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Not
long ago, a hand-addressed letter arrived at my home in Brooklyn. “Dear Mr. Cassidy,” it began. “I represent
a buyer who is very keen to purchase a house in your neighborhood. This buyer is willing to pay cash. If you are interested
in selling, please contact . . . ” I
allowed myself a rueful smile. Almost five years ago, after driving out to Levittown, New York, and discovering that small
ranch houses in that quintessentially middle-class town were selling for more than $300,000, I wrote an article predicting a real estate downturn. As prices continued to soar in Levittown and elsewhere,
my friends and colleagues didn’t hesitate to tease me about the headline of my piece: “The Next Crash.”
At
the beginning of 2004, at the instigation of my wife, I swallowed my reservations and bought a decaying Brooklyn brownstone,
with the intention of doing it up and renting out part of it to help pay the mortgage. The purchase price, of just over $1
million, seemed astronomical, but from today’s perspective, it was a bargain. Houses on my block are now fetching more
than $2 million and, as evidenced by the real estate agent’s missive, demand for them is brisk. I dropped the letter
in the trash, turned to my wife, and said, “Thank God for the Chinese government. It’s made us a million dollars.”
The
link between Brooklyn real estate and policy decisions made in Beijing isn’t immediately obvious, but bear with me.
As you may well know, the U.S. is now the world’s largest debtor. According to the Treasury Department, at the beginning
of 2007, Americans—that includes you, me, Citigroup, hundreds of thousands of other businesses, and the federal government—owed foreigners roughly
$10.7 trillion. (In case you’ve forgotten what 14-figure numbers look like, that’s
$10,700,000,000,000.) Now, the U.S. has the biggest economy in the world. The gross domestic product—the value of all
goods and services that we as a nation produce each year—is about $13.6 trillion, so we can shoulder more debt than
other countries. But still, in just three years, the external debt has shot up by about 55 percent.
The
culprit is the chronic trade deficit, which has been running at almost 6 percent
of G.D.P., a level unprecedented in our history. To pay for the difference between our import bill and our export
revenue, we have to borrow from abroad. Most countries with comparable trade deficits meet a predictable fate: Investor
confidence ebbs, capital flees, the currency crumbles, the central bank is forced to raise interest rates, firms and consumers
retrench, and the economy goes into a recession.
Nothing like this has happened in the U.S.—at least not yet—largely
because we have been able to withdraw cash from what is effectively a giant A.T.M. stocked by the Chinese government, the
Japanese government, and other generous lenders. In return, we have been handing out IOUs, mostly in the form of Treasury
bonds. On June 30, 2006, China owned about $680 billion worth of bonds issued or backed
by the U.S., and Japan owned about $800 billion. (These are conservative figures from the Treasury Department. Many
analysts believe the
real numbers are much higher.) Other big holders of U.S. debt include Russia
and Saudi Arabia, which are both flush with oil revenue. But even countries such as Brazil, India, and Thailand have been
lending us substantial amounts of money. It is impossible to say precisely what would happen to the U.S. economy
if it weren’t benefiting from the largesse of central bankers bearing yen, renminbi, won, rubles, and riyal. It is pretty
certain, though, that mortgage rates would be appreciably higher.
Back
in 2002, I assumed that the Federal Reserve would raise interest rates, and that once cheap money was no longer
readily available, housing prices would fall. The first part of this prediction proved accurate. Since the middle of 2004,
the Fed has taken the federal funds rate—what it charges banks on overnight lending—from 1 percent to 5.25 percent. Normally, such a dramatic shift would prompt a sell-off in long-dated Treasury
bonds and a rise in long-term interest rates. This time, that didn’t happen. Thanks to all those central banks stocking
up on paper issued by Uncle Sam, the interest rate on 10-year and 30-year Treasurys, rather than jumping to 7 percent—which
might have been predicted based on past experience—stayed closer to 5 percent.
