Organic Revolution
7th December 2005, 15:30
America's exploding debt is a ticking time-bomb. No one can say for
sure what might trigger a crisis and when the bomb might explode, but
this much is for sure: America's current level of borrowing is
unsustainable. America's Debt Time Bomb
By John F. Ince, AlterNet
Posted on December 1, 2005, Printed on December 2, 2005
[Editor's Note: John Ince is the producer/director of a new documentary
about America's debt crisis. For more information, visit
TIME-BOMB.org.]
America's exploding debt is a ticking time-bomb. No one can say for
sure what might trigger a crisis and when the bomb might explode, but
this much is for sure: America's current level of borrowing is
unsustainable.
America's debt crisis is reflected both in our exploding national debt
and our astounding level of borrowing from foreigners, as measured in
the current account trade deficit. Every day we fail to address these
problems, we increase the chances that the country will be facing an
economic crisis of major proportions. Yet few Americans are aware that
anything is amiss. The mainstream media covers the issue
intermittently, but because the debt increases incrementally, the issue
lacks the sort of "crisis" banner that motivates editors and reporters.
The lessons of history are clear: a nation's heavy borrowing from
abroad is usually a precursor to decline. America's debt is also a
moral issue, because we are in effect stealing from future generations.
By borrowing so heavily today, we are hollowing out the foundation of
America's economic future.
There are two components of America's debt time-bomb: the national debt
and the current accounts trade deficit.
The national debt: When President Bush took office in 2000, the
projected surplus for the U.S. government for the next decade was
approximately $5 trillion. By fiscal year 2005 the surplus was entirely
gone and the annual domestic deficits were at record levels, somewhere
in the range of $350-450 billion depending on whose estimates you use.
This is the most radical reversal of government finances in U.S.
history. Today the national debt is approximately $7.9 trillion, and
growing by over a billion a day.
The current account trade deficit: In the last 25 years America has
gone from the world's largest creditor nation to the world's largest
debtor nation. Today we rely upon foreigners to finance over 40% of our
national debt. In fiscal year 2005 our current account trade deficit is
on track to be almost $700 billion, which represents over 6% of our
GDP. When America borrows from abroad to finance its domestic deficits,
we give foreigners a claim to the financial assets of this country
through either interest payments or a share of profits. Essentially
America has been borrowing from abroad to finance our military buildup
and war in Iraq. Should we continue to run current account deficits
comparable to those now prevailing, the net ownership of the U.S. by
other countries and their citizens a decade from now will amount to
roughly $11 trillion.
Uncharted Territory
The globalization of financial markets has made it easier for American
policymakers to engage in potentially dangerous borrowing patterns.
Today there is a worldwide glut of savings, and because the United
States is viewed favorably by global investors, we have been able to
borrow from abroad without any appreciable pain.
But this is all based on a short-term perspective. Sooner or later
America must begin paying foreigners back. Even with recent increases
in interest rates, they remain relatively low by historical standards
and inflation does not seem to be an major concern of policymakers in
the short run. This state of affairs has perplexed many economists
because, with capital flowing so freely across international
boundaries, many of the traditional guideposts used by the Fed to gauge
the economy have diminished relevance. If potential long-term problems
are masked, the magnitude of an eventual downturn could be greatly
magnified.
A confluence of factors could quickly create a downward spiral in the
economy. Most likely it would begin when foreign investors lose
confidence in America as an investment opportunity. Suddenly and
traumatically, this would create a contraction of our economy.
An economy in recession further increases the size of the deficits
because of increased interest costs on the existing debt and transfer
payments through entitlement programs such as unemployment insurance.
This further creates pressures on the financial markets through the
"crowding out" effect as the government absorbs a higher share of the
available pool of capital.
As businesses have more difficulty raising capital, it further
depresses the economy and places additional upward pressure on interest
rates. Rising interest rates would take the steam out of a real estate
market that has become increasingly speculative and exhibits many
bubble-like characteristics. Highly leveraged sectors like the
derivative markets could also encounter a severe contraction. Combine
these factors with the coming demographic wave of retiring baby boomers
and you have the outlines of a major crisis.
Based upon a credit analysis of America's current borrowing and our
long-term commitments through entitlement programs, some economists are
suggesting that the U.S. Treasury will have no other option than to
"monetize" the debt by reducing reduce its real value through
intentionally inflationary policies. This is essentially a means by
which the government would default on its debt without calling it a
default. Individuals and institutions that lent money to the federal
government by investing in Treasury bills would be paid back with
dollars that are worth less than the dollars they lent.
