The issue of massive US debt and future obligations has bugged me since the early 80s. I seriously believed that we would be in bigger trouble by now. I no longer have any idea of when the collapse will occur, just a strong belief that it will happen someday. After all, pyramid schemes work great until they don’t.
There is no political will from either party or outcry from the public to fix this problem, and I don’t see that changing until it is forced upon the citizens of this country. In the same way that the obese of America (myself included) need to both diet and exercise, the country needs to increase revenue (taxes) and decrease spending to do something about the problem. That’s pretty unlikely to happen based on current expectations.
What do I see for the future? Probably what Freddy the Pig mentions. Defaults and readjustments of what Social Security will provide the retirees of the future. I’m 49 years old and don’t think Social Security will be there for me when I retire. I can see the future workforce and voters wondering why they are paying for Regan and Bush-era tax cuts for the wealthy, the Iraq War, etc. What I don’t see happening is an actual fix.
This is a similar message that the Concord Coalition was saying years back and that fell largely on deaf ears. As for lack of political will, if you care to check the US Budget historical tables*, they show that in only 24 of the last 100 years have our administrations actually taken in more than they spent. This lowers to 6 years in the past 50, and 4 of those were the result of Clinton budgets. * Warning: 2.43 MB pdf
The movie and article may be interesting, but they will have no impact on the actions of the next administration (whichever party wins) or the voting public. Nothing will happen until the problem looms too large and the system collapses.
When I really want to depress myself, I imagine a scenario that I don’t think would happen, but makes for an interesting Michael Crichton-like script: China weans itself away from dependency on the US markets and then cashes in loans, dumps its US dollars and floods real estate markets by selling all US properties. That would devastate the world economy but if they prepared themselves for it, they would recover long before the US would and would end up being the sole world leader without the need for bombs. Would China be willing to do this to achieve world leadership? Probably not, but we have put ourselves in the position where it could happen.
They have to keep investing because they created their own situation. They chose to go into capital and labor intensive manufacturing (rightly so because their cost of living is so low), but the moment they see market share erosion, they start perpetuating their own market eventually giving us the economy that we’re in now. The US never forced anyone, not according to the tone of the article, to buy its debt. China and any other nations that do so (your “over strengthens” example) does so at their own detriment.
Speaking of which…
As well as they should. This over-strengthening is really a sign of a weakening economy (yahoo has some blurb right now of this happening right now as the US dollar strengthens, which should’ve happened naturally some time ago). This allows both economies to downturn naturally. Even in non-distorted markets there will be business cycles. Another point of free markets is that it’s easier to find distortions and easier to plan/account for them. If China hadn’t been propping up the US dollar for so long, there wouldn’t have been this housing bubble that exists now. Recessions aren’t necessarily “teh suck.” They give time for the suffering economy to re-tool and re-focus and to cut back on inefficient production. It forces suppliers to cut price as well (or add more value), which in the long run is a benefit for the consumer. They’re bound to happen anyway, so they might as well be comfortable and as short-lived as possible, but more difficult to plan for and harder to alleviate when another country chooses to monkey around with its currency.
I confess I find much of your last post confusing.
What do you mean by “market share erosion”? What do you mean by “perpetuating their own market”? And what’s the connection with “the economy that we’re in now”? I see no signs that China’s share of anything is eroding, unless there’s some blip in the last month or two that I haven’t kept up with. And I thought you and Airman were arguing that it was in China’s interest to prevent an economic downturn like the one America’s experiencing now.
I’m not sure why this is supposed to be comforting: if personally I run up $100K in credit card bills, I’m not exactly going to be wagging my finger at Mastercard and saying ha, ha, I didn’t force you to put me so deep in the hole. Again: But anyway, and once again, doesn’t this contract Airman’s assertion that Asian central banks have no choice but to buy our debt, for fear of sabotaging their main market? If that’s not forcing them (insofar as such a thing is possible), then what is?
Sorry, I really don’t know what you’re talking about here.
If you agree that it’s in China’s own interest to divest away from dollars, doesn’t that support the argument that the US, still as dependent on foreign debt as ever, will need to seek out other buyers for its debt–buyers that won’t be satisfied with ~2% returns, thereby requiring an interest rate hike?
I will be very interested to see you defend this assertion. In other words, cite?
I’m not sure who introduced the moron-speak in this discussion, but it wasn’t me. As for the rest: yes, yes, textbook high school economics. Except it doesn’t always work that way. E.g., Japan has staged a brilliant recovery, what, fifteen years on, is it?
Sorry, again I’m unable to parse your meaning here.
So we reiterate that inflationary pressures give China ample incentive to stop soaking up so many of our dollars to facilitate our current account deficit. Once more, where do you find the comfort in this?
