The Looming Dangers of American Debt

i came across this interesting article and i thought i would share it with members of ATS (especially those members from the US).

What does the term serf bring to mind? Poor, indebted, landless, forced labor—perhaps even medieval. Shockingly, serfdom is a reality many Americans may face in the future. Here is why.

The U.S. national debt now stands at more than $8.3 trillion, of which more than $2 trillion is owned by foreigners. Since 2000, the percentage of U.S. public debt owed to foreigners has doubled.

Take China for example. As of March of this year, China held over $321 billion worth of U.S. Treasuries, up from the $60 billion it owned at the end of 2000. Similarly, Japan now owns $640 billion worth of U.S. Treasuries, up from $317.7 billion in December 2000. Lately, however, America has also borrowed heavily from oil exporter nations (as defined by the Department of the Treasury), which include many nations that despise America. Luminaries such as Venezuela, Ecuador, Iran, Libya, Algeria, Indonesia and Iraq, and several other primarily Middle Eastern nations, now own $98 billion worth of U.S. debt.

According to Brad Setser, director of research at Roubini Global Economics, “The irony is that the three countries in the world adding to reserves the fastest and thus buying the most U.S. debt now are China, Saudi Arabia and Russia, none of them democracies. … We are increasingly counting on a group of creditors who are not our closest friends but have a bigger and bigger stake in America,” he says.

www.thetrumpet.com...

Are Americans worried about the growing debt and of those nations who own American debt? i do recall, there have been numerous threads throughout ATS history regarding the subject of US debt. some have suggested its nearly breaking point.

[edit on 1-9-2006 by infinite]

I'll bite -

Econ 101 and the balance of trade dictates the foreign debt owned (and not by countries, it by the investors, banks, and traders typically). Others posts have gone into this in detail but in a nutshell, if you have a trade deficit with a country the balance of trade is made up via invesment in capital or debt. The numbers balance out. Since we (US) is a net consumer it is a simple economic fact that to balance the trade, other people and countries will balance that with debt and capital investment.

The other way to look at it if you don't believe the economic 101 balance of trade concept, is that those people and countries are wasting away their own countries by investing here and not at home. We have a better rate of return and a more stable market and investors will always make their investment choices based on those two principals.

Right/wrong - who knows. Our GDP is still massive and our deficit to GDP ratio is quite low in fact so most economic brains say all is OK. Have we lost jobs at home because of cheap labor elsewhere - yup, and that leads to the balance of trade issues noted above. Not sure if its good or bad - the global stage has really only picked up steam in the last 20 years and somthing as large as the US economy takes a while to re-adjust. The US standard of living is still toward the top, and trade balances will move again as other countries standards of living move up toward us.

This again...

Many, many, many times I've posted several graphics showing America's debt burden is rather small, both on a historical basis and when compared to other industrialized nations.

The fact you discuss the debt in terms of raw, unadjusted dollars AND fail to mention America's GDP is irrefutable proof that you suffer from and extreme paucity of knowledge regarding this subject.

Despite numerous and enormous economic difficulties face by America in the last five years, America has the best performing industrial economy on earth.

You and the others who bring this up every two weeks are woefully uninformed and your ignorant blathering has long since grown tiresome.

Please go away.

[edit on 1-9-2006 by Number23]

posted by infinite

I thought I would share it with members of ATS especially those members from the US. The U.S. national debt now stands at more than $8.3 trillion, of which more than $2 trillion is owned by foreigners. [Edited by Don W]

I’m not much concerned who owns the public debt. Our dollar is convertible. That let’s anybody holding dollars in. The dollar is still ‘king of the hill’ although not getting the respect from Bush43 I think it should. There are 2 rules of thumb for small-town bankers that compliment each other and may have some application here. 1) Never loan so much to one borrower that his default will endanger the bank. (Eggs in basket theme.) And 2) never loan a borrower so much the bank has become his silent partner. (You have lost your leverage. ) These rules apply to lenders, but you can imagine yourself in the borrower’s shoes.

China as of March of this year, held over $321 billion worth of U.S. Treasuries, up from the $60 billion it owned at the end of 2000. Similarly, Japan owns $640 billion worth of U.S. Treasuries, up from $317 billion in 2000. Lately, however, America has also borrowed heavily from oil exporter nations such as Venezuela, Ecuador, Iran, Libya, Algeria, Indonesia and Iraq. Primarily OPEC nations, now owning $98 billion worth of U.S. debt. The irony is the three countries adding to their reserves the fastest and buying U.S. debt now are China, Saudi Arabia and Russia, none of them democracies . . We are increasingly counting on a group of creditors who are not our closest friends but have a bigger and bigger stake in America. From the Trumpet. Are Americans worried about the growing debt and of those nations who own American debt? [Edited by Don W]

America’s national debt exceeded its GDP in 1945. This was caused of course, by the great expenses incurred in the successful prosecution of World War 2. Which by the way, was not always a given. National Debt declined until the 1980s when Ronnie Reagan and Bush 41 financed the Reagan Revolution on borrowed money. Kenysian pump priming with a vengence. Clinton reversed that approach and then actually brought the Federal budget into balance by 2000. Post 2001 you know the rest.

posted by UofCinLA

Econ 101. The balance of trade dictates the foreign debt owned. Not by countries, but by the investors, banks, and traders typically.

I don’t think the Treasury is unaware of that, but for purposes of our debate, it doesn’t matte whether Charlie Chan owns the debt or the PLA. Individuals in those less democratic countries will be subject to governmental policies in both buying and selling. Hmm? Maybe Americans are subject to similar rules?

If you have a trade deficit with a country the balance of trade is made up via interment in capital or debt. The numbers balance out.

