I’m not sure just how sanguine I’d be about the possibility of the bond market becoming a problem. The US Dollar has been falling steadily against most other major currencies for a few years now, and this is absolutely a big deal for the bond market. The slide of the dollar makes Treasury bills much less attractive as an investment option, especially since the fundamentals underlying the slide of the dollar - massive trade deficit, very large current account deficit, etc - aren’t showing any signs of changing. The dollar’s loss in value already constitutes a default on debt owed of epic proportions, and from the perspective of foreign investers that only looks to be getting worse. Sure, China and Japan will play ball for a long time because of how much they stand to lose if the dollar collapses more severely, but that doesn’t mean the situation can’t get to be a very serious problem in a relatively short period of time.
That said, the US debt/GDP ratio is only now getting to be where Canada’s was in '93 when then-Finance Minister Paul Martin became one of the very few politicians I’ve ever seen make good on a promise of fiscal responsibility. So, you have some time yet. If I were you I’d try to get things straightened out sooner rather than later, though, since you aren’t very far away from crippling government with the cost of debt maintenance should interest rates rise, as they inevitably will if current trends continue.
It depends. What do you want to use the money for?
Let’s say Canada wants to go to war. The nation needs massive capital (let’s say $2.5 billion per year for at least five years) to build up its military. Parliament has three options:
Raise taxes by an average of $100 per year for at least five years on all 25 million Canadians
Cut $2.5 billion from somewhere in the budget – let’s say national health
Borrow $2.5 billion and pay it back over 20 years or so using a combination of economic growth, smaller tax increases and fewer budget cuts.
Of course, you’re operating under the assumption that other countries actually respect your sovereignty, which may not always be the case when dealing with the US. That line of thinking didn’t work out too well for Cuba or Iran.* The 82nd Airborne division can be pretty persuasive when it comes to distressed debt counselling.
This is the same reason why I laugh at people who think foreign (Chinese, Japanese) ownership of American Canadian companies is somehow a threat. If the Chinese wanted to buy Saskachewan, I’d say let them do it. They can’t take it back to China with them, if we need it later down the road for some reason, just take it back. What are the Chinese going to do? Invade Canada?
*Yes, I realize those countries had issues not completely related to debt, but the concept of sovereign risk is the same.
It’s called leverage and it can work wonders for you if there are no snags. You borrow at the risk free rate and reinvest to get a higher return. Unless you find an opportunity for arbitrage, you must be taking on higher risk to get that 6%. Doesn’t apply to government situations though as they are not borrowing from one source and reinvesting it looking for a higher percentage return. They are looking to pay the bills of the government.
Not to mention the inevitable increases in Medicare and Social Security as the population ages (which isn’t as far off as we’d like to think–Baby Boomers, PLEASE keep working).
Or the possibility of OPEC decided to price oil in Euros instead of dollars.
Or a major economic downturn when rising interest rates cause housing bubbles to pop and consumers to spend a lot less (when your entire economy is built around consumers spending borrowed money to purchase imported goods and services and neglecting a manufacturing base, this is a bad thing).
Or continued involvement in foreign wars. Not that that’ll happen. We’ll be out of Iraq any day now, and I hear Afghanistan is coming along quite nicely.
Sorry, but other countries won’t keep paying us to buy their stuff forever. We’re not the center of the universe. Other places will start to look like more attractive investments sometime down the road.
(What can I say? I just finished reading American Theocracy and I’m about finished with Running On Empty. Between the federal debt, consumer debt, the current account deficit, entitlement program liabilities, the prospect of increased military spending, and no end to oil dependency in sight, I have a hankerin’ to start invest in Europe and Asia.)
