Is America going broke?

[Napoleon Chynamite]

I wonder whether this is blown out of proportion, and whether or not similar situations can apply to other countries as well. It was an interesting read for me either way.

______________________

Is America going broke?
Macleans.ca

Record deficits, colossal debt and no clear plan for digging itself out. If the U.S. sinks, it will take Canada down with it.

STEVE MAICH

David Walker can see the future, and it scares the hell out of him.

That wouldn't be terribly unusual if he were one of the thousands of lobbyists, legislators and activists crawling all over Washington on any given day, pontificating about the urgency of their pet issues. There is a thriving industry here built on pushing policy prescriptions for every ailment, real or imagined. But Walker isn't a lobbyist or an activist, he's an accountant. His title is comptroller general of the United States, which makes him the head auditor for the most important and powerful government in the world. And he's desperately trying to get a message out to anyone who'll listen: the United States of America's public finances are a shambles. They're getting rapidly worse. And if something major isn't done soon to solve the country's intractable budget problems, the world will face an economic shakeup unlike anything ever seen before.

Seated in his wood-panelled office in downtown Washington, Walker measures his words, trying to walk the fine line between raising an alarm and fostering panic. He cringes when he hears prominent economists warning about a financial "Armageddon," but he makes no bones about the fact the situation is dire. "I don't like using words that are overly inflammatory," he says, leaning forward in his chair. "At the same time, I think it is critically important that the American people, as well as their elected representatives, get a better understanding of just how serious our situation is."

THE NUMBERS are staggering -- a US$43-trillion hole in America's public finances that's getting worse every day. And the stakes are almost inconceivable for a generation of politicians and voters raised in relative prosperity, who've never known severe economic hardship. But that plush North American lifestyle to which we've all grown accustomed has been bought on credit, and the bill is rapidly nearing its due date. If the United States can't find a way to pay up, the results will spill beyond national borders, spreading economic misery far and wide. In Canada, the country whose financial well-being is most tightly tied to trade with the U.S., there wouldn't be a single region or industry left untouched by a fiscal shock south of the border.

It's the looming presence of this potential crisis that brings Walker to this office every day, through the doorway with the words "Honesty Accountability Reliability" inscribed above, in hopes that someone will listen and take up the challenge before it's too late. "The sooner we start fixing this, the better," he says, "because right now the miracle of compounding is working against us. Debt on debt is not good. We have to first stop digging, and then figure out how we're going to fill the hole."

HOW DID THE U.S. GET INTO THIS MESS?
In January 2001, George W. Bush took over leadership of a nation that was on its most solid financial footing in decades, thanks to years of strong economic growth and a booming stock market. That very month, the Congressional Budget Office projected that the federal government could expect US$5.6 trillion in surpluses over the coming 10 years. The key political issue of the day was how to spend the windfall. Bush's team was determined to return the money to the voters in the form of massive and widespread tax relief. What the world didn't know was that this surplus cash was largely illusory, the result of faulty bookkeeping.

The CBO's rosy outlook was based on a few deeply flawed assumptions, in particular that most government spending would not exceed the pace of inflation over the following decade, even though the rest of the economy and tax revenues were projected to grow much faster. Laurence Kotlikoff, a professor of economics at Boston University and a prominent critic of U.S. budgetary planning, released a paper that year drawing attention to what he called the CBO's "fiscal fantasy." But his was a single, lonely voice, and few on Capitol Hill were listening. The tax-cut agenda had taken hold, and there would be no stopping it.

The CBO and other agencies have since gone back and found that a more realistic surplus projection would have been US$2.2 trillion -- over 60 per cent less than initially thought. And that cushion quickly disappeared as Bush whittled or eliminated one tax provision after another, from the marriage tax and personal income tax rates to capital gains, gifts and dividends. The Center for Budget and Policy Priorities, a Washington think tank, estimates that between 2001 and 2004, federal tax revenue dropped by some US$600 billion. Most of the tax cuts introduced so far are temporary, but the Republicans have made it clear they intend to make the reductions permanent before the end of the current term.

