An Empire of Debt -- Collapsing Under Its Own Weight

Over at the Washington Note, Steve Clemons linked to a 2003 article titled "The Debtors Empire." What I find incredible about this article written almost four and a half years ago is how prescient its observations are today.

Isn't it just a little twisted that the United States, the world's richest country, is on track to borrow more than $500 billion from abroad this year? Isn't it even stranger that this borrowing includes sizable chunks from countries such as India and China, many of whose 2.3 billion people live on less than a dollar or two a day?

Sure, I know there are reasons why money flows the way it does. For one thing, the United States has a long history of treating foreign investors pretty decently, going back to the 1780s, when the first Treasury secretary, Alexander Hamilton, decided to honor pre-Revolutionary War debt. And the United States is growing decently (roughly 4 percent next year), albeit less than India (6 percent) or China (8 percent).

But whatever the reasons, and they are admittedly complex, isn't it still a bit nutty that the world's richest country has become by far the world's biggest borrower, with a net debt to the rest of the world (assets minus liabilities) of more than $2 trillion? The Romans would be jealous: They went to a lot of trouble to extract taxes from their empire; the world just gives money to the United States.

Even with the morality of it all set aside, pure self-interest ought to dictate that the United States be a net lender to the rest of the world rather than a borrower. We are an aging population that ought to be saving for retirement in real assets abroad. Unfortunately, you'd never know it from the consumption frenzy of recent years. We Americans may have coined the phrase "a penny saved is a penny earned," but these days it's "I'll gladly pay you Tuesday for a genetically modified hamburger today."

State governments are bleeding red. California alone is still running a deficit that by many measures is bigger than those of many countries. As for the federal government -- well, Washington is on track to achieve deficit records that could take a generation to break. And the American consumer? We save less of our income than any other rich economy. China's citizens save more than 40 percent of their income; the United States would be lucky if its citizens ever decided to save at half that rate. No matter how rich you are, if you continually spend more than you earn, you are eventually going to run into problems.

These are the exact same sentiments expressed by former Federal Reserve Chairman Paul Volcker on April 10, 2005 in an article titled "An Economy on Thin Ice":

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

The central problem is the US is addicted to consumption that our pocketbooks cannot pay for. So we borrow. Consider the following charts:

Gross Federal Debt now stands over $9 trillion dollars.

In the last 7 years, we have doubled the amount of debt we we borrow from abroad to a little over $2 trillion.

The central problems started when the Republicans began their "supply-side revolution." Notice in the chart above that starting in 1980 government expenditures continually outpaced expenditures by a wide margin. Hence the massive build-up in debt. Under Reagan's tenure, total federal debt outstanding increased from a little over 30% of GDP to over 60% of GDP. While Bush inherited a surplus, he again increase total debt outstanding from about 57% to 64%. In short, we have Republican economic policy to thank for this problem at the national level.

But it's not just the national government. US consumers are massively indebted as well. Consider the following charts:

All of that debt has to go somewhere. And it has -- it is currently on the balance sheets of literally every financial player in the market. And that's a large part of why Bear Stearns failed -- it owned a ton of loans that weren't any good.

And the end result of this policy is foreigners don't have any confidence in our economy. How do I know this? Take a look at a chart of the dollar.

It's dropping like a stone.

The policy of borrowing instead of growing is finally catching up with the great debtor that is the US. And the cost isn't pretty.

Comments

[BeyondGoodAndEvil]

These graphs just show how Corporations and consumerism has brainwashed Americans into living way beyond their means through credit card debt, car loans/leases, and housing mortgages. This has to change. Americans can't keep consuming without creating. We need to bring back manufacturing, fund science, research and development so we can innovate, rather than consume. All countries have finite natural resources, and with the manufacturing industry decimated in this country, IP is not protected, and millions of jobs have been shipped to China, India and elsewhere. American and multinational Corporations are using slave labor in other countries to entice consumers with shoddily and cheaply made products that have a shorter shelf life, but are cheaper to purchase. We need to increase exports and bring down our trade deficit. We need to stop giving tax breaks to the rich and to Corporations and bring down our national debt.

