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.
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Another example of "Disaster Capitalism
What other horrible condition will be 'shocked' into after huge deficits and an economy collapse? Oh wait, no more Social Security or Food Stamps, or any other assistance. Now I begin to see some of the intended consequences. OMG.
FairandJust,
The biggest problem America has is paying attention to
what is taking place around them. Friedman Disaster
Capitalism in the US began with Reagan, although for
his own political reasons, he didn't do everything to put
it into place. Now we have Bush and advisors in his administration
who have shown him how to make it work. And since
Chaney and Bush are first Capitalists, the process must
have been very easy. Toss in Hurricain Katrina, Iraq and
Afghanastan and now the falling economy and everything
has come together. The final peg to destroy the current
system will come before Bush leaves office, when he gets
us into WW III. Unless someone puts a stop to it soon.
One hard hitting increase you did not mention is that PROPERTY TAXES were raised reflexing the overvlaued housing market and is placing a squeeze on property owners who were not in trouble.
The overvlaued homes also forces owners to increase their homeowners insurance to protect that value assest by the local governments.
Even if they decrease those property taxes next year (most will wait 3 to 5 years) the damage is already done to those on fixed incomes.
Does the republican party's philosophies of "whatever is good for corporations is good for America," and "forego regulation and let the free market economy work and everything will be fine," coupled with the endless rounds of bailouts of mismanaged entities such as wall street/saving and loan/energy company/airline bailouts, and one-sided trade agreements, and a misantrophic notion that ALL taxes are detrimential, have any bearing on the state of the economy?
Our country needs some fresh new industries. By legalizing marijuana and home cultivation, just as it is legal to grow your own grapes and make wine, we could create enormous new wealth for a broad spectrum of Americans. Cannabis is a wonder plant, and it's cannabinoids are medical powerhouses. New research proves that THC kills cancer cells. Research in this area can save thousands of lives in the days ahead. It is time to end the costly and futile war against the most beneficent of plants, and revive our failing economy.
At least we could have a toke and relax.
I suggest it would be better to sell cannabis cultivation based on the utility of cannabis fiber (good stuff - strong, long-lasting, but easy to work with). As long as the Christers see cannabis as OhMyGAWD they're gonna SMOKE it, it will never be legal.
One tiny problem with legalizing drugs;
Drug lords still control the market.
You think having private security contractors
would be bad, wait until every neighborhood
has one of these guys in charge.
Why would the "drug lords" want to try to control a market they cannot control? Making marijuana, cocaine, speed, LSD, etc and using half the money saved to reduce demand through rehabilitation would take the profit out of "illegal" drugs.....
How well did Prohibition work?
I think the poster is specifically referencing legalization of marijuana. If that is the case, the "drug lords" comment doesn't make sense. Legalizing it would eliminate the black market, which would also eliminate the drug lord (although I'd note that I don't think that the pot trade is controlled by drug cartels like those typically associated with the production of cacaine or opiates, which aren't referenced in the post). With that said, it would seem that the idea that "drug lords" would take over our neighborhoods doesn't make any sense. If anything, criminal activity, at least as it related to pot growers and distributors, would be eliminated. My guess is a lot of folks would just grow their own.
It is pretty clear that treating drug usage as a criminal problem rather than a medical/mental health issue is not a workable proposition. If addiction is the problem, and I think the jury remains out on the addictive properties of pot anyway, a prison term isn't the way to fix it.
Just think of all the taxes the government would rake in.
Unfortunately, when the dollar drops to almost zero, we will have less economic cost in paying down our national debt to other countries and their institutions and investors. Unfortunately, we will at that time be in such economic turmoil and stagflation that it will make no difference; my father would be 108 and still not have recovered from The Great Depression if he was alive. My contempt for Ronald Reagan and his cohorts continues to expand as our "situation" deteriorates. As many bloggers have commented, "We have met the enemy and he is us."
BernieAttorney, CPA, Economics Major, Citizen-in-Pain.
We are currently paying $ 20 BILLION DOLLARS a month in INTEREST ON THE NATIONAL DEBT!!!!!!!
The debt is escalating because our production of goods and services has been moved abroad. Without goods and services index the GNP cannot be measured. When GNP barometer is down, the world concludes that we are stagnated, and rightly so. All this is the consequence of globalism that is now coming to roost! We must end the super trade deficits which increase our national debt each month. We must start building tramcars and tramlines to end the workforce's dependence on gasoline! We must declare a national emergency as the one we declared in World War II. Above all, we must stabilize the dollar or we will end up being a Banana Republic! If we work for, and retire on useless currency, our American Dream will be dead! Let's call upon the Nation to recruit thousands of Rosie the Riveteers to build trams, to end our dependence on OPEC! Let's restore our national pride!