In the midst of this tax-relief bonanza, and nine months into the new President's first mandate, came Sept. 11. The horror of the terrorist attacks profoundly changed the American public's attitude toward security and defence almost overnight. Within months, the U.S. military was on the ground in Afghanistan attacking terrorist camps and overthrowing the Taliban regime. From there, the troops moved on to Iraq. Between 2001 and 2004, the annual budget for the Pentagon and domestic security rose by US$87.1 billion, an increase of 27.5 per cent in four years. In the process, a budget that had a surplus of US$128 billion in 2001 crumbled into a deficit of US$412 billion last year -- the biggest annual shortfall in United States history.

But that's just one symptom of a much deeper fiscal problem. The U.S. is heading for a massive demographic shift as baby boomers start retiring in three years. As they do, the costs of providing social programs and health care are going to soar. "It's not the deficits of today that are the big problem," says Josh Bivens, an economist with the non-partisan Economic Policy Institute in D.C. "It's that, if you make the Bush tax cuts permanent, you're going to have deficits as far as the eye can see."

HOW BIG IS THE PROBLEM?
A trillion is a hard number to wrap your head around. Most people know it's a thousand billion -- 12 zeroes -- but even that is difficult to fathom in terms of value. So think of it like this: a trillion U.S. dollars is roughly the size of the entire Canadian economy. The world's six biggest oil companies had combined 2004 revenues just shy of US$1 trillion. And if you piled a trillion dollars in $1,000 bills, the stack would be more than 109 km high.

As of February, the U.S. national debt stood at US$7.7 trillion. And this year, the country is projecting another record deficit of US$427 billion, increasing its debt by about US$1.2 billion a day. Thanks to low interest rates, the cost of borrowing all that money remains relatively low, amounting to about 8.6 per cent of the federal budget for 2005. But when rates rise, so will the cost of carrying that debt, and current White House forecasts suggest that by 2010, those yearly costs will hit US$314 billion.

[Beat180]

I think most of us saw this coming with our idiot monkey president...

[Grasshopper]

http://www.foreignaffairs.org/20050301facomment84201/david-h-levey-stuart-s-brown/the-overstretch-myth.html

The Overstretch Myth

By David H. Levey and Stuart S. Brown
From Foreign Affairs, March/April 2005

Summary: The United States' current account deficit and foreign debt are not dire threats to its global position, as would-be Cassandras warn. U.S. power is firmly grounded on economic superiority and financial stability that will not end soon.

David H. Levey recently retired after 19 years as Managing Director of Moody's Sovereign Ratings Service. Stuart S. Brown is Professor of Economics and International Relations in the Moynihan Institute of Global Affairs at Syracuse University's Maxwell School of Citizenship and Public Affairs.


Would-be Cassandras have been predicting the imminent downfall of the American imperium ever since its inception. First came Sputnik and "the missile gap," followed by Vietnam, Soviet nuclear parity, and the Japanese economic challenge -- a cascade of decline encapsulated by Yale historian Paul Kennedy's 1987 "overstretch" thesis.

The resurgence of U.S. economic and political power in the 1990s momentarily put such fears to rest. But recently, a new threat to the sustainability of U.S. hegemony has emerged: excessive dependence on foreign capital and growing foreign debt. As former Treasury Secretary Lawrence Summers has said, "there is something odd about the world's greatest power being the world's greatest debtor."

The U.S. economy, according to doubters, rests on an unsustainable accumulation of foreign debt. Fueled by government profligacy and low private savings rates, the current account deficit -- the difference between what U.S. residents spend abroad and what they earn abroad in a year -- now stands at almost six percent of GDP; total net foreign liabilities are approaching a quarter of GDP. Sudden unwillingness by investors abroad to continue adding to their already large dollar assets, in this scenario, would set off a panic, causing the dollar to tank, interest rates to skyrocket, and the U.S. economy to descend into crisis, dragging the rest of the world down with it.

Despite the persistence and pervasiveness of this doomsday prophecy, U.S. hegemony is in reality solidly grounded: it rests on an economy that is continually extending its lead in the innovation and application of new technology, ensuring its continued appeal for foreign central banks and private investors. The dollar's role as the global monetary standard is not threatened, and the risk to U.S. financial stability posed by large foreign liabilities has been exaggerated. To be sure, the economy will at some point have to adjust to a decline in the dollar and a rise in interest rates. But these trends will at worst slow the growth of U.S. consumers' standard of living, not undermine the United States' role as global pacesetter. If anything, the world's appetite for U.S. assets bolsters U.S. predominance rather than undermines it.