True and true. But it’s not like there’s some government official sat watching a big dial marked “Outstanding Debt” graduated in thousands of dollars to make sure the needle doesn’t hit the red zone. My concern is more that if some banker (government or private) decides to cash out, and too many people jump on the badwagon, it might be kinda difficult to smooth out the resulting turbulence. It’s not like the international money markets are some kind of well-understood and easily controlleable machine, and the way the White House keeps blithely tossing more and more money on the roulette table seems imprudent. No-one knows where the limits are, and the imbalances building up make it more and more likely something is going to go wrong.
I’ve never understood the argument that this is at all relevant. If you show up at an auction with $100 in your pocket, and everyone else has $200 worth of foreign currency in their pocket, and there’s a functioning money market outside the door, chances are you won’t be placing the winning bid, no matter what currency the price is being set in.
And for all those wittering on about militaries, and government action, and whatever else - economic collapses cand and have happened without a shot being fired. If you look at the various crises suffered by Britain, Mexico, Argentina, all the Far Eastern economies you’ll see that the only thing that’s needed for a modern functioning economy to fall apart is for people to become uncertain about the value of payments due to be made to them in the future. If people don’t trust the currency they are being paid in, it gets really messy and often really fast.
It’s called “starving the beast”. The neocons want to rack up so high a debt that the government will have no choice but to cut back on social programs, and they don’t care if they cripple America in the process. They’ll keep lowering taxes and raising spending until everything falls apart.
So “neocons” want to cut government spending…why? Surely these neocons have some policy objective they wish to acheive by cutting government spending. According to your theory, why do the neocons want to “starve the beast”? Pure evil? And “cutting taxes and raising spending” sure is a funny way of cutting spending, no? Surely if the neocons want to cut spending, wouldn’t it be better to do so by cutting spending rather than raising spending?
If the neocons secret objective is an imperialist American military able to exercise hegemony over the world, surely they also desire a strong US economy to fund such an imperialist military? Or is a new feudal system in America worth destroying America’s economy? Or is the destruction of America out of spite their real goal?
No, only on social programs. They’re Satanic/Communist, you know.
What I just said. And yes, I do regard them as evil.
But that’s politically impossible.
They think we only need to use a smaller, high tech force; look at Rumsfield’s refusal to use the number of troops the generals wanted in Iraq. Besides, I think they think that if we have to choose between a big military and social programs, Americans will willingly give up Social Security, public education, college scholarships, Medicare/aid, and so on to keep the military big.
I think they’d consider it a worthwhile sacrifice.
Soo… when is this effort to actually cut social programs going to gather some steam? The largest deficit in history was about 2 years ago, IIRC, and while deficits are projected to continue for many years, they will probably be smaller than we have seen in recent years. And the only real effort I’ve seen to cut social programs was the paltry $30 billion in cuts over five years that the White House jammed through last year.
In short, “starve the beast” may be the political strategy some Republicans are giving lip service to. But when it comes to actually putting that strategy into effect, they seem to be screwing up “starving the beast” just as much as they screwed up “Mission Accomplished.”
So, when are the neocons going to get around to cutting social spending again? Will that be before or after they set up concentration camps for non-christians?
Japan’s national debt is 170% of its GDP. Italy’s is 107%. Given that US GDP is around $12 trillion, we’ve got some way to go before our national debt, by itself, becomes a real problem. $20 trillion wouldn’t kill us. $50 probably would. But that said, it’s still a pretty bad idea to run an enormous, multi-hundred-billion dollar structural deficit during a strong economy - we should be saving our reserve borrowing capacity for a potential crisis.
Why? They’re just scraps of paper. If the market is awash in dirt-cheap dollars, then all it means is that the foreign currency in the pockets of your competitors is worth even more in dollar terms, that any dollar earnings you might have are worth even less in real terms, and that anything you happen to buy from non-dollar users is way more expensive.
Besides which, your argument presupposes that you will be seriously advantaged and the seller and other buyers will be disadvantaged by the process of physical currency conversion. Which is a dandy reason for them to agree “250,000 barrels at $175 per barrel, done, and payment in Yen instead of dollars at a conversion rate of 52.32 will be just fine”