The
fixed rate on 30-year mortgages (closely tied to Treasurys) barely crept above 6.5 percent, creating a floor for real estate
prices. Despite all the talk of a housing slump, there is still no sign of a nationwide crash. In parts of South Florida,
there have been significant price reductions, but Oklahoma City and Albuquerque are still enjoying increases. In my neighborhood,
housing prices seem to go up every week. {This has all changed since when the
article was published in June of 06--jk}
If the sight of the world’s richest nation borrowing heavily from much
poorer countries strikes you as strange, award yourself a jelly bean. Traditionally, the relationship has been the other way
around. In the 19th century, when England was the workshop of the world, British lenders paid for the railways and other capital
projects throughout North and South America. After World War II, U.S. taxpayers financed the reconstruction of Western
Europe and Japan.
Economic
theory says wealthier countries should provide capital to poorer ones, because that’s where the highest potential returns
are. Today, however, the U.S. doesn’t have much savings to lend anybody. The personal-savings rate is negative (people
spend more than they earn), the federal government runs a big deficit, and American firms are using much of their surplus
cash to finance buybacks of their stock.
There is a neat phrase to describe the relationship between the U.S. and its
Asian creditors: vendor financing. The governments in Tokyo, Seoul, and Beijing lend us money; we use it to buy Lexus cars,
Samsung cell phones, and all manner of Chinese products. It seems obvious that such a one-sided arrangement can’t last,
but predictions of its imminent demise haven’t fared any better than my real estate call in 2002. In February 2005,
Nouriel Roubini, an economist at New York University, and Brad Setser, a senior economist at the website RGEMonitor.com, predicted that within two years, America’s lenders would balk at providing additional funds and the U.S. economy would
risk a recession. Oh really? In 2006, China bought an estimated $250 billion in dollar assets. In the first quarter of 2007,
it purchased at least $100 billion more, according to Setser.
Some
analysts did recognize the potential durability of vendor financing. In a series of articles published in 2003 and 2004, Michael
Dooley, David Folkerts-Landau, and Peter Garber, three economists then connected to Deutsche Bank, argued that it could
last a generation, until the Chinese economy had absorbed the country’s enormous pool of rural laborers into factories.
The
trio explained how China benefits from financing our profligacy. In the past two decades, it has transformed itself from a
rural country into the world’s second-largest exporter, after Germany (the U.S. now ranks third). From the perspective
of Beijing, investing hundreds of billions of dollars in low-yielding Treasury bonds is a modest price to pay for keeping
U.S. markets open to Chinese goods and gaining access to U.S. industrial technology.
Media accounts of Sino-U.S. dealings
tend to ignore this reality. Treasury Secretary Hank Paulson flies to Beijing to chide China for not instituting more reforms,
including currency revaluation. Chinese vice premier Wu Yi politely tells him to shove off. (Cue headlines about rising tension
between Washington and Beijing.) But the very idea of Paulson lecturing the Chinese is an absurdity akin to a shopaholic lecturing
his credit-card company on the need for lower monthly interest rates. The Treasury secretary’s trip was an elaborate
charade designed to discourage Congress from slapping tariffs on China.
The
U.S. and China have a symbiotic relationship that neither side can afford to disrupt. Partly for this reason, much of Wall
Street is remarkably sanguine about the U.S.’s growing indebtedness. A while ago, I had dinner with a big-time investor,
who told me to quit worrying: The foreigners won’t stop buying Treasurys anytime soon, he said. They need to park their
money somewhere, and the U.S. still provides the most hospitable environment for itinerant capital.
Perhaps my dinner
partner was right. He’s made a lot of money betting on his optimistic outlook. Many of the skeptics, meanwhile, have
been silenced. In April, Stephen Roach, the veteran chief economist at Morgan Stanley—who in November 2004 predicted
an “economic Armageddon”—was “promoted” to head the firm’s Asian operations, a position
in which he no longer opines on behalf of the company.
