Well, if we have debt, someone is financing it. Who?
China for one. They are likely to be our largest financial adversary over the next decade. And with tensions still high over Taiwan, there is even the possiblity if not a hot war, of potiential strife in Asia. A sleeper of a problem that has been raised is that water tables world wide are declining, and China may be the biggest victim. See Out Growing the Earth by Lester R. Brown. If Brown is right, there may be great wars over water and agriculture in the near future, and guess who is most likely to throw their considerable weight around as they may be one of the major victims? These aren’t necessarily the folks we’d want as our bankers.
Another creditor, briefly mentioned, is Saudi Arabia. Fortunately for us, they are a nation of wonderful Anglophiles, especially since they have a tight grip on one set of shorthairs whereby we owe them huge payoffs on the bonds they own (some actual single digit percentage or our GDP, some saying as high as 7%) and the other set of shorthairs where they are our main pusher…er, suppliers of oil.
OH BTW, China has its eye on a lot of that oil. Not that we’d have a conflict in that regard down the road.
We also sell to Japan and a number of others. If either China or the Saudis, or someone else, perhaps a coalition, wanted to give our economy a slam, all they need to do at this time is to call in what we owe them. Overnight, figure the prime rate would go up about 3% to cover it. Now sure, they may suffer too, but I bet China would recover faster than anyone. Let’s not forget, they are still only entering the world economy, they still have lots of financial independence. Perhaps enough so that in the future they’ll be able to begin making demands of us that we’d better appease. While we may be the largest buyer of their cheap goods, they can take cheap goods anywhere. We’ve helped them put the infrastructure in place to satisfy our craving for them; they can probably shift that market elsewhere if they like.
Or, if our economy starts tanking on its own, they may decide to sell, in which case we would need to raise our lending rate, which raises the prime rate, and then we start to see inflation. It never ceases to amaze me how the borrow and spend crowd find it so hard to see that national debt and inflation tend to be natural bedfellows. It may take a while, but it’s almost inevitable if the debt goes deep enough and goes on long enough. (And before anyone starts talking about all the debt we’re carrying now and the artificially low interest rates we’ve been seeing, let’s not forget that when Bush took office, our gov’t spending was below our revenues. There is still a game of catch-up going on)
With or without nefarious doings, it’s making us financially unstable, creating a huge problem for the rest of the world should our economy take a hit.
I too grew up in a frugal household. However, if folks did OK with 40 hours labor a week, having 80 by adding Mom to the workforce should have us all doing fabulously well, if our money was worth as much. I don’t see a nation of people with all kinds of excess money. You’d figure the average frugal family might have close to a years worth of savings in the bank after a few years. See below for the latest official figure. But I can tell you now most families have nothing close to that.
If you’ve doubled the hours per week spent working, you haven’t necessarily doubled your income if the cost of living hasn’t remained constant; you’ve fallen behind. When adjusted for inflation this is the claim. You need more or less 320 hours of labor a month to do approximately the same amount of heavy lifting that 160 did.
Actually, in doing some research, I came up with this cite, the Over Consumption Myth by Elizabeth Warren from Yale who argues that many of the goodies we enjoy today are relatively cheaper and even last longer than they used to. She says that what we are spending this money on is actually more affordable than what our parents bought us, even will all the additional stuff we buy. This might give more credence to your point, although I think that what she claims we really spend our money on weakens our spending power in the long run, as a weak middle class results in less currency flowing through the market.
Warren claims that discretionary spending is down. She says we forget that we may have had more of certain items that once cost more, such as shoes for school, shoes for church, & others for play a generation ago. Kids now may have two pairs of sneakers that they usually wear nearly everyplace. Also she states that new materials make today’s clothing cheaper. We don’t wear as much in the way of suits, ties, or pantyhose any more; less costly, more casual clothing is in style overall. When was the last time most of us guys bought a proper hat from a haberdashery? Time was, every man wore one out.