The economic polices of the last 2 decades - deregulation and tax breaks for Corporations and corporate bailouts - have benefited the stock market, Corporations and their executives, but haven't increased the standard of living for ordinary Americans. If this country is going to survive economically, it has to stop the Corporate welfare that encompasses current Government policies and legislation. The Iraq war is just a big fat paycheck to the Military Industrial complex, and the oil industry by keeping oil prices artificially inflated. If we require all vehicles to have the same kinds of fuel efficiency as Europe, we would not need to import any oil. We have mortgaged America to hand over taxpayer dollars to Corporations.

[iisopen]

Who could not see that a country of 300 million, with a gov't that produces almost zero, borrows heavily,
spends foolishly, and is the single largest (in all its forms) employer of its people would not begin to
"crumble"?

We have less than 5% of the worlds population and we "burn through" 25% of her resources.

Is this all by design?

[goodspeed]

yep !

[LuckyBlessed]

Here is an interesting link I've used for years outlining of the number of failed lenders and struggling lenders, the Mortgage Graveyard;
http://www.mortgagedaily.com/MortgageGraveyard.asp?spcode=graveyard

I wonder who bought loans from these failed and struggling companies? Hmmm.....

[themodernleader]

The question keeps arising: Why are we in this precarious predicament? May I suggest a fundamental "core" reason. Forgetting. Forgetting who we are. Forgetting where we have been and where we originated. Forgetting our responsibility to citizenship. Forgetting our duty to our communities. Forgetting our patriotic duty to our Nation and the Republic it stands.
The result is a gradually turning away from faith in and fidelity to the Constitution. This malefeasance has permitted a few individuals and exceptional groups to control our air waves and other media. This neglect has allowed money and wealth spent to determine the outcome of elections. This decaying character of citizenship has permitted think tanks and lobbyists to surround our national government with a stranglehold of deception, duplicity and stalemate. This declining decision making ability has invited onto our political process the poisonous influence of foreign ownership and control.
In the great Abraham Lincoln's words, we must have a new birth of freedom, even as our sources of information are manipulated, our economy is in precipitious decline, our treasury is empty, and our government is directed by a fool who, yet, is able to manipulate and steer timid, cowardly legislators.

[goodspeed]

I would offer a different "core" reason, the self indulgent "love of money".

The rest is just plain happy propaganda, results of self denial.

[ReasonIsMyReligion]

I always read Bonddad last.

Why?

a) He takes a while to sink in.

b) He is devestatingly thorough, accessible, and brilliant.

c) He is un-toppable.

d) When I slash my wrists, I don't want to mess up the keyboard.

Keep up the good work.

P.S. The posts on McGreevey's driver got more comments. Disheartening. Bonddad may be many things, but sexy he ain't. Dude, got any skeletons?

[LuckyBlessed]

Like your name, Reason Is My Religion,
Agree on all 4 points. Having been in various board rooms in precarious situations over the years I tried to image the Fed and BS on Sunday night, that had to be ugly.

Another late development(I LOVE how so many recent news reports include the most, the worst, etc. IN US HISTORY ,-- "History? What the "f" is that?";

"AP updated 7:43 p.m. ET, Tues., March. 18, 2008
SAN FRANCISCO - Visa Inc. raised $17.9 billion late Tuesday to complete the largest initial public offering in U.S. history and help prop up the wobbly financial services industry.

About $10 billion of the IPO proceeds are being used to buy back some of the shares owned by the banks that have helped build Visa during the past 50 years.

The money is expected to help banks strengthen their balance sheets as they write off billions of dollars in loans that have soured amid the worst housing slump since the 1930s."

[ReasonIsMyReligion]

In plain english, VISA saw a need to prop up the banks.

By buying back its own pre-public-offering stock, VISA injected THE PUBLIC'S cash (insider IPO cash perhaps) into the banks that owned said stock BEFORE it became publicly traded.

Agree?

[CharlesMac]

Yep, all Bonddad needs is a good scandal. Coast to coast syndication in 6 months.

Somebody has to stop Kudlow.

Ya take Household debt and disposable income. Voila! graph.

Kudlow takes household debt and disposable income..... weighted for tax cuts and adjusted for corporate subsidies and bailouts.....

Voila! 20 years of uninterrupted prosperity for all.

And the ROIC for the $9,000.000,000,0000 of personal and national debt we have run up in the past 7 is so evident, only an idiot couldn't see it.

I watched CNBC this afternoon for the Fed move.