Given
my sorry record as a real estate prognosticator, I should probably leave it at that, but I can’t resist adding
a historical note: During any period of intense speculation, there are signs that a peak is approaching. These include relaxed
credit standards, a glut of inexperienced buyers, elaborate theories that justify rising prices, a lack of dissent, and more
and more media outlets focused on the speculation.
During
the bull market of the mid-1980s, stock-market newsletters proliferated. In the late ’90s, there were CNBC and financial
bulletin boards on websites like Yahoo Finance, where small investors swapped stories about high-flying internet stocks. There
are dozens of real estate websites that critique and track the progress of new listings in Brooklyn. My wife and many of our
neighbors obsessively monitor these sites, which have names like Brownstoner, Curbed, and Property Shark. “Did you see
the news about 152 Dean?” they whisper to each other when they meet on the street. “It just sold for $2.45 million—$150,000
over asking.”
Suffice
it to say, I do not take these communications as a bullish signal. I would develop this argument further, but my wife just
asked me to look at a recent posting on Brownstoner. There’s a three-story fixer-upper close to the heavily polluted
Gowanus Canal that’s a real steal at $1.1 million . . .
national debt as percent of GDP |
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http://en.wikipedia.org/wiki/Us_debt
The
United States public debt, commonly called the national debt, gross federal debt or U.S. government
debt, is the amount of money owed by the United States federal government to creditors who hold U.S. Debt Instruments. As of October 17, 2007, the total U.S. federal public debt was $5.04 trillion.[1]
This
does not include the money owed by states, corporations, or individuals, nor does it include the money owed to Social
Security beneficiaries in the future. If intragovernment debt obligations are included, the debt figure rises to roughly $9
trillion.[2] If unfunded Medicaid, Social Security, etc. promises are added, this figure rises dramatically
to a total of $59.1 trillion.[3] In 2005 the public debt was 64.7% of GDP According to the CIA's World Factbook, this meant that the
U.S. public debt was the 35th largest in the world by percentage of GDP.[4][5]
It
is important to differentiate between public debt and external debt. The former is the amount owed by the government to its creditors, whether
they are nationals or foreigners. The latter is the debt of all sectors of the economy (public and private), owed to foreigners.
In the U.S., foreign ownership of the public debt is a significant part of the nation's external debt (see also below). The
Bureau of the Public Debt, a division of the United States Treasury Department, calculates the amount of money owed by the national government
on a daily basis.
Calculating and projecting the debt
Tracking
current levels of debt is a complex but rather straightforward process. Making future projections is much more difficult for
a number of reasons. For example, before the 9/11 attacks the Bush Administration projected that there would be a $1.288 trillion
surplus from 2001 through 2004 in the 2002 U.S. Budget. In the 2005 Mid-Session Review, however, this had changed to a projected deficit of $850 billion, a swing
of $2.138 trillion. Table 7 in this latter document states that 49% of this swing was due to "economic and technical re-estimates",
29% was due to "tax relief", and the remaining 22% was due to "war, homeland, and other enacted legislation". Reasons for
the inaccuracy of future projections include economic growth being different than projected and changes in fiscal policy (tax
cut and War on Terror).
In
extra, projections between different groups will sometimes differ because they make different assumptions. For example, an
August 2003 CBO document projected a $1.4 trillion deficit from 2004 through 2013. However, a joint analysis put out by the Center on Budget and Policy Priorities, the
Committee for Economic Development, and the Concord Coalition a month later stated that "In projecting deficits, CBO follows
mechanical 'baseline' rules that do not allow it to account for the costs of any prospective tax or entitlement legislation,
no matter how likely the enactment of such legislation may be". The analysis added in a proposed tax cut extension, AMT relief,
prescription drug plan, and increases in defense, homeland security, international, and domestic spending. This raised the
projected deficit from $1.4 trillion to $5.0 trillion. Hence, the assumptions on which the projections are based are also
very important.
