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Heavy Debts Threaten America's Economy!
USA Today
http://www.usatoday.com/money/economy/2005-08-27-growing-debt_x.htm
Experts warn that heavy debt threatens American economy
The Associated Press
You owe $145,000. And the bill is rising every day.
That's how much it would cost every American man, woman and child to pay the tab for the long-term promises the U.S. government has made to creditors, retirees, veterans and the poor.
And it's not even taking into account credit card bills, mortgages — all the debt we've racked up personally. Savings? The average American puts away barely $1 of every $100 earned.
Our profligate ways at home are mirrored in Washington and in the global marketplace, where as a society America spends $1.9 billion more a day on imported clothes and cars and gadgets than the entire rest of the world spends on its goods and services.
A new Associated Press/Ipsos poll finds that barely a third of Americans would cut spending to reduce the federal deficit and even fewer would raise taxes.
If those figures seem out of whack to you, if they seem to cut against the way you learned to handle money, if they seem like a recipe for a national economic nightmare — well, then, at least you're not alone.
A chorus of economists, government officials and elected leaders both conservative and liberal is warning that America's nonstop borrowing has put the nation on the road to a major fiscal disaster — one that could unleash plummeting home values, rocketing interest rates, lost jobs, stagnating wages and threats to government services ranging from health care to law enforcement.
David Walker, who audits the federal government's books as the U.S. comptroller general, put it starkly in an interview with the AP:
"I believe the country faces a critical crossroad and that the decisions that are made — or not made — within the next 10 years or so will have a profound effect on the future of our country, our children and our grandchildren. The problem gets bigger every day, and the tidal wave gets closer every day."
Federal Reserve Chairman Alan Greenspan echoed those worries just last week, warning that the federal budget deficit hampered the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. He criticized the nation's "hesitancy to face up to the difficult choices that will be required to resolve our looming fiscal problems."
Certainly, there are those who feel such comments bring to mind the preachers who predict the end of the world at a specific time and place, and have always been wrong. And undeniably, borrowing isn't all bad — easy access to money has been a critical tool in building America's businesses, from mom-and-pops to multinationals.
But something has changed. More than two centuries ago, Benjamin Franklin warned: "He that goes aborrowing, goes asorrowing." Now, a laugh-til-you-cry commercial portrays a man with a beautiful home and car declaring: "I'm in debt up to my eyeballs. I can barely pay my finance charges. Somebody help me."
The epidemic of American indebtedness runs from home to government to global marketplace. To examine it, let's start at home.
(Continued below)
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4/23/2006, 3:20 am
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Joseph Sarandos
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Re: Heavy Debts Threaten America's Economy!
Americans used to save, but no longer. Back in the 1950s, a generation of Americans who had survived the Depression and Second World War saved roughly 8% of their income. The savings rate rose and fell slightly over the decades — it went as high as 11% and as low as 7% during the "greed is good" 1980s — but now those days are only a memory.
In the charge-everything start of the new millennium, savings have plummeted: to just 1.8% last year, below 1% since January and at zero in the latest estimate from the Bureau of Economic Analysis.
The lack of savings is mirrored by a rise in debt. In 2000, household debt broke 18% of disposable income for the first time in 20 years, meaning debt eats almost $1 in every $5 American families have to spend after they get past the bills that keep them fed and housed. (That figure hasn't dropped. Credit card debt alone averages $7,200 per household.)
Many people take comfort in the rising value of their homes, and its spurred record home-building and buying, with new construction making places like Las Vegas the fastest-growing in the nation. But a home translates into wealth only when you sell it — and there's a vigorous debate over whether the housing boom is becoming a bubble that will burst.
"It seems like, with the younger generation, that they want to have now what it took us years to get," says Jo Canelon, a 46-year-old social worker in Statenville, Ga.
"I see people younger than me with comparable jobs that drive new vehicles and have a boat and mortgage and things," says Canelon, who responded to the AP/Ipsos poll. "And I just wonder about their debt."
Canelon sees echoes in the rise of obesity: a pervasive I-want-it-now attitude no matter what the consequences. To her, debt's a symptom of disease, and one that's spreading.