She says that cheaper materials and manufacturing processes make most household goods cheaper as well, and sometimes more durable so that we don’t replace them as often. She says that we spend less at the grocery store, and most of us don’t eat out all that much if you don’t count fast food as eating out. I’ll spend more on a nice meal I make at home than I do on McDonalds. And we buy in bulk overall more as well.
We don’t spend as much on dry cleaning, carpets, tobacco, and other items as we used to which makes up somewhat for the extra CD player. Anyone here download music or movies? She winds up saying we essentially live cheaper than our parents did despite having more stuff. She also argues that we don’t necessarily get a better deal on real estate although we pay much more, especially at this time.
She says more of our money goes towards rising mortgages, rising health care, rising short term credit expenditures, more vehicles which are more expensive, child care our parents didn’t spend on, & somewhat higher taxes according to this study.
Credit card debt and the car loan used to account for about 3% of our parents household incomes. Now it’s more like 10% to 12%. Where the average family 30 years ago kept about 10% of its annual income in savings, we officially have 0% as of a couple months ago (for individuals). And I’d bet anywhere from two weeks to two months of no income at all would financially cripple most of the people reading this. Not much change for doubling the labor in the workplace from 30 years ago.
She does also describe that men’s real income when adjusted has gone up only 1%, and women’s wages added to that, raise the family income to about 75% from a generation ago. About 2 months ago I heard that wages were not keeping up with inflation either after 14 years. I’m sure it’s still at least hovering at the tipping point. So we have inequities here on what we are worth. But we are also paying out in taxes something like a billion dollars a day on the interest of the national debt. And it’s going up all the time. Both the rate and the principal. This can’t be increasing the value of our money. The more you owe, the less your leverage, and the argument is that we are at the tipping point where it is now hurting even the American economy on top of it all.
If we weren’t losing the value our money had before, we could probably expect to have less debt & more savings, at least. Especially if wives weren’t getting screwed out of their earnings. And now gas prices when adjusted may be greater than anything we’ve paid before within the next couple of years. I believe anyone paying about $3.25 per gallon or so is nearly at that watershed high price from the 70’s. And if we are spending money on the world’s most expensive health-care that is not particularly better than most other industrialized nations, and if more of our tax money is being paid out on interest in debt rather than used constructively here, it all adds up to a weaker dollar.
If nothing else, having a habit of carrying large amounts of debt is becoming a way of life both for our nation and individuals. A cavalier attitude about such debt at the top general may be placing us in a bad place all around. If the loans get called in early, gods help us all.
To the OP: this is really the only debatable issue. Is the current US Debt excessive? I aruge no, not really. In terms of debt to GDP levels on a global level, the US is average. Being the world’s largest and strongest economy probably means we can do a lot more. In contrast, Japan has a GDP level of 110% (I’ve seen this cited in a couple of places). The US has been at over 100% a couple of times (though, they may have been all during war times, I forget, but I’m pretty sure one of those times was during the great depression). Japan still has a lot of productivity even though their in deflation, which, imo, is worse than inflation (also the subject of a huge debate).
Ok, I’m not sure what you mean here. The US government really doesn’t care about day to day needs for cash. Though inflationary, it will simply print cash. I’m sure I’m not addressing your issue, because I take your statements to mean something on the level of a person needing cash quickly. Though I’ve made this statement before in this thread, it bears repeating: the US government is not a person and it should not behave like one, i.e. it should not treat its finances personally.
I also disagree that we are on a lifeline using our good credit. Like Japan, and many other G8 nations, we can borrow well over 100% of our GDP. At the level of debt we are at now, we’ve managed to overcome a recession with nary an increase in inflation (though, at my company, that’s kind of bad news for raises because companies know that there isn’t a large COLA hurdle to overcome, thus justifying smaller raises). The other large issue with the debt is debating how much debt we can carry without impacting GDP growth.