Confiscating Assets
The integrity of our nation is being compromised by the fiscal
irresponsibility of our policymakers. In the process, the stability of
our currency and economy is being jeopardized. We should all be
concerned because 1) The market value of everyone's financial assets
will be reduced dramatically if we stand by and do nothing; 2) The
costs of things we buy will rise dramatically if the government
inflates the currency; and 3) Republicans will use the exploding
national debt as a pretext for cutting social programs.
The unraveling happens in countless invisible acts that most Americans
will never be aware of until it is too late. If the U.S. Treasury does
"monetize" the debt to reduce its real value, it would be tantamount to
the government's "confiscating" the financial assets of its citizens
through intentionally inflationary policies. This course of action
would have profound implications not only for the sustainability of the
global financial system, but all for individual investors. In the words
of former Fed Chairman Alan Greenspan, "In the absence of the gold
standard, there is no way to protect savings from confiscation through
inflation." As Harvard economist John Maynard Keynes explained: "By a
continuing process of inflation, governments can confiscate, secretly
and unobserved, an important part of the wealth of their citizens."
Since the terrorist attacks on the World Trade Center on September 11,
the debate over America's priorities has been framed in patriotic terms
as a need for strong measures to protect the nation from future
attacks, whatever the cost. The wars in Iraq and Afghanistan have been
linked to this "war on terrorism" and funding for these initiatives has
by and large sailed through Congress without substantive debate or
questioning. Yet it hardly makes sense for a nation to go into debt to
pay for wars and a military buildup, at the expense of other more
fundamental and abiding national needs.
While military expenditures go unquestioned in Congress, funding is
being cut for education, environmental protection, sustainable energy
programs and many other programs that arguably will have a more
profound effect on the strength and economic competitiveness of our
country. Increasingly the battleground of modern international conflict
will be in the global marketplace, rather than in the military sphere.
China's economy is growing at an impressive pace. Its need for energy
and other resources will ultimately place its national requirements on
a collision course with those of the U.S. and other Western nations.
Sooner or later, America must begin paying off its debts, and its binge
of borrowing must come to an end. If our leaders continue to ignore the
problem, we will all suffer the consequences.
sure what might trigger a crisis and when the bomb might explode, but
this much is for sure: America's current level of borrowing is
unsustainable. America's Debt Time Bomb
By John F. Ince, AlterNet
Posted on December 1, 2005, Printed on December 2, 2005
[Editor's Note: John Ince is the producer/director of a new documentary
about America's debt crisis. For more information, visit
TIME-BOMB.org.]
America's exploding debt is a ticking time-bomb. No one can say for
sure what might trigger a crisis and when the bomb might explode, but
this much is for sure: America's current level of borrowing is
unsustainable.
America's debt crisis is reflected both in our exploding national debt
and our astounding level of borrowing from foreigners, as measured in
the current account trade deficit. Every day we fail to address these
problems, we increase the chances that the country will be facing an
economic crisis of major proportions. Yet few Americans are aware that
anything is amiss. The mainstream media covers the issue
intermittently, but because the debt increases incrementally, the issue
lacks the sort of "crisis" banner that motivates editors and reporters.
The lessons of history are clear: a nation's heavy borrowing from
abroad is usually a precursor to decline. America's debt is also a
moral issue, because we are in effect stealing from future generations.
By borrowing so heavily today, we are hollowing out the foundation of
America's economic future.
There are two components of America's debt time-bomb: the national debt
and the current accounts trade deficit.
The national debt: When President Bush took office in 2000, the
projected surplus for the U.S. government for the next decade was
approximately $5 trillion. By fiscal year 2005 the surplus was entirely
gone and the annual domestic deficits were at record levels, somewhere
in the range of $350-450 billion depending on whose estimates you use.
This is the most radical reversal of government finances in U.S.
history. Today the national debt is approximately $7.9 trillion, and
growing by over a billion a day.
The current account trade deficit: In the last 25 years America has
gone from the world's largest creditor nation to the world's largest
debtor nation. Today we rely upon foreigners to finance over 40% of our
national debt. In fiscal year 2005 our current account trade deficit is
on track to be almost $700 billion, which represents over 6% of our
GDP. When America borrows from abroad to finance its domestic deficits,
we give foreigners a claim to the financial assets of this country
through either interest payments or a share of profits. Essentially
America has been borrowing from abroad to finance our military buildup
and war in Iraq. Should we continue to run current account deficits
comparable to those now prevailing, the net ownership of the U.S. by
other countries and their citizens a decade from now will amount to
roughly $11 trillion.