If she's right, the government is sick, too.
Leaders are elected by the people they serve, of course, and the American people seem to want the best of both worlds — tax cuts and government services — while they hope the dollars sort themselves out. They worry about the nation's problems, but not enough to agree on a course of action to fix them.
The AP/Ipsos poll of 1,000 adults taken July 5-7 found that a sweeping majority — 70% — worried about the size of the federal deficit either "some" or "a lot."
But only 35% were willing to cut government spending and experience a drop in services to balance the budget. Even fewer — 18% — were willing to raise taxes to keep current services. Just 1% wanted to both raise taxes and cut spending. The poll has a margin of error of 3 percentage points.
The nation's political leaders could hardly be said to have a mandate calling for fiscal responsibility.
A few years ago, government finances were the strongest they've been in a generation. Then came a turnaround — and a stunningly quick one. The budget surplus of $236 billion in 2000 turned into a deficit of $412 billion last year. The government had to borrow that much to cover the hole between what it took in and what it had to spend; a difference that's called the federal deficit.
(Continued below)
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4/23/2006, 3:22 am
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Joseph Sarandos
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Re: Heavy Debts Threaten America's Economy!
Blame the bust of the dot-com boom, the ensuing recession, President Bush's federal tax cuts, the Sept. 11 terrorist attacks and the subsequent wars in Afghanistan and Iraq.
Bush has gotten his share of brickbats, from both the right and the left, for the spending while he's in office. Still, the federal deficit isn't as big as it was in the worst of the years under President Reagan as a percentage of the overall economy.
Some note things are getting better: The latest reports project a deficit of $331 billion for 2005, nearly $100 billion less than expected. Outstanding debt — the amount of securities and bonds that must be repaid — is far below what it was in the early 1990s.
But bigger worries lie ahead.
The nation's three biggest entitlement programs — Social Security, Medicare and Medicaid — make promises for retirement and health care (for the elderly and the poor) which carry a huge price tag that balloons as the population grows and ages.
Add it up: current debt and deficit, promises for those big programs, pensions, veterans health care. The total comes to $43 trillion, says Walker, the nation's comptroller general, who runs the Government Accountability Office. That's where the $145,000 bill for every American, or $350,000 for every full-time worker, comes from.
Simply hoping for good times to return won't erase numbers like that, Walker says.
"There's no way we're going to grow our way out of our long-range fiscal imbalance," he says, adding that the country must re-examine tax policy, entitlement programs and the entire federal budget.
"I really do not believe the American people have a real idea as to where we are and where we're headed, and what the potential implications are for the country if we don't start making some tough decisions soon," he says.
The dangers are clear as day to Felicia Brown in Saginaw, Mich. To her, it's the leaders who ignore them, she says.
"We're stealing from our children's future and our grandchildren's future," says the cashier and mother of three, who also responded to the AP/Ipsos poll. "We're led off on this belief that we should buy, buy, buy. Everyone needs a big house, everyone needs a new car every two years. We're spending all this money on that, and we're not saving anything."
Some people, however — including economists — think the picture isn't so gloomy.
Ben Bernanke, who recently left the Federal Reserve Board to serve as President Bush's top economic adviser, has argued that the problem is not with the United States. The trouble lies overseas, where people want to save rather than spend their money. The key is to encourage other countries to spend and invest more, he says, though he also believes that the federal budget needs to be balanced.
By raising the issue of foreign investment, Bernanke touches on another area that scares economists — America's inexhaustible desire for foreign goods.
The trade deficit — the difference between what America imports and what it exports — is the highest it's ever been, both in absolute numbers and in comparison to the size of the economy.
As a society, Americans are on track this year to spend $680 billion more on foreign goods such as Chinese-made clothes, Japanese-made cars and Scandinavian cell phones than overseas buyers do on American goods. The crush of arriving, Asian-made products recently spurred the Port of Los Angeles to switch to 24-hour operations.
Nearly two decades ago, the country fretted over a trade imbalance equal to 3.1% of the overall economy, or the gross domestic product. It's more than twice as big now, roughly 6.5%.
