The Trade Deficit, The Deficit and the Bail-Out: A Grand, Unifying Theory
I've been having some very interesting conversations over the last few weeks. One of the best is with Johnny Wendell, who hosts a Saturday morning radio show in KTLK in Los Angeles. I do a show with him called econ 101 at 7:30 every Saturday (a truly shameless plug if ever there was one). He suggested I title a piece "The Jig is Up". The reason is simple: the method of the US financing its lifestyle is now over. Our foreign creditors are starting to tell us how to allocate federal tax dollars. The Paulson plan may signal the end of this era.
Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.
"This is sobering, absolutely sobering, even to someone who doesn't drink,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.
.....
"The market is very, very negative because of the consequences of raising the debt ceiling and the increase in debt in general,'' Manfred Wolf, head of currency sales in New York for HVB America Inc., a unit of Germany's second-largest bank. ``Foreigners may not be that attracted anymore to U.S. assets.''
Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product.
The Treasury is already borrowing to fund Federal Reserve efforts to inject liquidity into credit markets. Last week it announced sales of $200 billion in short-term debt.
``We've all used the phrase `uncharted waters' so often, yet we keep finding new uncharted waters,'' said Louis Crandall, chief economist of Wrightson ICAP, a research firm Jersey City, New Jersey. ``The fact that the Treasury's borrowing operations are now being affected on such an unprecedented scale adds new uncertainties'' to bond markets.
Bad-Debt Purchases
The Treasury's potential use of all $700 billion to purchase impaired assets would raise the country's debt to more than 70 percent of GDP. The last time American taxpayers owed as much was in 1954, when the nation was still paying down costs incurred during World War II.
``It's an alarming level of debt given that we're not fighting something like World War II,'' said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog group.
The government reaching the requested debt limit would entail every man, woman and child in the U.S. owing more than $37,000 each. The median U.S. income last year was $50,233.
``We're putting a lot of debt on the books and people are going to be spending a lot of money paying that off for a long time,'' Bixby said.
Why is all of this so scary? Here is why:
Above is a chart of the current account. All this means is the following: the US buys more stuff from abroad then we sell abroad. The problem is we don't have the money to pay for all of this. Why? Because the US savings rate is terrible:
Notice how the US is saving less and less. That means we have to borrow money to buy all of this great stuff.
Above is a chart of foreign ownership of US government debt. Notice how it has doubled over the last 8 years. In other words -- we're in debt to foreign central banks up to our eyeballs
So let's review:
-- The US is living beyond it's means; we buy more stuff than we make.
-- As a result, foreigners lend us money. This is the equivalent of vendor financing. Think of it like the global GMAC account.
-- Now the US really needs to increase it's debt level. The problem is we've been doing that during the good times. The US has issued over $500 billion of net new debt per year since 2003. So now we're near the point where a massive issuance of debt could spike interest rates, sending the rate ever higher on the mammoth amount of debt we already have. Great news, huh?
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"Give me liberty, not more debts"
"foreigners lend us money"
Perhaps that is the very reason behind the bailout plan : To appear as a reliable and trustful payer to the foreigners who lend you money, for them to go on lending you money.
I admit that we throughout the world all benifited from the subprime mortgages system. Poor people bought homes in the US, homes' prices went up, Americans refinanced and bought crap from Chineses and oil from Saudis.
Wealthy Chineses and Saudis came to London, Geneva, Paris, and the French Riviera. They spent the money they got from you in our palaces, fancy restaurants, and luxury shops.
Everyone got richer in one way or another thanks to the American overconsuming.
But now banks around the world are stuck with complex financial packages which are less valuable than they tought. A lot less.
They bought AAA and they want AAA money back.
I guess either the bailout plan give them back the good money they paid in the first place, or they might refuse to do business with unreliable partners.
Paulson: I may have run my company into the ground and got 50 million for a bonus, but you can trust me on this.
Hey, Hank! I've got something here to grow your hair back!
Only if we agree to this. They own and recklessly inflated these assets. If America fails, we will pull their world economy down.
As for higher lending costs, what can they do with all the dollars? There just paper.
The monopolists and their bankers need to put their heads together and solve this, to devalue the dollar devalues their holdings ....no matter which currency they hold
Call their bluff, all roads lead to Rome, and we are not slaves
Debt = Slavery.
the comment "Foreigners may not be attracted to US assets" is FLAWED !!
what it should say is that "Foreigners are not attracted to only paper assets in the US". They still are attracted to real assets in the us. If you hold trillons worth of USD that is being devalued, what would you do as a sensible investor.
You would sell some of that and trade it for some "real" assets in the US.
And if we significantly cut gvpt spending and consumers in debt reduce their consumption to reduce their debt, we further slow down the economy, yes? Which causes more job cuts, reduced tax income (receipts) for the gvpt. It sounds like we are in a huge Catch-22 situation here.