To the extent the numbers are close, it may seem that way. But there is no law of economics that says China will take its trade surplus - owned by individuals etc - and buy US T-bills. China could put its profits into Africa - where I understand it is - for example. In other words, one country’s surplus will not necessarily be invested in the deficit country based on any economic theory or mandate of law.

We have a better rate of return and a more stable market and investors will always make their investment choices based on those two principals. End of Econ. 101

Apply this statement to your earlier statement regarding the direct relationship of trade deficit to debt. You have agreed with what I explained.

Our GDP is still massive and our deficit to GDP ratio is quite low in fact most economic brains say all is OK. We have lost jobs at home because of cheap labor elsewhere - not sure if its good or bad - the global stage has really only picked up steam in the last 20 years and something as large as the US economy takes a while to re-adjust.

Agreed. I believe we could have done more to soften the losses of employment and so on, but that rings of socialism and Good God A’mighty, that is verboten in the US. We’d sooner repeat the Irish Potato Famine than follow Fabian. Well, the R&Fs would.

The US standard of living is still toward the top, and trade balances will move again as other countries standards of living move up toward us.

On the first point, you are ignoring the growing disparency between the top and bottom in America. 8 more years under a GOP economic policy and America will look more like India. As to your second point, that is “for sure” to be the outcome as countries raise their standards of living, but that does not mean our standard has to decline. That is a function of domestic productivity and tax policy. We control that, not the other countries. And so far, we are not dong a very good job of it, post 2000.

Current GOP budget financing is more a tax transfer to later generations than any other thing. Spend today, let the poor pay for it later. Plus a bonus, we get to buy the paper with the money we would have paid in taxes, and so, we get not only the free ride today, but we get “our” own money back in the future and with interest. Bush43 has found the Philosopher’s Stone!

All Hail Bush43!



[edit on 9/1/2006 by donwhite]

money is no object, it's just binary data and sheets of paper. anyone with a slight desire for power and superficial knowledge of the fed system knows that in such a system, you're bound to be buried by debt and/or inflation within decades. no problem if all you have to do is sign a decree and voilà you're in the black again.

There is a looming danger in today’s budget deficits. It is named the Baby Boomers. This is the generation born after 1945, until 1965. 65 + 1945 = 2010. Add 20 and you have the looming danger from 2010 to 2030. By 2030, the number of new workers will pay in enough to put the Social Security system back into surplus.

From the beginning, Social Security collected more than it paid out. The surplus was put into a Trust Fund. Today, this Trust Fund receives 6.2% of wages up to $80,000, matched by the employer, or 12.4% paid by self-employed wage earners. The money goes into individual accounts so that when the person retires (or needs either the survivorship benefit or the disability benefit which are both included) the amounts payable will be based on his or her contributions.

The Looming Danger is this. Knowing up front there will be more to pay out than will be taken in, the General Fund - say taxes - will have to make up the short fall, unless we borrow to pay back borrowed money. Surely no economist would advise that. Therefore, the path the Clinton administration had set would have reduced the debt of th US just at the time when the world knows we will have to borrow several trillion dollars. It’s never good for borrowers to let lenders know they must have the money - at any cost! That is the risk Bush43 is running on the country.

Because the Federal government is the guarantor of this Trust Fund, and the benefits are promises made to the contributors, and for political reasons and for generally good economics, the money will be paid. As long as there is a United States, you can bank on that. 100%.

What do you do with surplus money if you are the government? You cannot pile the surplus money in the corner to await your retirement. It would not be prudent to store it in Ft. Knox. Just as in the case of gold, so cash stored for a later disbursement would be the same pile of cash. It will not grow.

Therefore, the government borrows the money in the Trust Fund to pay its general obligations. Its day to day expenses. Were it not for this practice, the government would have to either borrow more money or raise taxes or reduce the pay outs. The borrowed money receives interest. The formula or rate is calculated on the basis of what the 30 year bond bears. Once called the benchmark of world credit, the 20 year bond has replaced it to become the world's most dependable certificate of debt.

There is no currency currently that threatens the United States dollar's dominance as the world's currency. China’s Yuan is the closest to posing a challenge to US fiscal hegemony. The Euro will never pose a challenge to the US dollar until the UK adopts the Euro. The Japanese are not interested. No other country is even close to being a world currency.

Keep in mind that the US has about 400 billion dollars in various denominations in circulation. About 260 billion is inside the US and the remaining 140 billion is outside the US.

Conclusion. The borrowed Trust Fund money saves us taxpayers by keeping the interest rate on money we do borrow lower than it would be otherwise, and it earns interest deferred to a later time when experience tells us that inflation will make it cheaper to pay 2006 debts in 2026 money.



[edit on 9/1/2006 by donwhite]

I thought there was a law against the govt using the Social Security fund for anything other than Social Security purposes...?

posted by forestlady

I thought there was a law against the govt using the Social Security fund for anything other than Social Security purposes? [Edited by Don W]

Because they do, I feel sure it is not a law violation. When you look at FirstGov.org it is listed as “private debt” as opposed to the Treasury bonds etc., which are “public debt.”

There are several Trust Funds. The Highway Trust Fund is the oldest. The Fish and Wildlife Trust Fund. The Airport Trust Fund. And I’m sure there are others. The SS and Medicare Trust Funds are the largest, about $2.3 T. I believe. When the Treasury takes money out of the SS Funds, it has to proved the SSA with a special document verifying the withdrawal and pledging to repay as needed. The SS Fund is the only one like that. The others are purely electronic accountings.

Whether the SS Trust Funds have money in them or not is really not important. The Full Faith and Credit of The United States is the real backer of the debt. It’s up to the Congress and the Treasury Department how the monthly bills are paid. If Congress fails to “authorize” the payments, ALL 435 will be out at the next election.



[edit on 9/1/2006 by donwhite]