This Washington Post article deals much with the warnings of David Walker, whom I’ve started a thread about before.
The article says that their upcoming film on the subject, I.O.U.S.A., is an “Inconvenient Truth for the economy.” Will this movie, and its warnings/theories, get the traction of Inconvenient Truth? Any traction? Do they deserve to?
(PS: Read the first linked article for explanation of the $53 trillion mention in the thread title.)
Of course it won’t. The scary fact that we’re basically OWNED by our creditors doesn’t play as well as the notion that we’re destroying the planet and making random, stupid wars on anybody while dumping cash into the pockets of the obscenely wealthy (i.e. BIG OIL).
Both of the latter cases involve us being omnipotent retards, while the national debt case shows we’re impotent retards at the mercy of the spendthrift idiots in Washington with the no-limit credit card we’re all cosigners to.
Hence, there will be few showings, little media coverage, nothing.
Nobody will ever collect. I’ve said it before and I’ll say it here: countries loan us money, and they will never see any of it again. If they call in their markers they destroy their largest market, thus ensuring that not only will they not get their money back but they won’t make any more, either. Do you think that China will stop giving us money no matter how high the deficit gets? I think not. When they turn off the tap they get no return on investment, they have nobody to sell to, and they have no source of food to feed their people.
The game is fixed. We set the rules, and everybody has to play or everybody suffers. Who is beholden to who?
Yes, it’s cynical, yes, it’s elitist, but it’s also true.
The debt is in dollars.
We control the value of the dollar.
If I owe my creditors $1000, I have a problem. If the US government owes its creditors $53 trillion, the creditors have a problem.
Err. That’s not really true. People investing in US govt debt collect their money all the time. The T-bill or whatever matures, and it’s cashed in. Of course, the really big investors in US govt debt all immediately repurchase the debt, but they’re constantly either collecting the interest or else increasing their investment without fronting any new cash. It’s not like you guys are taking out loans at the People’s Bank of China and then defaulting on the payments.
According to the article linked in the OP, the US debt is at 66% of GDP. That’s quite a bit, but there’s lots of countries with much higher debts in relative terms. The article isn’t really very clear about how he gets to 53 trillion, but it seems like that must be part of the “if things don’t change that’s how bad it will get by 2040 thing”, because the “unfunded entitlements like Medicaid” are actually funded and show up in the budget each year. Medicaid doctors aren’t being paid in IOU’s, they’re being paid in dollars. If he’s right that US debt could reach 240% of GDP by 2040 if nothing is done, I’d suggest that doing something would be a wise course of action. But 66% isn’t anything to panic over.
If the US debt is 66% of GDP, the US is in better shape than I am with my mortgage & grad school loan vs. household income.
But that’s exactly it. They reinvest. They get a bit of interest for their investment and then they throw it right back at us in the hopes that we won’t default. We could, and what would they do? Nothing.
Essentially they are throwing money at us for nothing. 2%? I can almost make that much sticking it under my mattress. 2% is bupkis.
The don’t throw the money back at you because they hope you won’t default, they throw it back because they know you won’t default. If that confidence were ever to change, they’d go invest somewhere else.
No, you don’t.
Sure they do. US-dollar-denominated debt could be paid off by having lots of inflation.
This article in Foreign Affairs raises some good points, and very close to the ones Airman has raised already.
But it goes a bit further to point out that the system is unsustainable. Among other things, our forcing foreign (largely China and other Asian) central banks to keep purchasing our debt creates significant domestic problems for those countries, and they’re going to be looking for a way out as quickly as it’s feasible.
Furthermore, even if foreign central banks only slow their purchases of US Treasurys, that means that the government debt market must look to private borrowers instead of central banks–and private borrowers will not be satisfied with 2% returns, especially given the significant risks that are just now being revealed in the US financial system.
ETA: to spell it out, that means higher interest rates for you and me, and a concomitant drag on economic growth. Or significant inflation, take your pick.
I’d think you would make 0% shoving it under your mattress. 0% is a long way from 2%. Sure there are things that provide better returns than US bonds, however very few offer the low to zero risk that US government paper offers, and risk is as important as return on investment.
The low risk profile of the bonds is often used in a portfolio of investments to lower the risk of the portfolio whilst maintaining (or staying close to) a given return.
The US doesn’t force anyone to buy their T-Bonds or other debt. People buy it because it’s a good investment, because the US has never defaulted. The article is written as if the US controls the global economy and through its own whimsy, chooses to play this game of free markets and currency valuations, etc., if only to make the appearance of an otherwise global economy. I highly disagree. China and other foreign nations willfully and quite gleefully buy US debt and hold it as reserves (again back to the lack of default) to strengthen its own economies. It’s like saying GE forces me to buy their light bulbs because of their highly efficient and cost effective light bulb design.
As a regular person or even as the US government, you want these things to happen. These are natural drivers to slow an otherwise hot economy. If not, then the economy risks inflation. Any economist would much rather pick high interest rates (which is a boon to savers and people who buy bonds and T-bills) over high inflation any day.
If you’re counting the national debt as $53 trillion, instead of the official figure of $10 trillion, then most of it isn’t owed to foreigners. Most of it is owed to the American people, in the form of an “entitlement” to Social Security and Medicare when we retire.
But guess what, the American people are easy to stiff. Some time during the middle decades of the Twenty-First Century, those entitlements will be drastically scaled back. They will have to be, because we couldn’t possibly tax enough or borrow enough to make good on them.
We saw the first hint of this in 1983, when the retirement age for collecting full SS benefits was raised to 67 for people retiring in the distant future. In effect, this was a tiny “default” relative to the promise implicit in earlier law.
There will many more such “defaults” in the future, on a larger scale. What are we going to do about it–riot in the streets and make things worse? Everyone knows it’s coming, and we’ll have no choice but to suck it up and deal with it.
It was somewhat of an exaggeration, but 2% is on the very low end of return on investment. People can do better elsewhere. That they continue to invest in US Treasuries, continually financing our debt, is to me indicative of the reality that they have to keep investing.
Where would that be? The old adage about how when America sneezes, the world catches a cold is appropriate here. Due to the sub-prime mortgage crisis the world is already facing an economic slowdown globally. Imagine if the US decided it couldn’t or wouldn’t pay.
That rather contradicts Airman’s assertion “[t]hat they continue to invest in US Treasuries, continually financing our debt, is to me indicative of the reality that they have to keep investing.”
And as noted in the article:
Except when it overstrengthens their economies to the point where they risk inflation, as has happened recently with China’s ongoing bank credit glut. This gives them an incentive to divest away from dollars.
Don’t know 'bout you, but I don’t see no “otherwise hot” American economy. I see an already recessionary environment where the further drag of a forced interest rate hike would be damaging, not helpful.
I’m venturing into guesswork here, but I think the real bad news for the US is that the subprime crisis (which is really only the tip of the iceberg) will lead the global investment environment to become more risk-averse, distrustful of fancy-schmancy instruments that Wall Street is so good at cooking up, and inclined to retreat to debt markets like bonds.* When they do foray into equities, they’ll favor those that are backed up by factories and other hallmarks of tangible production.**
*Great for savers, you say? Too bad America doesn’t have any.
**Too bad America doesn’t have much of that left, either.
Yes you can get better ROI with other investments, however return is only part of the equation. Risk is as important, people continue to invest in US Treasury Bills etc because they offer an exceptionally low risk, which they cannot get elsewhere. So I would say it is not so much people have to invest in a low return product, but want to invest in a low risk product.