Despite
the drawbacks of making future projections, however, a responsible government must arguably make long-run projections so it
can prepare the country for future possibilities. The federal government does provide long-run budget projection in Table
13-2 on page 209 of the Analytical Perspectives of the 2006 U.S. Budget. It projects that the federal debt
held by the public will reach 249 percent of GDP in 2075. This is more than double the maximum reached during World War II
and nearly four times its current level. Most of this increase is due to projected increases in entitlement spending and the
resulting interest on the debt. It is worth noting that this is a projection, not a prediction. This projection assumes normal
economic conditions and that government policies will follow current law. The stress of a quadrupling of the debt would likely
cause one or both of these items to change.
The mechanics
of U.S. Government debt
When
the expenses of the U.S. Government exceed the revenue collected, it issues new debt to cover the deficit. This debt typically
takes the form of new issues of government bonds which are sold on the open market. However, the debt can also be monetized by which the Federal Reserve creates an entry on its books to credit the US Government for an amount
equal to the dollar amount of the bonds the Federal Reserve is acquiring. The money created in this process not only includes
the new dollars that came into existence just to purchase the bonds, but much more because this new money is now sitting in
the form of checkbook money at the Federal Reserve. Under the scheme of Fractional Reserve Banking this new checkbook money is treated as an asset to lend against.
Economists estimate the expansion of the money supply as being many times the amount of the initial money created with the
exact amount of the expansion being a function of the marginal propensity of the consumer to consume (rather than save) each
new dollar.[6][7]
The
ultimate consequence of monetizing U.S. debt is that it expands the money supply which will tend to dilute the value of dollars already in circulation.
Thus, expanding the pool of money puts downward pressure on the dollar, downward pressure on short-term interest rates (the
banks have more to lend) and upward pressure on inflation. Typically this causes an inflationary boom that ends in a deflationary
bust to complete the business cycle. Note that money supply expansion is not the only force at work in inflation or interest rates. United States Dollars are essentially a commodity on the world market and the value of the dollar at any given time is subject
to the law of supply and demand. In recent years, the debt has soared and inflation has stayed low in part
because China has been willing to accumulate reserves denominated in U.S.
Dollars. Currently, China holds over $1 trillion in dollar denominated assets (of which $330 billion are U.S. Treasury notes).
In comparison, $1.4 trillion represents M1 or the "tight money supply" of U.S. Dollars which suggests that the value of the
U.S. Dollar could change dramatically should China ever choose to divest itself of a large portion of those reserves.[8][9][10][11] [12]
The US budget deficit has been declining for the last three years and the Congressional Budget Office projects
a surplus by 2012. [13] When the U.S. Government has a surplus, it may pay down its outstanding debt. It does this
by paying back the principal of the outstanding bonds redeemed for payment while not issuing new bonds. The U.S. Government
could also purchase its own outstanding securities on the open market if it was searching for a way to use a surplus to reduce
outstanding debt that was not due for redemption in a given year. [6] [7] In recent years, the US trade deficit has reached roughly 6% of the GDP, a level former Federal Reserve Chariman Paul Volcker calls unsustainable.[14]
Arguments
against paying down the national debt
Since
the money supply is reduced when the U.S. Government pays down its debt, the unintended
result of a government surplus could be a deflationary recession as the money supply contracts in the reverse of the process
of monetization described above. The government can avoid this unfortunate consequence by instead focusing on expanding its
GDP and thereby "reducing" the percentage of GDP that debt represents. The hope is that the deficit spending that increases the debt will increase GDP by a greater amount, and thus
— in relative terms, at least — the debt would decrease. This worked to great effect in the U.S. between the end
of World War II and 1980, even though the debt showed a net increase in absolute value
over the same period.[15] Kenneth L. Fisher's recent article "Learning to Love Debt" is a good representation
of the argument that "more debt is good thing" because of after effects the resulting money creation will have on the economy.[16]
Arguments
for paying down the national debt
Economists
from the Austrian School point out that the United States experienced depreciation of 43% of CPI (from CPI of 51 to 29) from 1800-1912: a period of strong economic
growth in U.S. history.[17] Furthermore, those who would argue that an expansion of the money supply is necessary to
expand the economy need to explain the colossal failure of Japan's Central Bank to do just that. In an attempt to follow Keynesian economics and spend itself out of a recession, Japan's central bank engaged
in no fewer than 10 stimulus programs over the 1990s that totalled over 100 trillion yen.[18] This did nothing to cure Japan's recession and has instead left the nation with a national
debt that is 158% of GDP.[19]
In the absence of debt monetization, when the Government borrows money from the savings of others, it consumes
the amount of savings there are to lend. If the government were to borrow less, that money would be freed to work in the private
sector and would lower interest rates overall. Lastly, raising interest rates is one of the traditional ways that the U.S.