Uncharted Territory
The globalization of financial markets has made it easier for American
policymakers to engage in potentially dangerous borrowing patterns.
Today there is a worldwide glut of savings, and because the United
States is viewed favorably by global investors, we have been able to
borrow from abroad without any appreciable pain.
But this is all based on a short-term perspective. Sooner or later
America must begin paying foreigners back. Even with recent increases
in interest rates, they remain relatively low by historical standards
and inflation does not seem to be an major concern of policymakers in
the short run. This state of affairs has perplexed many economists
because, with capital flowing so freely across international
boundaries, many of the traditional guideposts used by the Fed to gauge
the economy have diminished relevance. If potential long-term problems
are masked, the magnitude of an eventual downturn could be greatly
magnified.
A confluence of factors could quickly create a downward spiral in the
economy. Most likely it would begin when foreign investors lose
confidence in America as an investment opportunity. Suddenly and
traumatically, this would create a contraction of our economy.
An economy in recession further increases the size of the deficits
because of increased interest costs on the existing debt and transfer
payments through entitlement programs such as unemployment insurance.
This further creates pressures on the financial markets through the
"crowding out" effect as the government absorbs a higher share of the
available pool of capital.
As businesses have more difficulty raising capital, it further
depresses the economy and places additional upward pressure on interest
rates. Rising interest rates would take the steam out of a real estate
market that has become increasingly speculative and exhibits many
bubble-like characteristics. Highly leveraged sectors like the
derivative markets could also encounter a severe contraction. Combine
these factors with the coming demographic wave of retiring baby boomers
and you have the outlines of a major crisis.
Based upon a credit analysis of America's current borrowing and our
long-term commitments through entitlement programs, some economists are
suggesting that the U.S. Treasury will have no other option than to
"monetize" the debt by reducing reduce its real value through
intentionally inflationary policies. This is essentially a means by
which the government would default on its debt without calling it a
default. Individuals and institutions that lent money to the federal
government by investing in Treasury bills would be paid back with
dollars that are worth less than the dollars they lent.
Confiscating Assets
The integrity of our nation is being compromised by the fiscal
irresponsibility of our policymakers. In the process, the stability of
our currency and economy is being jeopardized. We should all be
concerned because 1) The market value of everyone's financial assets
will be reduced dramatically if we stand by and do nothing; 2) The
costs of things we buy will rise dramatically if the government
inflates the currency; and 3) Republicans will use the exploding
national debt as a pretext for cutting social programs.
The unraveling happens in countless invisible acts that most Americans
will never be aware of until it is too late. If the U.S. Treasury does
"monetize" the debt to reduce its real value, it would be tantamount to
the government's "confiscating" the financial assets of its citizens
through intentionally inflationary policies. This course of action
would have profound implications not only for the sustainability of the
global financial system, but all for individual investors. In the words
of former Fed Chairman Alan Greenspan, "In the absence of the gold
standard, there is no way to protect savings from confiscation through
inflation." As Harvard economist John Maynard Keynes explained: "By a
continuing process of inflation, governments can confiscate, secretly
and unobserved, an important part of the wealth of their citizens."
Since the terrorist attacks on the World Trade Center on September 11,
the debate over America's priorities has been framed in patriotic terms
as a need for strong measures to protect the nation from future
attacks, whatever the cost. The wars in Iraq and Afghanistan have been
linked to this "war on terrorism" and funding for these initiatives has
by and large sailed through Congress without substantive debate or
questioning. Yet it hardly makes sense for a nation to go into debt to
pay for wars and a military buildup, at the expense of other more
fundamental and abiding national needs.
While military expenditures go unquestioned in Congress, funding is
being cut for education, environmental protection, sustainable energy
programs and many other programs that arguably will have a more
profound effect on the strength and economic competitiveness of our
country. Increasingly the battleground of modern international conflict
will be in the global marketplace, rather than in the military sphere.
China's economy is growing at an impressive pace. Its need for energy
and other resources will ultimately place its national requirements on
a collision course with those of the U.S. and other Western nations.
Sooner or later, America must begin paying off its debts, and its binge
of borrowing must come to an end. If our leaders continue to ignore the
problem, we will all suffer the consequences.