PRIME NUMBERS

Discussion of the United States' "net foreign debt" conjures up images of countries such as Argentina, Brazil, and Turkey, evoking the currency collapses and economic crises they have suffered as models for a coming U.S. meltdown. There are key differences, however, between those emerging-market cases and the current condition of the global hegemon. The United States' external liabilities are denominated in its own currency, which remains the global monetary standard, and its economy remains on the frontier of global technological innovation, attracting foreign capital as well as immigrant labor with its rapid growth and the high returns it generates for investors.

The statistic at the center of the foreign debt debate is the net international investment position (NIIP), the value of foreign assets owned by U.S. residents minus the value of U.S. assets owned by nonresidents. Until 1989, the United States was a creditor to the rest of the world; the NIIP peaked at almost 13 percent of GDP in 1980. But chronic current account deficits ever since have given the United States the largest net liabilities in world history. Since foreign claims on the United States ($10.5 trillion) exceed U.S. claims abroad ($7.9 trillion), the NIIP is now negative: -$2.6 trillion at the start of 2004, or -24 percent of GDP.

Unpacking the NIIP gives a better sense of the risk it actually poses. It has two components: direct investment, the value of domestic operations directly controlled by a foreign company; and financial liabilities, the value of stocks, bonds, and bank deposits held overseas. At the start of 2004, foreign direct investment in the United States was $2.4 trillion, while U.S. direct investment abroad was about $2.7 trillion. (Direct investment is relatively stable, changing mostly in response to changes in expected long-term profitability.) Removing direct investment from the equation leaves $5.1 trillion in U.S.-held foreign financial assets versus $8.1 trillion in U.S. financial assets held by foreign investors.

This last figure represents a whopping 74 percent of U.S. GDP -- a statistic that would seem to give ample cause for alarm. But considering foreign ownership of U.S. financial assets as a percentage of GDP is less enlightening than comparing it to the total available stock of U.S. financial assets. At the start of 2004, total U.S. securities amounted to $33.4 trillion (some 50 percent of the world total). Foreign investors held more than 38 percent of the $4 trillion in U.S. Treasury bonds, but only 11 percent of the $6.1 trillion in agency bonds (such as those issued by Fannie Mae and Freddie Mac); 23 percent of the $6.5 trillion in corporate bonds; and 11 percent of the $15.5 trillion in equities outstanding. These foreign liabilities are the result of a string of current account deficits that have grown from 1.5 percent of GDP in the mid-1990s to an estimated 5.7 percent of GDP -- about $650 billion -- in 2004. Economists at the Organization for Economic Cooperation and Development estimate that ongoing deficits of 3 percent of GDP would bring the U.S. NIIP to -40 percent of GDP by 2010, and that it would eventually stabilize at around -63 percent. If the deficit remains at today's level, they foresee the NIIP growing to -50 percent of GDP by 2010 and eventually to -100 percent.

These estimates, however, fail to consider that future dollar depreciation and market adjustments in interest rates and asset prices will likely check the increase of the NIIP. Dollar depreciation against the euro and the yen in 2002 and 2003 kept the NIIP flat despite large current account deficits. The same result is likely for 2004 (final numbers will not be available until the end of June). Thus, although the NIIP will surely continue to grow for many years to come, its increase will be far less dramatic than many economists fear.


FALSE ALARM

The real question is just how much the United States' deteriorating NIIP threatens to undermine the economic foundations of U.S. hegemony. The precise answer depends on whether you explain current account deficits in terms of trade, domestic savings and investment, or the composition of global wealth. In each case, though, the risks are far less dire than they are made out to be. And in many ways, chronic current account deficits reflect strong economic fundamentals rather than fatal structural flaws.

A trade-oriented approach to current account deficits views them as a byproduct of robust economic growth, reinforced by a still overvalued currency and the U.S. economy's powerful structural import bias. In this view, the U.S. has a stubborn current account deficit because it grows faster than its trading partners and spends a disproportionate share of its growing income on imported goods and services.