The large National debt is not an accident. It was done by the " deficits don’t matter" Repubs. Nordquist said they would flush entitlements down the toilet. They are well on their way to accomplishing that. We will not be able to afford,welfare, unemployment. Social Security, Medicare etc because we will have to pay the interest on the enormous debt.
Why would anyone start an extremely expensive war and not raise taxes to pay for it. It sounds stupid until you see it as a long term plan to get at programs they do not like.
China will experience market share erosion in the US and anywhere they sell cheap goods because their currency is bound to rise (the natural consequence of a strong economy). There are other reasons for China’s market share erosion, but this is the main one I was discussing and more relevant to this discussion. China’s goods will become more expensive as its currency strengthens causing less people to buy their goods, therefore further slowing its economy. China perpetuates its own market (in the US and other places it has a competitive advantage of selling cheap goods) by tying the Yuan to a 3% variance to the dollar (last time I checked), artificially depressing the value of the Yuan, and at the same time buying more USD to keep the currency down, here and here. The first link better articulates the real world consequences of what the Chinese are doing and why other Asian banks are careful not to compete.
Because the US dollar is free floating (something that I urge all countries to do), and because China has been propping up demand for it, the interest rates here in the US have been low. Low interest rates mean cheap borrowing/credit. People took that cheap money and created the housing bubble. China diversifies its US holding by buying CDOs made up of these loans, thus providing the basis for the economy we have now.
China’s stock market is in a downturn as noted by the article I posted in my last post and as also evidenced by my stock portfolio that tracks the Chinese market :smack: like the one I have that tracks the Dow Jones. :smack: :smack: (if I hit 12% loss I’ll probably do a post in the Pit or something). China’s market share in the US market and globally will definitely slow and erode when the Yuan rises in price. The falling US dollar means that US exports are cheap, thus again, crowding out same or like goods in the global markets.
It is in China’s best interest to keep or retain their market share, but I’d rather have them do that by being more competitive and adding value (thereby increasing wealth) than by monkeying around in the markets. They’re trying to take the easy (or Authoritarian) way out and I hope it bites them on the ass and teaches them a lesson. The more they monkey around with the economy, the more distortions and dislocations they will create and the more problems and unintended consequences (usually pretty bad ones) they will create in their society.
No, but you get to declare bankruptcy. I just found out that one of my friends did that exactly, but it wasn’t like she purposely spent money. Though, on the other hand, she is now in a better position and will have her debt wiped away in two years, and she still owns her house. China on the other hand will be left holding the bag. Though, they much rather not have the US default, but they will be suffering from the rise in their currency and the shrinking of their markets, not to mention some heavy inflation and ultimately large unemployment. They will probably look back through a weepy tear and see their half-ass attempt to modernize their economy and their society stagnate.
They made their own bed, they should sleep in it. Here’s a thought for them: why not free up the markets and let people choose to do as they please? Oh, but that’s too contrarian for the old communists.
In the long run, and in the nexus where economics meets politics meets sociology, free markets and free people is ultimately desirable. If they let their market cool down, they can focus on heading off wealth-crushing inflation and focusing on the needs of their society, like diversifying the economy away from manufacturing, creating a strong infrastructure, getting the other like 90% (or whatever percentage it is) of their population out of subsistence farming. The state run businesses that are at a loss will shifted to more productive areas. They can stop gas subsidization and encourage conservation, alternative fuel development, increased public transportation and clean up the pollution they toil in. In the long run, another large free market will make a more harmonious global economy.
They’ll seek out other buyers by offering higher interest rates. This will mean the end of cheap money, but it will force people to save and get their individual financial houses in order. This will normalize and stabilize prices, and head off inflation. Foreign banks (as well as people) should have diversified portfolios as a matter of minimizing risk and identifying other hot areas for investment.
See the first two cites in this post. That’s why there has been a flurry of discussion of other countries holding US debt. There is a minority position out there that it was influx of cheap money set by Alan Greenspan that set cheap interest rates, but that does bear out with the facts at hand. I think it was Paul Krugman (who I respect, but don’t always agree with) who popularized this notion, but I’ve been hearing about it since 2005.
Ok, chillax.
Japan was at something like 150% debt to GDP ratio last year (a surprise from the estimated 175 or 180% from the year before.) On top of that, they tried to liquidate/spend their way out by setting the interest rate at like 0%. Clearly, the Japanese market is not the American market, but even the US can’t do that. If it isn’t obvious by now, Japan’s time during their recessionary period has not been well spent.
You said you weren’t seeing a hot economy in the US. True, the US isn’t a hot economy (though relatively stable, which is very attractive). China is the hot economy. They had something like 8.6 or 9.5% growth, they can’t keep that up without a slow down or inflation. Inflation aversion should be China’s (and most country’s) number one goal. But, the trick is not to completely stave off inflation as inflation (often called healthy inflation) is needed for an economy to grow. (too simply put for an otherwise complicated concept). As China’s economy slows down, it allows the US to strengthen. It’s a win-win situation.