Here's how economists, from former Federal Reserve Chairman Paul Volcker to former Clinton Treasury Secretary Robert Rubin to analysts at the International Monetary Fund, explain the danger: Americans, who go into debt to keep living a life beyond their means, are spending more and more of that borrowed money to buy goods from overseas.
At the same time, the government provides more services to the public than it can afford to — and goes into debt to cover the cost.
Other nations actually purchase that debt, in the form of U.S. Treasury bonds and notes. Those bonds have increasingly been snapped up not just by private investors but by foreign banks. Japanese investors hold the most U.S. debt, but China has been buying more than any other country in recent months.
The biggest trade deficit is with China, too, at $162 billion. Japan is next, at $75 billion.
In a very real sense, the U.S. economy is dependent on the central banks of Japan, China and other nations to invest in U.S. Treasuries and keep American interest rates down. The low rates here keep American consumers buying imported goods.
But the lack of fiscal discipline in the United States is undermining the value of the American dollar, thereby lowering the value of the U.S. Treasuries in foreign banks. As the dollar's value drops, other nations' willingness to keep investing cannot last, says Nouriel Roubini, an economics professor at New York University.
If those banks reduced their dollar holdings or were simply less willing to invest so much, it could spark a sharp fall in the value of the dollar. And that could create a host of economic problems.
Economists and business leaders are closely watching China's decision last month to uncouple the value of its currency, the yuan, from the dollar and tie it instead to a basket of different currencies. The move could make the dollar's position less exposed to a quick shift by international investors — or it could spur those investors to look elsewhere and leave the United States' position more precarious.
In the end, Roubini, Walker and others say, disaster is still avoidable, but it's going to require the American people and the country's leaders to clean financial house — to reduce the federal deficit and the trade deficit. Global economics may drive some changes: if Japanese cars cost more, for example, Americans may buy less-expensive GMs.
If not, the future poses some frightening what-ifs:
•What if the dollar plummets? Do stocks follow? How about pensions?
•What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?
•How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.
•How would government, which depends on the taxes of a strong economy to operate, keep all its promises?
Roubini says time is critical because the worse debt becomes, the more vulnerable America is to shocks in the global economic systems — another spike in oil prices, another major terrorist attack, another major military conflict.
OK, now back to you. No one's asking you to write a check to cover that $145,000, not yet. But the pressures are building around the world, in Washington, and in America's homes to straighten out our finances or get ready for a real mess.
"We're living beyond our means," Roubini says, "and we have to get our act together."
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4/23/2006, 3:23 am
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Incog4
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Re: Heavy Debts Threaten America's Economy!
Just pointing out that this study was released by the Associated Press on 8/27/2005, and that the findings have not been updated since.
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6/30/2006, 2:12 am
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Joseph Sarandos
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Re: Heavy Debts Threaten America's Economy!
quote:
Incog4 wrote:
Just pointing out that this study was released by the Associated Press on 8/27/2005, and that the findings have not been updated since.
I don't expect that there'll be any sort of officially-sanctioned updates on the state of America's stressed-out Economy, but here's a well-written alternative that paints an even "scarier" picture:
http://counterpunch.com/whitney09092006.html
America's Economic Meltdown
Days of Reckoning
By MIKE WHITNEY
There’s growing concern among economists and market-savvy pundits that the global financial system is hanging by a few well-worn threads that could snap at any time. The $10.4 trillion real estate “bubble” has attracted the most attention, but the shaky derivatives market, hedge funds, and falling dollar are equally worrisome. 20 years of deregulation has created an economic monster which is increasingly unmanageable and threatens to bring down the whole system in a heap.
As Gabriel Kolko said in a recent CounterPunch article (“Why a Global Economic Deluge Looms”),
“The entire global financial structure is becoming uncontrollable in crucial ways its nominal leaders never expected. Instability is increasingly its hallmark….Contradictions now wrack the world’s financial system, and if we are to believe the institutions and personalities who have been in the forefront of the defense of capitalism, it may very well be on the verge of serious crisis.”