An alternative perspective takes as its point of departure the accounting identity that equates the current account deficit with the difference between total investment in the United States and U.S. domestic saving. Low domestic saving, according to this view, is to blame for deficits. The fear is that a sudden reluctance by foreigners to continue exporting their excess savings to the United States would choke off the investment needed to sustain economic growth, sending the U.S. economy into crisis.

This explanation becomes less alarming, however, when you consider that both savings and investment are seriously undervalued in U.S. economic accounts. Capital gains on equities, 401(k) plans, and home values are excluded from measurements of personal saving; when they are added, total U.S. domestic saving is around 20 percent of GDP -- about the same rate as in other developed economies. The national account also excludes "intangible" investment: spending on knowledge-creating activities such as on-the-job training, new-product development and testing, design and blueprint experimentation, and managerial time spent on workplace organization. Economists at the National Bureau of Economic Research estimate that intangible investment grew rapidly during the 1990s and is now at least as large as physical investment in plant and equipment: more than $1 trillion per year, or 10 percent of GDP. Consequently, the size and growth rate of the U.S. economy have been seriously underestimated. In fact, when tangible and intangible investment are both counted, the apparent (and much decried) increase in consumer spending as a share of GDP turns out to be a statistical artifact.

A third approach to the current account deficit focuses on the growth and composition of global wealth. In this framework, international capital movements drive the current account balance, rather than vice versa. With the United States expected to grow faster than Europe and Japan over the next several decades and wealth growing rapidly in Asia -- especially in China and India -- it makes sense that foreign investors will continue to flock to U.S. financial markets. This could generate a sequence of U.S. deficits as high as 5 percent of GDP, causing the NIIP to balloon. But such an increase would not mean an end to the foreign appetite for U.S. assets; NIIP ratios that appear dangerously high relative to U.S. GDP would be sustainable because of the rapid growth of global wealth.

U.S. financial markets have stayed strong even as the financing of the U.S. deficit shifts from private investors to foreign central banks (from 2000 to 2003, the official institutional share of investment inflows rose from 4 percent to 30 percent). A large percentage of the $1.3 trillion in Asian governments' foreign exchange reserves is in U.S. assets; central banks now claim about 12 percent of total foreign-owned assets in the United States, including more than $1 trillion in Treasury and agency securities. Official inflows from Asia will likely continue for the foreseeable future, keeping U.S. interest rates from rising too fast and choking off investment.

In a series of recent papers, economists Michael Dooley, David Folkerts-Landau, and Peter Garber maintain that Asian governments -- pursuing a "mercantilist" development strategy of undervalued exchange rates to support export-led growth -- must continue to finance U.S. imports of their manufactured goods, since the United States is their largest market and a major source of inward direct investment. Only a fundamental transformation in Asia's growth strategy could undermine this mutually advantageous interdependence -- an unlikely prospect at least until China absorbs the 300 million peasants expected to move into its industrial and service sectors over the next generation. Even the widely anticipated loosening of China's exchange-rate peg would not alter the imperatives of this overriding structural transformation. Ronald McKinnon of Stanford argues that Asian governments will continue to prevent their currencies from appreciating too much in order to maintain competitiveness, avoid imposing capital losses on domestic holders of dollar assets, and reduce the risk of an economic slowdown that could lead to a deflationary spiral. According to both theories, there should be no breakdown of the current dollar-based regime.

Official Asian capital inflows, moreover, should soon be supplemented by a renewal of private inflows responding to the next stage of the information technology (IT) revolution. Technological revolutions unfold in stages over many decades. The IT revolution had its roots in World War II and has proceeded via the development of the mainframe computer, the integrated circuit, the microprocessor, and the personal computer to culminate in the union of computers and telecommunications that has brought the Internet. The United States -- thanks to its openness, its low regulatory burden, its flexible labor and capital markets, a positive environment for new business formation, and a financial market that supports new technology -- has dominated every phase of this technological wave. The spread of the IT revolution to additional sectors and new industries thus makes a revival of U.S.-bound private capital flows likely.


A SOFTER LANDING

Whichever perspective on the current account one favors, the United States cannot escape a growing external debt. The "hegemony skeptics" fear such debt will lead to a collapse of the U.S. dollar triggered by a precipitous unloading of U.S. assets. Such a selloff could result -- as in emerging-market crises -- if investors suddenly conclude that U.S. foreign debt has become unsustainably large. A panicky "capital flight" would ensue, as investors raced for the exits to avoid the falling dollar and plunging stock and bond prices.

