestic deficits were at record levels, somewhere in the range of $350-450 billion depending on whose estimates you use. This is the most radical reversal of government finances in U.S. history. Today the national debt is approximately $7.9 trillion, and growing by over a billion a day.
The current account trade deficit: In the last 25 years America has gone from the world's largest creditor nation to the world's largest debtor nation. Today we rely upon foreigners to finance over 40% of our national debt. In fiscal year 2005 our current account trade deficit is on track to be almost $700 billion, which represents over 6% of our GDP. When America borrows from abroad to finance its domestic deficits, we give foreigners a claim to the financial assets of this country through either interest payments or a share of profits. Essentially America has been borrowing from abroad to finance our military buildup and war in Iraq. Should we continue to run current account deficits comparable to those now prevailing, the net ownership of the U.S. by other countries and their citizens a decade from now will amount to roughly $11 trillion.
The globalization of financial markets has made it easier for American policymakers to engage in potentially dangerous borrowing patterns. Today there is a worldwide glut of savings, and because the United States is viewed favorably by global investors, we have been able to borrow from abroad without any appreciable pain.
But this is all based on a short-term perspective. Sooner or later America must begin paying foreigners back. Even with recent increases in interest rates, they remain relatively low by historical standards and inflation does not seem to be an major concern of policymakers in the short run. This state of affairs has perplexed many economists because, with capital flowing so freely across international boundaries, many of the traditional guideposts used by the Fed to gauge the economy have diminished relevance. If potential long-term problems are masked, the magnitude of an eventual downturn could be greatly magnified.
A confluence of factors could quickly create a downward spiral in the economy. Most likely it would begin when foreign investors lose confidence in America as an investment opportunity. Suddenly and traumatically, this would create a contraction of our economy.
An economy in recession further increases the size of the deficits because of increased interest costs on the existing debt and transfer payments through entitlement programs such as unemployment insurance. This further creates pressures on the financial markets through the "crowding out" effect as the government absorbs a higher share of the available pool of capital.
As businesses have more difficulty raising capital, it further depresses the economy and places additional upward pressure on interest rates. Rising interest rates would take the steam out of a real estate market that has become increasingly speculative and exhibits many bubble-like characteristics. Highly leveraged sectors like the derivative markets could also encounter a severe contraction. Combine these factors with the coming demographic wave of retiring baby boomers and you have the outlines of a major crisis.
Based upon a credit analysis of America's current borrowing and our long-term commitments through entitlement programs, some economists are suggesting that the U.S. Treasury will have no other option than to "monetize" the debt by reducing reduce its real value through intentionally inflationary policies. This is essentially a means by which the government would default on its debt without calling it a default. Individuals and institutions that lent money to the federal government by investing in Treasury bills would be paid back with dollars that are worth less than the dollars they lent.
The integrity of our nation is being compromised by the fiscal irresponsibility of our policymakers. In the process, the stability of our currency and economy is being jeopardized. We should all be concerned because 1) The market value of everyone's financial assets will be reduced dramatically if we stand by and do nothing; 2) The costs of things we buy will rise dramatically if the government inflates the currency; and 3) Republicans will use the exploding national debt as a pretext for cutting social programs.
The unraveling happens in countless invisible acts that most Americans will never be aware of until it is too late. If the U.S. Treasury does "monetize" the debt to reduce its real value, it would be tantamount to the government's "confiscating" the financial assets of its citizens through intentionally inflationary policies. This course of action would have profound implications not only for the sustainability of the global financial system, but all for individual investors. In the words of former Fed Chairman Alan Greenspan, "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation." As Harvard economist John Maynard Keynes explained: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."
Since the terrorist attacks on the World Trade Center on September 11, the debate over America's priorities has been framed in patriotic terms as a need for strong measures to protect the nation from future attacks, whatever the cost. The wars in Iraq and Afghanistan have been linked to this "war on terrorism" and funding for these initiatives has by and large sailed through Congress without substantive debate or questioning. Yet it hardly makes sense for a nation to go into debt to pay for wars and a military buildup, at the expense of other more fundamental and abiding national needs.
While military expenditures go unquestioned in Congress, funding is being cut for education, environmental protection, sustainable energy programs and many other programs that arguably will have a more profound effect on the strength and economic competitiveness of our country. Increasingly the battleground of modern international conflict will be in the global marketplace, rather than in the military sphere. China's economy is growing at an impressive pace. Its need for energy and other resources will ultimately place its national requirements on a collision course with those of the U.S. and other Western nations.