There are other ways to fight inflation. China’s example clearly isn’t the best way to do it. In fact, what China is doing with their currency monkey games is exasperating the current situation. IOW, they reap what they sow.
I think there’s an easier answer that doesn’t require long-range plans. The war is already unpopular; raising taxes to pay for it will make it even more so. Since Bush wants to stay the course he is avoiding anything that will threaten the support for the war and will let future generations deal with the ramifications.
The article says that the real debt is $53 trillion when including entitlement programs such as social security, medicare, and medicaid as compared to the current debt of approximately $10 trillion. Even if you put all of the blame for the current debt on Republicans, wouldn’t you give Democrats a big portion of the blame for the entitlement programs that make up the vast majority of the real debt? They were all enacted be Democratic administrations.
Wow. And how exactly are these creditors going to collect? Yes we probably need to negotiate somewhat on certain terms of these loans but what are these counties going to do?
Foreclose?
Good luck with that.
Oh wait. China can fly a few fighters over here and intimidate us.
Go ahead and foreclose on those T-bills and loans. Watch which country it hurts the most.
:rolleyes: A T-bill default (or as mazinger_z puts it, “you get to declare bankruptcy”) is an impossibility–such an event wouldn’t be allowed because it would amount to a deliberately inflicted catastrophe on the global financial system in general and the US in particular. It’s not like it would lead to systemic collapse–it’s almost the definition of systemic collapse.
If this thread reflects the average American’s ignorance of the financial system that supports his/her way of life, then sadly, in answer to the OP, it suddenly all becomes clear. Just hope that Asia and Europe proceed apace with “decoupling” from the dollar so that someone at least will be left to pick up the pieces.
Or you could have your government try to stave off a shorter term, healthier inflation by making “stimulus” payments to the entire US population. And probably increasing the hard landing of a real depression a few years later instead of a softer recession now. But it is an election year, and people like free money. Your political system is also fully involved in keeping Americans debating the merits of one idiot over the other, and keeping Americans from doing any serious thinking about where they are and how to get to where they want to be. “Don’t look at that man behind the curtain! Look! A circus!”
I actually think this documentary could be very good for America (and the world) if it makes information about the economic crises going on as accessible as Gore made global warming. People need to know about these things, but even saying the word “economics” makes most people’s eyes glaze over.
Not at all. Governments know very well how to stop inflation - it’s just that at times, a little inflation is not such a bad thing and that when it’s excessive it’s very costly to stop. That doesn’t mean the government doesn’t control it it, just that it’s not costless to control and that governments are not always judicious about it.
Indeed. But government are sometimes tempted by it, and it has been one of the ways countries have dealt with things over the centuries (particularly to finance wars).
As I’ve said repeatedly over the years here, the US does not have an alarming level of debt and debt is not in itself a bad thing. It is however on an unsustainable path and getting back to a sustainable path will require painful adjustment. What happened after the US got itself back on a sustainable path last time will make it very difficult for your political system to achieve this without a crisis.
Asian central banks are closing the cheap money spigot, all but guaranteeing that Fannie and Freddie will have to be nationalized. US taxpayers will have to start pumping in massive amounts of money in order to avoid seeing the American mortgage market seize up altogether.
If the U.S. ever defaulted on a single “full faith and credit” loan, and if it did not subsequently invade and seize the money of potential t-bill buyers, the going-forward cost of such a default would be . . . a lot of money. Considering how many T-bills the government relies upon to fund various costs, even a marginal uptick in the interest rate they’d have to pay – an uptick that would surely be demanded by investors once they realized the T-bill was anything other than bulletproof – would equal billions and billions in incremental interest expense to get the same amount of capital.
Some commentators think that even absent such a cataclysm, T-bills (and hence the entire government) may be at risk of losing their AAA rating within a few years.
Social Security is not in trouble for at least 30 years. It then would be still paying ou but not full benefits. . It was supposed to be a locked box but the government kept taking it to further the illusion that we were not in financial trouble. It was a sound idea. It was also a lot better than ignoring the plight of the elderly, the poor and the sick.
OK. So you’re telling me that the US government could at the same time create enough money to pay off its debts and keeps inflation at a low level (hence “control the value of the dollar”)?
They should tell Zimbabwe how to achieve that.
I see no signs that China’s share of anything is eroding, unless there’s some blip in the last month or two that I haven’t kept up with. And I thought you and Airman were arguing that it was in China’s interest to prevent an economic downturn like the one America’s experiencing now.
Just hope that Asia and Europe proceed apace with “decoupling” from the dollar so that someone at least will be left to pick up the pieces.