As is usually is the case in human history----it takes a total meltdown of something to make people realize that the way things have been done are very unwise---
It might be going to be tough for most of us---but perhaps a total meltdown will be a good thing if it makes us "wake up and smell the coffee" so that we get things back on a more rationaly track!
One thing is for sure--we need to reverse the trend of having America being a glorified third world country that is merely a source of natural resources that are sent elsewhere on the globe and turned into durable goods-----we need to stop that idiocy forthwith and start making things again!!!
We should be the ones making and selling the hard goods again---
1
I think mpgarr could be on the right track. The U.S. is like the drug addled user or the gin soaked boozer who ruins their family by spending them into a hole or beating on their spouse and children. We like them must hit bottom before we come to our senses and realize how much we have been doing wrong. If we can survive the next 4 years maybe just maybe we might make some positive changes that could make this a better country. Maybe we might learn some humility and cease with the arrogance of the last twenty or thirty years. It might do us some good.
Then again the government bails out another big business! How many will lose their jobs over this? Any top executives? I think not ,it will be the little guy that get the boot, and the Multi million dollar white collar "Executive "will again stay in charge. He has been saved by the people he hates. Taxpayers who want to knock down his castle, like they have ours, Does big business vote these assholes in to office? No but their multi million dollar "donations" to a campaign needs to be paid back in favorable voting. The government can save the problem, but not help the little guy! Someday the little guy will get even, soon too
I owe you one.
Look at those graphs and weep. From 1998-2000 federal revenues exceeded expenditures--the first surplus since 1969. For all his failings Clinton left office with a budget surplus and a plan to pay down the national debt. Bush took office and handed the surplus to his "base," the haves and have-mores. He pre-funded the Republican party's electoral campaigns with this money. This is top down class warfare. As opposed to the bygone Gilded Age this cannot be easily undone with a bit of reform legislation here and there on the margin. We can only default or inflate away all that debt. For now we are doing some of both. The magnitude of the problem predicts a calamity bigger than the Great Depression, which will hit in full force when the Boomers start munching the entitlements. I suspect the plutocracy is hedged already and has put their money offshore so they can buy America for ten cents on the dollar when the time comes.
I don't think you can necessarily condemn supply-side policies here. I think it had more to do with failure to control government spending and failure to balance the budget. And I don't mean to be a jerk here (I actually love graphs and charts), but the graphs and charts here are a bit useless because the ones outlined in blue are very small and can't be enlarged (could you present them as links to larger versions) and the bar graphs begin at 1980. If you are want to me see that the trend began in 1980, please show some pre-1980 data.
Even with the small size of the first graph, it is apparent (at least to me) that the national debt accelerates in the 1980 time frame. Even with that poor resolution, it shows a 20 fold increase since the beginning of "supply side" economics.
"I think it had more to do with failure to control government spending and failure to balance the budget. "
Taken out of context, yes.
Still.
You are a riot!
I don't know what you've been smoking, but to anyone sober it is readily apparent that supply side policies are totally to blame. It is because of supply side policies that the budgets can't get balanced.
Supply side nonsense let the right wing continue to stimulate the economy with deficit spending while giving tax breaks to the rich. They were under no pressure to cut spending because in the supply sider's addled minds "Deficits don't matter". It was free lunch time for the haves. Naturally the predicted surges in revenues never occured, revenues never even returned to historical norms. Hence DEBT, DEBT, DEBT, and MORE DEBT.
And the ever increasing Republican debt adds ever increasing interest on the debt that must be paid--making balancing the budget even more difficult into the future.
I can so condemn supply-side policies.
Supply side is, as Pres. H. W. Bush said, is voodoo economics. It does not work. It never has worked. It will never work. Anyone who supports supply-side economics either has zero idea about economics, or has his own agenda.
HuffPost's Pick
Supply side economics is aptly dubbed "trickle-down" economics because all it accomplishes is the middle class getting urinated upon. It was nothing more than a ploy for the corporations and the wealthy to grab more money, pocket the corporate welfare and tax breaks, and put the burden of the cost on their middle class workers who they put on the unemployment line, at least until they found jobs at Wal-mart.