Sooner or later, America must begin paying off its debts, and its binge of borrowing must come to an end. If our leaders continue to ignore the problem, we will all suffer the consequences.
The world turns the US dollar down to the benefit of the euro
Does any one remember when the Japanese Primeminister critized the US dollar and deficit?
Here is a story regarding Asian Central Banks favouring the Euro.
The world turns the US dollar down to the benefit of the euro. 03/11/2005 18:05
Central banks in several Asian states considerably reduced the dollar constituent of their reserves
The US currency has been balancing on the verge of disaster these days. Several countries have announced their intention to diversify their dollar reserves this week. Central banks have decided to add some euro cash to their financial sources.
Another stage of the American currency decline touched upon Russia as well. The dollar value has been declining against the Russian ruble since February 9th, 2005. The US dollar costs 27.46 rubles at the moment in Russia in comparison with 28.18 rubles per dollar just a month ago.
This is the result of another wave of the anti-dollar hysteria. The story started with a message from the Basel-based Bank for International Settlements. It was said that central banks in several Asian states considerably reduced the dollar constituent of their reserves over the recent several years. Banks of China and India, for example, were rather emphatic about such a decision of theirs. The dollar funds of those banks, BIS said, made up 81 percent of their total reserves in 2001. The dollar index dropped to 67 percent by September of 2004. The most considerable reduction of dollar reserves was registered in India: they dropped from 68 to 43 percent from 2001 to 2004.
Market specialists realized that the dollar dependence of the dynamic Asian region was exaggerated. The new concept later resulted in a very active promotion of the European currency. The European Central Bank said that it was going to raise its basic rate (2.25 percent currently) to create "the image of the euro" as a more attractive and reliable world currency. The statement from the bank gave an additional incentive to the growth of the euro.
The dollar started plummeting. The slide was intensified even further after the statement from the Japanese Prime Minister Koizumi. The minister told the national parliament that it was necessary to consider the issue regarding the diversification of Japanese currency reserves. Spokespeople for the Finance Ministry of Japan assured the troubled market a bit later that Japan would not be enlarging its euro-assets: the dollar demise was suspended. Nevertheless, the dollar rate has already stepped over the psychologically important level of 1.34 dollars per euro.
The future of the American currency can hardly be viewed as promising, though. The USA is to publish the balance of trade data in the near future. Specialists believe that they can hardly be better than the previous ones. "The liquidation of the dual American deficit - of the balance of trade and payment - is a matter of distant future. Oil prices are growing, and they have nothing to cut deficit on," FIBO analyst, Rushan Zeinetdinov said.
Europe and Japan taught a good lesson to the States. The US Federal Reserve System is taking measures to stabilize the national currency. European and Asian specialists, however, believe that those measures are not sufficient. Raising the FRS rate by only 0.25 percent cannot stop the ongoing decline of the US dollar. Europe is apparently tired of the never-ending financial fight with the USA and decided to play the game of the strong euro, although it is definitely not good for European exporters. The strong euro might eventually undermine the global reputation of the dollar as the major world currency.
Specialists believe that the information of the Bank for International Settlements can be considered as another proof of the general trend to turn the dollar down as the key currency for saving deposits in.
Managing Director and Chief Economist of Morgan Stanley, Stephen Roach - excerpt opinion is given below.
Mar 18, 2005
Tipping points are a great concept, but virtually impossible to identify ahead of time -- let alone when they are occurring. It is only with the great luxury of hindsight that we can look back and know that the proverbial bell has rung. In my view, March 16, 2005 could end up in the running as a possible tipping point for America. Suddenly, the US has taken on a very different aura in an increasingly unbalanced world: The confluence of a record current account deficit, a disaster from General Motors, and yet another new high for oil prices all speak of an increasingly precarious role for the global hegemon. World financial markets have barely begun to sniff that out.
He delivered a public address on the radio today saying how great the economy is and how many new jobs were created. Yep, happy days are here again... Not. Reality control as usual.
So pardon me while I burst into flames.
I\'ve had enough of the world and it\'s people\'s mindless games.
So pardon me while I burn, and rise above the flame. Pardon me, pardon me, I\'ll never be the same. -Brandon Boyd
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