Deregulation has reduced market transparency and created a plethora of financial instruments which are relatively untested and extraordinarily volatile. By eliminating the “rules of the game” the market big shots have raked in hefty profits but reshaped the economic landscape in a way that no one can predict what the ultimate outcome will be. The new investment-regime includes such opaque standards as credit derivatives, credit derivative futures, and collateralized debt obligations. Hedge funds are now loaded with these over-leveraged debt-instruments that promise a generous return in an “up-tempo” market, but certain doom in an economic downturn. Now, that the indicators are all pointing toward a slowdown or recession, the potentially devastating effects of this new “liberalized” system will soon be felt throughout the global economy.
Kolko’s article is a “must-read” for anyone who wants to get a better idea of the fragility of the present system. Americans have dumped trillions of their hard-earned savings into risky hedge funds which have only been in existence for a short period of time. No one knows what the future holds for these “flash-in-the-pan” investments. As Kolko says, “The credit derivative market was almost nonexistent in 2001, grew fairly slowly until 2004 and went into the stratosphere, reaching $17.3 trillion by the end of 2005.”
That’s right; a whopping $17.3 trillion, enough to sink the entire economy if the market takes a nosedive.
This whole idea of re-selling debt is a relatively new phenomenon and fraught with peril. Hedge funds can bundle together a slew of Adjustable Rate Mortgages (ARMs) and make a handsome profit, but when the housing market starts listing, the investor is trapped on a sinking ship with little hope of recouping his losses.
Deregulation is characterized in the business-friendly media as a way of lifting the burdensome restrictions on the free flow of capital. This is nonsense. Deregulation is, in fact, the removal of the laws which traditionally protect the public from the hucksters and scam-artists who create lofty-sounding investments which are nothing more than Ponzi-schemes. (The purchase of “credit derivative futures” definitely falls within this category of dicey investments) Deregulation has gravely undermined the long-term prospects for western capitalism to succeed. By removing the safeguards to investment, the business and banking communities have created what many call “casino capitalism,” an anarchic structure with few protections that is hurling the markets toward a system-wide meltdown.
Similar problems plague the sagging real estate market. In recent years a buyer could pick up a house with no down payment, an “interest-only” loan, a low ARM, and be reasonably certain that the next year it would increase 20 to 30% in value. This allows the buyer to refinance his home, use his “presto-equity” as discretionary income, and begin the cycle all over again next year. With wages stagnating since the 1970s, the increase in home equity has been the preferred method for most Americans to “get ahead”. Housing prices have steadily increased since the 1980s and skyrocketed in the last 5 years. This has created a feeding-frenzy for low interest loans and attracted millions of speculators and (traditionally) unqualified applicants to the real estate gold rush.
It’s been a great deal for the banks, too. Mortgages make up the bulk of the banks loans in America, more than $400 billion last year alone. If it wasn’t for the steady steam of mortgages many banks would have seen negative growth in the last decade. Now that housing prices are flattening out and expected to fall (precipitously) the easy money has dried up and many over-leveraged homeowners are facing the dismal prospect of having to pay off an asset that is quickly losing its value. Economist Michael Hudson calls this phenomenon “negative equity”, that is, when the current value of the house falls beneath the amount that one has to pay on his mortgage. It is a predicament which now faces an estimated 30 million Americans who are drowning in red ink and skittering towards a life of indentured servitude.
The magnitude of the housing bubble is shocking and unprecedented. According to the Federal Reserves own figures, “The total amount of residential housing wealth in the US just about doubled between 1999 and 2006 up from $10.4 trillion to $20.4 trillion.”(Times Online) This tells us that the Fed had a clear idea of the size of the equity balloon their low interest policies were creating, but decided not to take corrective action. It also tells us that there will be no “soft landing”. When the market begins to fall, no one knows when it will hit bottom. $10 trillion is more than a “little froth”, as Greenspan opined; it is an earth-shaking, economy-busting catastrophe that will put millions at risk of foreclosure, bankruptcy and ruin.
Greenspan and the privately-owned fed played a major role in putting us in this mess by rubber-stamping the new system of precarious loans (no down payments, interest-only loans, ARMs) and perpetuating their “cheap money” policies. Greenspan admitted this a few months ago when he said that current housing increases were “unsustainable” and would have corrected long ago if not for the “the dramatic increase in the prevalence of interest-only loans…and more exotic forms of adjustable rate mortgages that enable marginally-qualified, highly leveraged borrowers to purchase homes at inflated prices.”