Federal Reserve uses to combat inflation (which can be brought on by government debt), but a large national debt figure makes
it difficult to do so because it raises the interest paid in servicing that debt.
Risks
Risks
to the US Dollar
By
definition, international trade is the exchange of goods and services across national borders. Historically the currencies of nations involved were backed by precious metals (typically using some form of Gold Standard), which would cause a nation operating under a trade imbalance to send
precious metals (economic goods in and of themselves) to correct any trade imbalances. In the current scheme of fiat money, the U.S. Government is free to print all the money it wants. Consequentially,
the government cannot technically go bankrupt as any debtor nation can just issue more money through a practice known as Seinorage.[20]
If
there is a gross imbalance between the amount of new money being brought into circulation and the amount of economic goods
that are represented by an economy, then there is an unstable situation that can lead to hyperinflation.[21] This has been observed in smaller nations such as Argentina in 1989; the International Monetary Fund and World Bank try to end such crises by working with the problem country
to institute sound economic policies and restore faith in the international community that the country can again service its
debt with a stable currency.[22]
The
interest rate offered on new bond issues is the one that clears the market. On December 13 2006, the U.S. 30 year treasury note had a rate of 5.375%.
Were investors to become concerned about the future value of the US Dollar, they would demand a higher interest rate on US
bonds to compensate them for the risk they are assuming.[23]
In 2006, Professor Laurence Kotlikoff argued the United States must eventually choose between "bankruptcy,"
raising taxes, or cutting payouts. He assumes there will be an ever-growing payment obligations from Medicare and Medicaid.[24] Others who have attempted to bring this issue to the fore of America's attention range from
Ross Perot in his 1992 Presidential bid, to Investment guru Robert Kiyosaki, and, most recently, David Walker, head of the Government Accountability Office.[25][26]
Consequences
of foreign ownership of U.S. debt
A traditional defense of the national debt is that we "owe the debt to ourselves", but that is increasingly
not true. The US debt in the hands of foreign governments is 25% of the total[27], virtually double the 1988 figure of 13%.[28] Despite the declining willingness of foreign investors to continue investing in dollar denominated
instruments as the US Dollar has fallen in 2007,[29] the U.S. Treasury statistics indicate that, at the end of 2006, foreigners held 44% of federal
debt held by the public.[30] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In total, lenders from Japan and China held 47% of the foreign-owned
debt.[31] Some argue this exposes the United States to potential financial or political risk that either banks will stop buying Treasury securities or start
selling them heavily. In fact, the debt held by Japan reached a maximum in August of 2004 and has fallen nearly 3% since then.[32]
Last year, the central banks of Italy, Russia, Sweden, and the United Arab Emirates announced they would reduce
their dollar holdings slightly, with Sweden moving from a 90% dollar based foreign reserve to 85%. [33] On May 20, 2007, Kuwait discontinued pegging its currency exclulsively to the dollar preferring
to use the dollar in a basket of currencies.[34] Syria made a similar announcement on June 4th, 2007.[35]
A brief
history of the debt
See also: National debt by U.S. presidential terms
The
United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly reported value of $75,463,476.52 on January 1, 1791. Over the following 45 years, the debt grew, briefly contracted to zero
on January 8, 1835 under President Andrew Jackson but then quickly grew into the millions again.[36][37]
The
first dramatic growth spurt of the debt occurred because of the Civil War. The debt was just $65 million in 1860, but passed $1 billion in 1863 and
had reached $2.7 billion following the war. The debt slowly fluctuated for the rest of the century, finally growing steadily
