Think the Nation's Debt Doesn't Affect You? Think Again

By John F. Ince, AlterNet. Posted March 20, 2007.

Sometime in the next year, Congress will start going through their periodic rituals and related public relations charades in an effort to absolve themselves of any blame for raising of the federal government's debt ceiling.

With Bush and cronies having added over $3 trillion dollars to the national debt, the country's credit card tab now stands at $8.8 trillion. This represents an astounding increase of over 45 percent since Bush came into office in January of 2001. And all this fiscal profligacy took place during the years when the CBO originally forecasted record surpluses of approximately $2.5 trillion. And there is no end in sight to the deficits.

More alarmingly we now rely on foreigners to finance over 40 percent of this debt with the lion's share coming from the Asian central banks. In FY 2006 the current account trade deficit is on track to set yet another record, on the order of $700 billion. To put this in perspective, billionaire investor Warren Buffet points out that, "15 years ago, the U.S. had no trade deficit with China. Now, it's 200 billion dollars." He says if the country does not change course, the rest of the world could end up owning 15 trillion-dollars worth of the United States. That's equal to the value of all American stock.

Is it a natural state of affairs for the world's richest nation to be borrowing from the world's poorest nations, to the tune of over 6 percent of its GDP? Harvard Economic Professor and former Chief Economist at the International Monetary Fund, Kenneth Rogoff doesn't think so. Rogoff goes on camera in the recently released documentary film, TIME-BOMB: America's Debt Crises, Causes, Consequences and Solutions and says, "This is not a normal state of affairs. And it's certainly not something we expect to see from the world's richest country. Back when Britain was on top they were lending money to the world, but we're borrowing from the rest of the world. Our current account trade deficit is now more than our defense spending and incredibly we've been borrowing from the rest of the world like this for several years now. I think we're going to reach a point where the rest of the world decides that they don't want to lend to us. And that can be kind of traumatic."

America's high deficit strategy is due for a critical review, but the review won't be coming from Congress, the media or the American electorate, because these issues just don't rank high on a national agenda dominated by war, sports, celebrity worship, and scandal. But like it or not, Bush's deficit strategy will be getting critical review from the people who matter most: global investors.

There are renewed signs that global investors may be getting concerned about the level of U.S. borrowing. Recently the Chinese, holders of about $1 trillion in U.S. Treasuries, recently set up a new agency of their central bank to take a hard look at their investments overseas, and their continued financing of U. S. deficits may come under close scrutiny. If global investors were to begin to balk at picking up the tab for American excesses, it would be a monumental embarrassment to the United States.

More palpably it would force the Fed to raise interest rates to make the T-bills marketable. That, of course, would have serious effects for the U. S. economy, the stock market and the real estate market. Could this be the beginning of the unraveling? Perhaps.

There are of course, countervailing forces that could enable the U.S. Treasury to continue its glut of borrowing. China and the Asian Central banks would hate to see the markets for their exports go soft and they know that only by continuing their financial largesse will the United States continue to be the "shopper of last resort" in the global marketplace. Oil producing nations are also awash in capital and, as long as the dollar remains the default currency for petrodollars, they view the dollar as a safe bet. But these conditions can't continue indefinitely and no investor wants to be the last to react to bad news.

If history is any guide, we need to be concerned. The last time there was a changing of the guard at the Fed, Alan Greenspan was greeted just about 90 days into his new tenure with the stock market crash of '87, which overnight wiped out over 20 percent of the amassed wealth of investors. The recent hiccup in the global financial markets has raised new concerns about market instability. With the softening of the real estate market, the subprime mortgage market has already sent shock waves through mortgage lending circles, with several notable bankruptcies. There is concern that it may move up the food chain jeopardizing the lending portfolio's major banks, most of whom have been quietly raising the loan loss reserves.

Nobody knows for sure how this will play itself out, but the big picture is not a rosy one for the American economy. In the past year the median sales price for a home in America actually declined and homeowners are starting to feel the hangover of over $1.5 trillion that Americans have extracted from the equity of their homes with interest-only loans and the easy money the banks are throwing at them. The derivatives market, despite having been racked with scandals, is still highly leveraged and due for a "correction". And the stock market has turned jittery on news from China and spiked oil prices.

See more stories tagged with: national debt, trade deficit

John Ince is a former reporter at Fortune Magazine and the producer/director of a new documentary about America's debt crisis. For more information, visit http://www.time-bomb.org/ or to purchase the film visit http://www.customflix.com/208246.

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