Greenspan’s circuitous comments are tantamount to an admission of guilt. The fallout from the fed’s policies are bound to be widespread and devastating. The country has been buoyed along on $10 trillion of borrowed money which has created the unfortunate sense of prosperity which is not reflected in the general economy. The increase in housing prices has not come from wages (which have actually decreased under Bush) or from demand (inventory is now at a 10 year high) It has merely been the availability of low interest loans and the promise of getting rich quick. As the market cools, millions of Americans will either face foreclosure or be shackled to a mortgage that is higher than the dwindling value of their home. It is a grim picture of 21st century debt-slavery.
Industry trade groups now believe that the falling housing market will trigger “a softening of capital spending which will cause a slowdown in US manufacturing next year”
“The housing market has turned; it’s going to be down this year and even more sharply next year,” said Dan Meckstroth, chief economist an Arlington, Virginia-based trade group. (Reuters) As the housing bubble deflates, economic growth will slump, and the anticipated recession will steadily deepen.
Alas, the deregulated “matchstick” markets and the housing bubble are just two of the three worms which now infect the American economy. The last of the fiscal demons is the falling dollar. Since, Bush took office the dollar has dropped a whopping 30% against the euro. At the same time Bush has added another $3 trillion to the national debt and increased the trade deficit to an astonishing $800 billion a year; 6.5% of GDP. The US now needs $2.5 billion per day just to cover its trade deficit. No one believes that this will go on forever, in fact, Greenspan sagely noted that it was “unsustainable”. The Bush administration seems to think that if they corner the global oil-trade by integrating Iran and Iraq (60% of world oil will come from the Middle East by 2020) into the US economic system, they can forestall the demise of the greenback as the world’s “reserve currency”. As long as oil continues to be denominated (mainly) in dollars, the dollar will remain the de-facto international currency and western elites will maintain their role as the stewards of the global system. However, as America’s debts continue to mushroom, the US produces fewer manufactured goods, and the oil-producing countries become more hostile to Bush’s belligerent foreign policy, there’s a real chance the dollar will be abandoned as the main unit of foreign exchange. If this happens, then the $3 trillion that is currently held in central banks overseas will flood the US triggering hyper-inflation and economic disaster.
Article continued below
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9/13/2006, 10:44 am
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Joseph Sarandos
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Re: Heavy Debts Threaten America's Economy!
Most people understand now that our involvement in Iraq had a lot to do with oil supplies, but that is only part of the story. The administration is trying to maintain US dollar-hegemony so they can preserve the system whereby fiat money is traded for precious resources. That system is under growing strain and bound together by the tattered webbing of military force. If the mission in Iraq fails, the dollar-system, which has dominated the world since the Second World War, will quickly unravel sending tremors through America’s economic heartland.
Doug Casey, president of Casey Research, comments on the fate of the dollar in uniquely apocalyptic terms in a recent article in “Review and Focus”. He says:
“Foreign owners of the big green mountain of US dollars have become uneasy and are generally looking to sell. There’s no dumping, at least not yet. When it comes, the flight from the dollar will come slowly, and then gain momentum before moving into a blow off. Like a glacier sliding toward a cliff, movement that seems inevitable may take a puzzlingly long time to get underway. But once it does, things speed up at a surprising rate….Given the choice between (A) a dead housing market and a scorched earth depression in the US or (B) a collapsing currency, which at least has the virtue of reducing the real cost of paying off all those Treasury bonds, I’m forced to believe the US government will choose to sacrifice the dollar.”
Casey does not mince words, but his sentiments are becoming more mainstream as the Bush administration continues to increase its “dollar-savaging” deficits and reckless economic policies.
Many of America’s fiscal troubles could have been mitigated by prudent management or judicious leadership, but that won’t change things now. The system is not in the control of the elected representatives and the deeply rooted problems are likely to persist until a calamitous event precipitates a fundamental change. The imbalances are now so humongous that everyone agrees that something has to give. The system is on its last legs as manifested by its increasing tendency to express itself in terms of repression at home and militarism abroad; the ominous signs of an injured beast in its death throes.