in the 1910s and early 1920s to roughly $22 billion as the country paid for involvement in World War I.[38]
The
buildup and involvement in World War II brought the debt up another order of magnitude from $51 billion in 1940
to $260 billion following the war. After this period, the debt's growth closely matched the rate of inflation until the 1980s, when it again began to skyrocket. Between
1980 and 1990, the debt more than tripled. By the end of 2005, the gross debt reached $7.9 trillion, about 8.7 times its 1980
level.[39]
At
any given time (at least in recent decades), there is a debt ceiling in effect. Whereas Congress once approved legislation
for every debt issuance, the growth of government fiscal operations in the twentieth century made this impractical. (For example,
the Treasury now conducts more than 200 sales of debt by auction every year to fund $4 trillion in debt operations.) The Treasury
was granted authority by the Congress to issue such debt as was needed to fund government operations as long as the total
debt (excepting some small special classes) did not exceed a stated ceiling. However, the ceiling is routinely raised by passage
of new laws by the United States Congress every year or so. The most recent example of this occurred in September
of 2007, when the U.S. Congress agreed to raise the National Debt limit to $9.815 trillion.[41]
Debt
clocks
In several cities around the United States, there are national debt clocks—electronic billboards which supposedly
show the amount of money owed by the government. Some also attempt to show the money owed per capita or per family. There
is a significant level of fluctuation day-to-day, both up and down, so any "clocks" must be continually re-set with proper
values.
The
most famous debt clock, located in Times Square in New York City, was created by eccentric real estate mogul Seymour Durst. The clock is now owned by his son Douglas Durst. Durst's clock was deactivated
in 2000 when the debt began to decrease. However, following large increases, the clock was reactivated a few years later,
though had to be moved to make way for One Bryant Park. (Interestingly, some "man on the street" interviews showed
that some people felt that the sign's deactivation meant that the debt had been eliminated, though it remained at roughly
$5 trillion.) According to Durst the National debt is now increasing at such a rate that his clock will be obsolete (for lack
of digits) when the debt reaches the $10 trillion mark, expected in the next two years.
There
is an online debt clock at: brillig A free debt clock for web sites is available at: zFacts
[edit] Statistics and comparables
- U.S.
public debt on 30 December 2005 was $8,170 billion (or $8.1 trillion),[42] which is nearly six times the amount of United States currency in circulation (M1 Money
Supply), estimated to be $1,372 billion.[43]
- The
debt equates to $28,412 per head of the U.S. population, or $58,390 per head of the U.S. working population.[44]
- In
2003 $318 billion was spent on interest payments servicing the debt, out of a total tax revenue of $1,952 billion.[45]
Must watch:
Parts of Europe (such ask Netherlands and Denmark) use small local electricity generation plants, which permits the use of the byproduct heat for heating. In one example they use all he CO2 generated to supply 4,000 hectares of green houses. The combined heating and energy production (CHP) is a proven technology that lowers the energy consumption
for electricty and heating by over 50%. British (BBC) documentary on this http://www.youtube.com/watch?v=klooRS-Jjyo&mode=related&search
Teddy Roosevelt's advice that, "We must drive the special interests out of politics. The citizens of the United
States must effectively control the mighty commercial forces which they have themselves
called into being. There can be no effective control of corporations while their political activity remains."
For the
best account of the Federal Reserve (http://www.freedocumentaries.org/film.php?id=214). One cannot understand U.S. politics,
U.S. foreign policy, or the world-wide economic crisis
unless one understands the role of the Federal Reserve Bank and its role in the financialization phenomena. The same sort of national-banking relationships as in our country also exists in Japan and most
of Europe.
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