Why does a lender have to be a financial adversary? Why are there financial adversaries? The only real adversarial positions in finance is to compete for a market to lend out money (though, I’ll accept an argument to grab depositors). There is not any competition in this scenario – US borrows, China lends. It is entirely in China’s best interest to allow the US to pay back its debt, arguably moreso than for the US to pay back that debt. This statement, please note, is dependent on how the debt is created, see below:
[nitpick] I believe according to this Time article I was reading a couple of months ago, it’s Japan first, China a distant, but respectable second, and I forget the rest. I’ll stipulate that Saudi Arabia rounds out the top 5. [/nitpick]
[quote=snag]
Fortunately for us, they are a nation of wonderful Anglophiles, especially since they have a tight grip on one set of shorthairs whereby we owe them huge payoffs on the bonds they own (some actual single digit percentage or our GDP, some saying as high as 7%) and the other set of shorthairs where they are our main pusher…er, suppliers of oil.[/snag]The Saudis as well as every other oil producer simply throws oil out on the market. Preventing the US specifically from buying oil is pointless/fruitless.
That may be true if this is how the debt worked. It doesn’t, iirc. Uncle Sam didn’t go to China, look around, and say, “Hey, can I borrow some cash for a hamburger today, and I’ll pay you back next Tuesday?” (apologies to Wimpy). Uncle Sam through the US treasury makes for sale bonds and securities (generically speaking), and people/governments buy them. The US did not buy a debt instrument from China. China bought a debt instrument from us. It is, simply speaking, our promise to repay the loan (typically with interest) later. And, how does the US repay the loans? Not like a person would, they don’t write checks, send over cash (unless it’s seignorage, but that’s something completely different), or send over wood, corn, or any other (for lack of a better word) stuff. That’s right, you guessed it, they issue more debt instruments. Like the originally issued debt instruments, next Tuesday is some day (typically) decades from now (though I can’t remember if the 30 year bond has been decomissioned, or decommissioned and re-issued – sorry, too lazy to Google). These debt holders cannot come and demand money for a debt that hasn’t yet matured. It’s like your banker or mortgage company coming to you tomorrow and asking for the exact repayment of their loan as it is due now. Why would anyone put themselves into that position? This isn’t like going to the bank and asking for your money back, a la It’s a Wonderful Life.
Hmmm…I guess it depends on what you mean by “suffer.” The way I look at it, China will suffer the most, if the US were to default (at least vis-a-vis the US). China will be back in the stone age, where the other 80% of the nation currently is. There only foray into the world market is through manufacturing. The US is by and far their largest market, as you have noted. If our market were to collapse, China’s would collapse even more. They’re economy isn’t as fungible as ours. The US can always return to manufacturing, at least to meet our own needs. There are two Chinas: one stuck in the agriculture economy/society, stifled by the communist government, the other experimenting with Capitalism, bustling and growing and finally entering the 21st century. Now that the Chinese see what the world is really like, they will like to continue in this existence. If there economy tanks, I foresee revolution. Anyway, back on point, I don’t have a cite for this, but I think the main reason that the US is such a good market for the Chinese is that 1) we can afford it; 2) our market is freer than the EU (i.e. they issue more tariffs).
Well, I don’t know Marx so your probably right about that, but it should be obvious what I was saying. Yes, war is bad. But you cannot compare a wartime economy with a peacetime economy because 1. men who are fighting are not a part of the labor market, 2. war (the kind we are talking about here) means rations, 3. governments control the market to a greater extent, and award more contracts, than usual.
As a war ends the economy kickstarts both because of the return to the free market and because you’ll need to replace whatever is destroyed (again we agree). But as the economy grows faster than usual, the cost of longterm interest payments constitues an increasingly smaller part of GDP. It’s not the economic activity that went into replacing something that’s important, it’s the ease of paying for something you’ve already bought because the economy us growing faster than expected.