This is just what Michael Hudson has been saying in "Global Fracture" and "Superimperialism" since the 1970s, but funny how no one paid any attention to Hudson's work. This is how we paid for the Vietnam war. This is how we paid for the arms race / cold war. This is how we are paying for Iraq. But Hudson has been warning people for decades ... why is it that now people are paying attention?
A LOT of people have been saying this for along time, Sally...a LOT.
And now, we are being proved right.
Still, not everybody is paying attention.
While with this additional debt, the situation has certainly become alarming. However, let's put the ..."govern
Can't see what you cite as proof that income tax has become more progressive in recent years. Which wage earners by percent of income provide which percent of taxes collected does not prove the rate of taxation has become more progressive. The rate of taxation by percent on the wealthiest Americans has gone down since Bush took office. Rich folks paid a greater portion of their income to the tax man when Clinton was in office, and a much higher rate when JFK was president.
He continues to make this argument and I have yet to see any hard numbers to back it up; however, common sense should be used to level this seemingly unjust breakdown of taxes. What percentage these taxpayers pay as a group is extremely misleading, as vast amounts of earnings are never reported or are not subject to tax per loopholes--taken into account, those points modify the taxation picture considerably.
You can be certain that the wealth of the cited 5% is much greater than any number appearing on their tax filings.
The notion that the magnitude of wealth is comparatively irrelevant when considering overall pecentages paid is dishonest and completely unrealistic.
DuganS1
You are repeating one of the false justifications for the plutocratic few.
One should also consider the regressive Social Security tax (which is used for the general fund).
One also should consider the regressiveness of the three tier taxation system (federal, state, and local), a three tiered system not found in other nations.
On a more philosophical note, most regard part of the role of government to reallocate misallocated resources. Losing the benefits of a proper reallocation, schools, roads, health care, mass transit, public parks, is also a form of 'taxation' that affects the poorer 95% the most.
When you do your math, doogie, do you realize the INCOME does not ever catch up to the OUTGO?
Put that in your pipe and smoke it.
As many comments state, the fact that top earners pay more taxes has NOTHING to do with porgressive or regressive tax structures. It might have something to do with the fact that thes folks have increased thier wealth lots more than the folks in the middle or bottom. Here's a fun fact -
THE 400 WEALTHIEST FAMILIES IN THE UNITED STATES OF AMERICA INCREASED THEIR WEALTH BY $670 BILLION (YES BILLION WITH A 'B') during the 'Bush golden years'.
That's an average of $1,675,000,000 ($1.675 billion) per family, or $240,000,000 ($240 million) per year per family. WOW!
For every $1,500,000 ($1.5 million) of annual income, these same folks paid $58,000 LESS TAXES PER YEAR than they would have under Clinton. That means that they paid $9,280,000 less per year in taxes on average!
So here's the question - HOW IS THIS CONSIEDERED PROGRESSIVE TAX POLICY?
'If it fails to act we risk" a bunch of stuff.... Tell me if it acts, is it a promise that jobs will miraculously appear....
tell me again what this is about??? I am still getting credit card with 0 % interest rates....
We need to put out a hand for the bottom 60% so that they can really participate in society.. They are gravely at risk of bankrupcy and foreclosure and have lame healthcare coverage..
We also need ot resurrect the IRS for aiditing the rich and get pay equity for women and blacks, University Women had a great article about that and we have made minimal progress in the last 35 years....
Why only women and blacks? why not for asians, hispanics, old, young ?
If the 700 billion Paulson plan will make things worse, why is it even being considered?
Would we be better off to let these firms go bankrupt and take our lumps now?
One of the arguments I've heard is the Paulson plan would stop housing prices from dropping. If true, it's only delaying the drop as housing prices will resume falling until they are affordable.
Why aren't other plans being considered?
Funny how European governments aren't interested in following the U.S.'s lead. Do they believe it's not as bad as Paulson and Bernanke are warning us it is?
Bernanke says if we don't do this we risk a recession. I'd say the only reason we're not in a true recession as defined by GDP declines in two quarters are the half trillion dollar deficits the government is running up. This 700 billion will as you point out be added to the 500 billion forecast for 2009.
"We risk a recession"???? What planet is he living on? Out here in the reality-based world, we're already IN a recession. Here in RI, unemployment last month was 8.5%. Foreclosure signs are everywhere. The state government is as good as bankrupt, as is the gambling joint we rely on for some obscene proportion of state revenues. Food prices are through the roof, gasoline almost as bad, and even though ridership is up, they're cutting bus service because diesel costs too much.
If Paulson and his friends in the ten-figure income crowd feel a bit recession-ish, I say: welcome to where the rest of us already live.