Those people have lost all perspective.

[ReasonIsMyReligion]

Let us not overlook the impact of stagnant real wages.

The average consumer (me) thinks, "I can take on say 3-5% more bills because my income will go up by at least that."

Add another 3-5% on the pile. Annually.

[nosralsinned]

Let's see, Bush 41 was right in 1980.....it is voodoo economics. Supply-side economics was never a solution to the problems, it was and is a solution to a non-existing problem. All the Reaganites, the neo-cons, supply-siders agree.....let's lower tax rates on the rich so they can be even more self-indulgent.
The number of new jobs created because and only because tax rates are lower is non-existent. Career opportunities are created by demand for services and products not by excess supplying the well-off with more capital.
The only current solution is the elect more members of Congress and Senators who will return to pay-as-you-go budgeting, and aren't afraid to raise some tax rates on the most affluent.

[Bladernr1001]

Well one of posters above professed a return to the ideals of the constiution.

I agree, but I don't tink that he was referring to the idea that if you truly followed the constitution we would have no welfare state, SS, Medicare or subsidies to corporations or farmers. All of the preceeding are unconstitutional.

Can ya dig?

Government at all levels is just as deralict or more so than the private sector for making us a debtor nation.

[LuckyBlessed]

Perhaps at different levels.

But i make a HUGE difference between money the government spends to support the infrastructure of our economy.

When hiring people i wanted to know they had some education. Many business owners who would like to avoid the skyrocketing health insurance costs (3x the rate of inflation) by having their employees get govt. sponsored healthcare. (Before Corporate Health Insurance involvement, Medicare was extremely efficient operating at 3% cost, no pharm reps or stock holders like myself to pay, I'm a hypocrite, but "In a world full of thieves the final sin is stupidity"- HS Thompson.The welfare state, welfare provided to Halliburton and others like the loan from the Fed to Chase to bailout Bear has been expensive indeed.

[Overd0g]

Bravo. Nobody (or few) on the this board (or many others) wants a constitutional government. The constitution defined the government as a protector of individual liberty, not a giant Santa Claus or "nation builder". Of course Bush tries to be both, and his opponents propose shifting the money from nation building to more Santa Claus. We are lost. The constitution is essentially a dead document.

[LuckyBlessed]

Nosralsinned,
Pay as You Go??, how are the members of Congress going to pay for all of those earmarks to keep their lobbyists/campaign contributors happy?

[nosralsinned]

What percentage of the annual budget are the earmarks? But your point is well taken; the practice of streamlining spending by adding to non-related bills should be curtailed.
During President Clinton's terms the government actually had higher revenue than expenses (not including debt-reduction). That alone won't solve the all the problems, but it will help.
I could devise a plan to actually reduce the size and cost of government, but it would never get enacted because of the lobbyists.
Here are two ways to save a lot of money.... stop making personal choices illegal. Wanna smoke cigarettes don't make them so expensive that getting illegal cigarettes become attractive.
Stop the war on Drugs...remember how well prohibition worked?
Do not allow excessive CEO benefits and salaries as valid expenses to reduce corporate taxes.
Put each member of the Congress on a budget to reduce staff and the earmarks will disappear....how about 5M a year per house seat, and 7.5M per Senate seat?
End all non-competitive bidding at the Pentagon, and elsewhere in the government.
If the government can't find at least firms that want to submit bids, reject the entire project.

[Not Blind]

We can't blame anyone but ourselves for this economic mess. Since Reagan, the sentiment of most Americans is to feel good, be happy, buy what we want now, and worry about our needs later, expecting the government would take care of us. The thought of saving for a rainy day didn't occur to anyone, especially our government. The basic equation of weighing priorities, spending only what we take in (even less) rather than cutting revenues while increasing spending and consumption at soaring rates was bound to bring the house of cards down. Perhaps this fallout might be a good thing, ultimately, when the government closes down, people realize they've been duped into thinking they'll get Social Security or medicare benefits upon retirement, and will be left with nothing other than bills to pay, for which they'll have to work until they drop dead. The simple fact is no one can have everything they want, borrow and spend more than they make, and expect the bubble not to burst sooner or later.
We, Americans, think in the short-term, rather than tend to plan ahead for the next decade. Bailing out the S&L's, utilities, airlines, and now banks may help a bit, but unless we change our long-term strategy and plan for economic growth, we'll end up right back where we are now.
Rather than sending $300-$600 checks (most of which will be used for paying bills or basic essentials), investing in new industries (non-polluting, renewable energy sources), education, our infrastructure so we have a functioning country, safe environment free from dependency upon foreign energy sources, and a generation of skilled, competitive, critically-thinking and creative work force, our country and economy will be doomed.
Spending money to invest, create new industries, jobs that will create and build wealth for our country is the right way to go. Bailing out failed companies, artificially propping up weak or declining industries (out of loyalty), or just free give-aways to make people happy isn't very sound.