From the cratering hedge funds, to the faltering dollar, to the fizzling housing bubble, western-style capitalism is in the advanced stages of collapse. Deregulation and liberalization have only hastened its decline.
The mighty locomotive of global growth is slowly grinding to a standstill, bogged down by the accumulated weight of it own inconsistencies and inequities. Change is coming, for good or bad.
Mike Whitney lives in Washington state.
End of article
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9/13/2006, 10:46 am
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Joseph Sarandos
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Re: Heavy Debts Threaten America's Economy!
Now to the official reports of our faltering Economy.
-------------------------------------------------------------
Current account gap up, capital inflows fall
Mon Sep 18, 2006 11:58 AM ET
By Doug Palmer
WASHINGTON (Reuters) - Surging oil costs helped widen the U.S. current account deficit more than expected in the second quarter and capital flows into the United States in July ebbed, government reports showed on Monday.
The $218.4 billion quarterly current account shortfall was larger than Wall Street forecasts for a deficit of $214 billion, a Commerce Department report showed. The government raised its estimate of the first-quarter current account deficit to $213.2 billion from a previously reported $208.7 billion.
Both reports measure what world financial leaders call 'trade imbalances,' which include the large U.S. trade deficit and capital flows from countries with large trade surpluses to the United States. These officials have warned that a sudden shift in capital flows could endanger the world economy.
The current account, the broadest measure of U.S. trade with the rest of the world, includes both trade in goods and investment flows. The deficit totaled 6.6 percent of gross domestic output, the same as in the first quarter.
A separate Treasury Department report showed net flows of capital to the United States fell to a much smaller-than-expected $32.9 billion in July, less than half of the U.S. trade deficit in that month.
U.S. government bond prices extended losses after the data showed a sharp decline of net inflows into Treasuries. The benchmark 10-year Treasury note's price traded down 9/32 in price for a yield of 4.83 percent.
The dollar briefly fell to session lows against the euro but then retraced most of the losses as dealers quickly turned their focus more on upcoming inflation data on Tuesday and a meeting of the Federal Reserve on Wednesday.
Stocks were little changed as a downgrade of Home Depot Inc. offset optimism that Fed policy-makers will continue to hold interest rates steady.
Analysts were expecting net capital inflows into the United States of $70 billion.
CHANGING CONDITIONS
Market conditions have changed significantly since the data for both reports were collected. Oil prices were rising the second quarter and hit a record $78.40 a barrel in July, but have since fallen to about $63 a barrel in New York trading. The Dow Jones industrial average was below 10,700 in mid-July, and has since risen above 11,500.
Alan Ruskin, chief international strategist at RBS Greenwich Capital, said the most interesting feature of the current account report might have been the record $4.1 billion deficit on investment income flows in the second quarter.
"This is going to highlight ... that the U.S. is a net debtor and as such is paying out more income than it is receiving. That has been anticipated for a long time and it is finally coming home to roost," Ruskin said.
The Commerce Department revised its first-quarter estimate of the investment income balance to a deficit of $2.5 billion, from a previously reported surplus of $1.9 billion.
The goods deficit increased to $210.6 billion in the second quarter from $208.0 billion in the first.
Foreign demand for industrial supplies and materials and capital goods pushed U.S. exports to $252.8 billion in the second quarter, from $244.5 billion in the first.
That was overshadowed by the effect of higher oil prices, which boosted imports to $463.4 billion in the second quarter, from $452.5 billion in the first, the Commerce Department said.
The huge current account gap has put downward pressure on the dollar in recent years. The greenback depreciated 3 percent on a trade-weighted average basis against a Group of Seven major currencies in the second quarter, the report said.
In July, private net buying of U.S. assets fell to $31.8 billion, the lowest since May 2005, in what analysts took to be a danger sign for appetite for U.S. assets.
"This is a very disturbing number and clearly we were unable to finance our deficit for the month of July," said Michael Woolfolk, a senior currency strategist at the Bank of New York.
(Additional reporting by Mark Felsenthal)
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9/18/2006, 10:58 am
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