The only way that the tactics of supply side economics can work is attaching requirements to all the tax breaks and corporate welfare so that all its beneficiaries (the wealthy and the corporations) must invest 100 percent of that savings into domestic expansion. Conveniently, no such requirements were ever attached and as soon as the wealthy got their gifts from the traitorous Bush administration and its Congressional republican accomplices, that sucking sound that Ross Perot warned about 16 years ago became deafening. Except it wasn't just to Mexico, but to India and China as well. Unemployment peaked and then waned, but underemployment has been at an all-time high under this administration. As such, millions of people who used to be able to support themselves are now working Wal-jobs and McJobs, with little pay and little or no benefits.
I can point you to plenty of pre-1980 data. Regarding supply-side policies, I've posted an analysis of the effect of tax cuts on revenues at http://hom
Regarding deficits and debt, see the graphs and discussion at http://usb
I think that people don't concern themselves with massive debt for two reasons, 1) Those most likely to be hurt in a collapse ( banks ) keep handing out money like it was water. 2) People have no confidence in the government to manage the US economy so they figure, why not "stock up" on stuff before the bottom falls out.
The Administration does not care...the
The feeling seems to be: "If I go broke when it all crashes, what are they going to do to me anyway?"
People will at least have the things they bought. Most is unsecured and can't be retrieved. With the terrible housing market, some will be better of losing properties they can no longer afford to pay for, including rising property taxes etc.
When the bottom falls out what good is a credit rating anyway, when only the rich have access to money.
The consuming public is not stupid but I think they are depressed by it all and in a hording mode until everything falls apart.
I personally have property in SE Florida I can't sell and have trouble renting. For me another Hurricane Andrew might actually be the best thing to happen. Wipe it clean, use the insurance to pay off the mortgages and sell the vacant lot for whatever I can get. Most people would be stupid to rebuild these days with so many empty houses waiting for a buyer at rock-bottom prices.
We have been driven into this corner by greed and a sense of hopelessness that there is no way out.
Depression will destroy any nest egg whether it be stocks,
bonds, cash, or property. Best to start putting that money
in a jar in your house, so at least when the economy crashes
you might still be able to eat.
"I do not know which makes a man more conservative—to know nothing but the present, or nothing but the past." --John Maynard Keynes
There's an ironic quote! It is the theories of Keynes that got us into this mess!
"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone." - Keynes
To TheNewHamp
Not all that ironic really. It is often true of life that the wrong sort will take perfectly good philosophies and twist them to suit their own needs.
What are you talking about? This mess was caused by the anti-Keynes crowd who worship Ayn Rand, Milton Friedman, and Chainsaw Al.
There is nothing Keynsian in what the Republicans have been doing.
What we need to fix the economy is a war.... er, wait a minute...
America, fat and stupid and darn proud of what we used to be.
Geez, gop, that makes it sound like we could almost be--French!
Isn't it ironic that the party that claims better economic policy, is the party that actually is destroying the US? Actually not. While I look at my Universal life insurance, in perspective to the collapsing Dollar, it will not be worth what I put into it. It pisses me off that under the reasoning of saving the US economy, saving Bear is just rewarding the executives that promoted bad decision still get their golden parachute and bonus and high salary though they have proven less effective than the clerk in the mail room. The bail out comes with a bill and more debt. Where do you think we will get the bail out money. It comes to no surprise that the incompetent business man Bush, who basically destroyed businesses, is now destroying the US. Still you hear the same rhetoric of cut taxes, blablabla. There is no more money for consumption, no more money for debt. Just imagine if we have to buy oil with Euros. Since Dollars left the country, the wealth has as well. How much is the value of your home if you cannot sell it? Zilch! But this seems to no concern to our Republican voting comrades. Still in denial they come up with incredible formulas that prove that our debt is next to nothing compared to the GDP. We had a surplus in 2000. The money was squandered to give gifts to the rich. The treasury plundered by incompetent business man. How much does it take for Americans to rise up? How long will Republicans successfully sell the American Dream that will make you rich so you can act as an incompetent pig yourself and get paid for it?
I will be forever perplexed by the GOP reasoning that a drunk loser who couldn't even manage a baseball team, was/is even remotely capable of running the country.
Yeah, but didn't you want to have him over for a beer or some BBQ?
He had the ONLY necessary qualification: He could raise more money than anyone else.
What should give us even more room for thought, is the fact that it was a large quantity of Holy Rolling Evangelicals who supposedly believe in God, who helped get the scoundrels that now run our Country elected.
Yes.
But at least the liberals did not force gay marriage on everyone.
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