I agree with you. We are in a recession. The only reason it's not met the technical definition of a recession is because they (the federal government) are pumping hundreds of billions of dollars into the economy in the form of deficit spending.
GDP includes government spending. What they are doing is delaying the recession. The deficits won't prevent it because at some point the national debt becomes untenable (like what we're starting to experience especially as the amount of debt is financed by foreign institutions).
I'm fortunate, living in an area with alot of government jobs. Just across the river from me, it's not so good as they are bleeding jobs.
What really strikes me as comical is the CEO compensation even being debated and how it's a line in the sand to Paulson. He's telling us the country is about to come to a grinding halt and he's more worried about CEO compensation than he is about the country.
Paulson, the epitome of a Bush patriot.
I did find out why Europe and Asia aren't wild about emulating Paulson's plan. Seems the biggest fools in this disaster are the U.S. and Great Britain.
The more I try to understand, the more my head hurts. Please somebody write in: what is the amount of the US government's debt? What is the total of state and local government debt? What is the amount of corporate, and the amount of individual debt in the US? I add these numbers up to get an idea of the total amount of US indebtedness, correct?
I believe the total you are seeking is 51 trillion dollars. This does not include our future obligations which are unfunded. This would double that figure. Take 2,000,0000
ROFLOL.
That was probably yesterday's figure, ole.
Remember that the $700 BILLION translates into we owe about $2.2 TRILL in order to pay That off.
Did you watch the end of Colbert last night?
He NAILED it.
Mr. Stewart: I would like to know the answers to these question, which have troubled me of late, given the financial news on view: If the government rescues the speculators from themselves with a trillion dollors of borrowed money, and that raises the deficit to over 10 trillion dollars, won't that drive the worth of the dollar down? On what basis is the dollar a credible currency, given the seemingly interminable debtor status of its printer? As the dollar has since the '30's been a currency untied to gold, on what basis is its worth predicated? Isn't the dollar valuable only because of an international consensus of belief in the viability and strength of the the US economy? On what basis can our economy be considered strong and viable now?
I am often guilty of writing snarky posts, and angry ones, but I am attempting sincerity here. I would really like to read your answers, because I can't figure out why any day now the dollar won't be seen by everyone on earth as a worthless scrap of paper...
I second the motion.
See Neil Grossman's Profile
You know, one of the problems is accounting. The US government uses a cash accounting approach which masks the problem significantly. Beyond its means is an understatement. The current deficit is a fraction of the actual liability stream. Last year, David Walker, the former Comptroller of the Government Accountinig Office estimated the actuarial position of the US at $55 Trillion (Yes, it is a "T"). This was probably conservative by $10- $15 Trillion (There is a paper by Gokhale and Smetters if you care). The economic events of the last 12 months have altered employment, income, debt service, inflation and other trajectories in a significant way, probably raising these numbers by10% - 20%. Let me give you an idea of how big these numbers are. Using non-farm payroll numbers, there are 130 million workers. Each of those workers will have to ante up 40,000 to 50,000 a year for the next 50 year to balance the books.
Isn't this calculation proof in itself that the US cannot and will not be good for what it owes, unless it institutes a program of inflation that makes Weimar Germany look robustly solvent? Not trying to be a smart-ass here. I just want to know...
See Neil Grossman's Profile
it means that either we print money, a la weimar germany; we cut expenditures dramatically; or something happens in a way that is hard to foresee that allows us to generate enormous growth and income in a non-inflationary way. i suspect we are past the point of no return, but that remains to be seen. one thing is clear from my perspective, and that is that i do not have a lot of confidence in our executive, legislative and regulatory system.
Trying to keep up:
Re the main post's Bllomberg quote: "The government reaching the requested debt limit would entail every man, woman and child in the U.S. owing more than $37,000 each. The median U.S. income last year was $50,233."
You and the above differ by a factor of your "50 years."
this is federal debt and does not include state debt, or corporate debt or personal debt...
See Neil Grossman's Profile
the reason is the method which the government accounts. it is cash based. it ignores liabilities to come. the social security/medicare system is insolvent, but has been cash flow positive. it goes cash flow negative in the next two or three years. the numbers are extraordinary. the actuarial values, which as i noted the government also estimates, assume certain population growth, employment, income growth, inflation, interest rates (and other key variables), to come up with income and liability streams and then discounts those estimates. in the case of my per annum cost estimate, the present value of a 50 year stream of payments of $1 is about $17 (depending on interest rate). so the pv of a stream of payments of $40,000 is just under 680,000. multiply by 100,000,000 and you get $68 trillion.
Hale,
Nice charts as always. Though, I am still wondering how the dollars rise, this year, relative to the rest of the worlds currencies fits into all this.
Regards,
It's like a Hurricane. We are in the eye of the storm.
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