[LuckyBlessed]

Yes we do think in the short term. Part of it is technology, when I started as a processor it took weeks to get a loan approved a "critically- thinking" human being looked to see if the person had a job, had some money in the bank, paid their rent or mortgage. But the magic of computers just pop the loan info in it spits out a Fannie Mae Freddie Mac approval, which in many cases didn't require a paystub, w-2s. People could charge up and refi, refi, refi.

Bear Stearns just pushed the envelope a bit further, low scores and no verification of a job, money in the bank.

Unfortunately I don't think anyone will invest that $300-$600, maybe a Chinese TV?

And years from now we will be begging the World Bank and International Monetary Fund like other 3rd world countries have in the past. Some might call this poetic justice. "Bye, Bye, Ms. American Pie.......

[Garvagh]

Great piece! The idiot in the White House is unable to comprehend that by pumping trillions of dollars into the world marketplace, while running gigantic budget deficits, the US drives the dollar down and the price of oil up. Meanwhile, he keeps squandering more hundreds of billions of dollars on his Iraq adventure.

[LuckyBlessed]

Oh Garvagh, Iraq was just a payback. Didn't Saddam threaten his daddy.

So if, " that's a large part of why Bear Stearns failed -- it owned a ton of loans that weren't any good." Are those who invest in US loans investing in a ton of debt that's no good? And if over the next 10-20 years the US becomes a third world nation begging the World Bank and the International Monetary Fund for money to pay our overwhelming debt, who will hold the purse strings and conditions of our repayment- India? China?

[Ironfox]

The US invaded Iraq because Sadam wanted to trade oil in Euros, period.
The Iranians want to set up a bourse to trade oil in Euros, gee!, guess what's going to happen?

[Janskats]

Hmm...sorry but the U.S. is already a third world nation. The dollar may as well be a Mexican peso..the employment sector has been stripped of virtually all manufacturing jobs, engineers and physicists are flipping burgers (oh yes, they are), folks are losing their homes and living in tent cities, we're in debt in the trillions, China and India own half our financial institutions and the rest of the world is ready to slap a Foreclosure sign on the White House lawn..and George thinks that a few hundred dollars out to taxpayers is going to turn it all around. Where are this man's keepers? Get over here and give him his meds!

[Rule Of Law]

quoting Volcker on Finance is kind of like quoting Hitler on population control.

[S1m0n]

The US can no longer afford your low low taxes: the US pays the lowest taxes of any major democracy, and resents them the most.

Because of the need for low taxes, your non-military public infrastructure sucks; Health care overhead drives off all but BAD jobs away: white collar jobs go to India and blue-collar jobs to China, leaving those who used to work at them to take low-paid service jobs with no benefits.

Thus driving down the tax base and up the cost to government of providing back-up healthcare, etc. for people who no longer have benefits.

[Overd0g]

Interesting assertion. Presumably it was just pure luck that post WWII America thrived without socialized medicine and high taxes.

[RepigsLuvOxycontin]

Duh.

The reason was that the rest of the world was in ruins after WWII.

Do you stupid repigs ever get anything right?

Find those WMD yet?

[Artos]

I read a very funny article in Yahoos site that said something to the effect that now Americans were doing what they should have all along, saving their money and spending money more carefully. I thought that was funny because if you watch T.V. or read magazines and newspapers they are always trying to lure us into spending every last dime. We are told every December how much the Corporate world is depending on us to spend till it hurts otherwise the numbers won't look good for the year. To save America we must spend, spend, spend. Our Government which we look to like a parent to set good examples is spending us into a hole in the ground because our Fearless Leaders just had to have themselves a war or two. The rest of our Fearless Leaders use money which they take from us and call Social Security and then they use it like a slush fund because they can't be counted on to spend our money wisely. They never heard the word balanced budget or thriftiness before, but they expect ordinary Americans to do it, except around Christmas time. We live in idiotic times and the hypocrisy abounds.

[deminmo]

Artos,
Remember when Bush said something about not to
worry, go shopping?

[research]

Shock Doctrine,

Robber Barons,

Borrow and steal for your cronies republicans:

Conservative=corporatist=fascist=GOP=BushCo=McCain=Bankruptcy.

Bankrupt morally, intellectually, politically.

Bankrupt financially unless you are one of the few chosen cronies.

The Permanent republican fascist majority is still moving forward toward a Hoover depression, so they can further dominate the peasants and avoid prosecution.

[Metacortex]

Occam's Razor:
"entia non sunt multiplicanda praeter necessitatem", or "entities should not be multiplied beyond necessity".


Also known as the Principle of Parsimony, Occam's razor is really nothing more than the Principle of Clear-headedness. When Ptolemy in the 1st century AD established his model of the heavens in the Almagast, he established the first scientific model of the universe. Astronomy as a science was born. It all seemed so simple...at first. But back and forth between observing the night sky and reconciling this model future astronomers found that the planets and stars must move in all sorts of crazy patterns of motions. Eventually, after many centuries the model was so intricate and convoluted that only the most devout expert could make any sense of it. This, however, was not enough to convince anyone to search for a better way...until in 1514 scholars had approached a promising young polish cleric to make the night sky more comprehensible. By this time, the mere assumption that the earth was a stationary, fixed object around which the universe of planets and stars revolved was so deeply embedded in the consciousness of the public that the notion was impervious and impenetrable to argument. It was and rermains the longest prevailing scientific model in history. Nicholaus Copernicus would not publish his own book on the Motions of the Celestial Orbs for another 30 years. It would then remain on the list of banned books for another century afterwards.

Perhaps our economy suffers a similar fate. Maybe, just maybe there are only people and what they believe and no such things as corporations. Perhaps, like the family tree of the Greco-roman gods, they too are just entities multiplied beyond necessity.

"We can't solve problems by using the same kind of thinking we used when we created them."
"Imagination is more important than knowledge."
~Einstein

"Imagine"
~John Lennon

[ReasonIsMyReligion]

"The definition of insanity is doing the same thing twice while hoping for different results."
~ Einstein

Ah yes, Repukanomics.

[Robert59]

Bonddad,

Your articles are always spot on but you're missing the really big story. What we're seeing is an attempt to stave off economic disaster until after the election. This is all about holding onto power which is why the Fed will dump even more hundreds of billions. We taxpayers are getting 160 billion of our own money back while the financial industry has already gotten close to 400 billion dollars. And what have they put up for collateral, paper everyone knows is worthless.

The taxpayer is slowly being given all this debt to assume responsiblitiy for. And the big institutions will still fail. But all of that will take time. Meanwhile the GOP is trying to stave off its own disaster or given the infighting of the Democrats win the the next election.

This isn't a billion dollar election campaign but a half trillion dollar campaign, paid for in its entirety by the U.S. taxpayer.

The financial markets behave like kids, going from one extreme to the next. Today up 3 percent based on a 3/4 cut which means in the long term nothing. It will be inflationary, but who wants U.S. dollars anyway (at least for the next 10 to 20 years)? We're not seeing foreigners buy our goods because we don't manufacture what they want (unlike the Europeans). Tomorrow when another respected institution collapses the market will head south. The Fed will do pump more money, get it headed back up, and it will continue until November.

At this rate we'll have 11 trillion in national debt. What a Christmas present. Just keep printing more money, reminds me of the Weimar Republic.

[GreedyOldPsychopaths]

HuffPost's Pick

Hale,

If you believe Steve Clemons is prescient, you should read Veblen's "The Engineers and the price System". He envisioned an oligarchy of WS bankers and corporations running the world just after the turn of the century. And Galbraith envisioned out-of-control consumerism in the 50s. But the real question Hale is: Did we start consumming too much, producing too little, or both?

[dadw5boys]

no the gme changed the producer discoveref that by creating their on product competition under a differnet name they can control the price by producing less and keeping competition at bay.