But even if such a sharp break occurs -- which is less likely than a gradual adjustment of exchange rates and interest rates -- market-based adjustments will mitigate the consequences. Responding to a relative price decline in U.S. assets and likely Federal Reserve action to raise interest rates, U.S. investors (arguably accompanied by bargain-hunting foreign investors) would repatriate some of their $4 trillion in foreign holdings in order to buy (now undervalued) assets, tempering the price decline for domestic stocks and bonds. A significant repatriation of funds would thus slow the pace of the dollar decline and the rise in rates. The ensuing recession, combined with the cheaper dollar, would eventually combine to improve the trade balance. Although the period of global rebalancing would be painful for U.S. consumers and workers, it would be even harder on the European and Japanese economies, with their propensity for deflation and stagnation. Such a transitory adjustment would be unpleasant, but it would not undermine the economic foundations of U.S. hegemony.

The U.S. dollar will remain dominant in global trade, payments, and capital flows, based as it is in a country with safe, well-regulated financial markets. Provided U.S. firms maintain their entrepreneurial edge -- and despite much anxiety, there is little reason to expect otherwise -- global asset managers will continue to want to hold portfolios rich in U.S. corporate stocks and bonds. Although foreign private demand for U.S. assets will fluctuate -- witness the slowdown in purchases that precipitated the decline in the U.S. dollar in 2002 and 2003 -- rapid growth of world financial wealth will allow the proportion of U.S. assets held by foreigners to increase.

For foreign central banks (as well as commercial financial institutions), U.S. Treasury bonds, government-supported agency bonds, and deposits in highly rated banks will remain, for the foreseeable future, the chief sources of liquid reserve assets. Many analysts have pointed to the euro as a threat to the dollar's status as the world's central reserve currency. But the continuing strength of the U.S. economy relative to the European Union's and the structure of European capital markets make such a prospect highly unlikely. On the basis of likely demographic and productivity growth differentials, Adam Posen of the Institute for International Economics estimates that the U.S. economy will be at least 20 percent larger than that of the EU in 2020. The United States will maintain its 22 percent share of world output, but Europe's share will, in the absence of serious structural reforms, shrink by 3 to 5 percent. Moreover, European government bond markets, although larger than the U.S. Treasury market, are divided among five large countries and a host of smaller ones, greatly reducing liquidity, and European corporate bond and equity markets are smaller than their U.S. counterparts. With Asian capital markets still in their infancy, it will be a very long time before the pre-eminence of the dollar and U.S. capital markets is challenged.

At the peak of its global power the United Kingdom was a net creditor, but as it entered the twentieth century, it started losing its economic dominance to Germany and the United States. In contrast, the United States is a large net debtor. But in its case, no plausible challenger to its economic leadership exists, and its share of the global economy will not decline. Focusing exclusively on the NIIP obscures the United States' institutional, technological, and demographic advantages. Such advantages are further bolstered by the underlying complementarities between the U.S. economy and the economies of the developing world -- especially those in Asia. The United States continues to reap major gains from what Charles de Gaulle called its "exorbitant privilege," its unique role in providing global liquidity by running chronic external imbalances. The resulting inflow of productivity-enhancing capital has strengthened its underlying economic position. Only one development could upset this optimistic prognosis: an end to the technological dynamism, openness to trade, and flexibility that have powered the U.S. economy. The biggest threat to U.S. hegemony, accordingly, stems not from the sentiments of foreign investors, but from protectionism and isolationism at home.

www.foreignaffairs.org is copyright 2002--2004 by the Council on Foreign Relations. All rights reserved.

[yoMAMA]

The U.S is engaging in the classic practice of "spending beyond its means".

oh while...such is the consequences of short sighted economic policies....and wall street penny pinchers.

[imturok]

I think most of us saw this coming with our idiot monkey president...
I disagree. He could be smarter than most of us. Perhaps he knows a way how to write it off. :rolleyes:

[rotrab]

You guys got it all wrong! Haven't you read the blogs and editorials?? Bush has it right!!! He's spreading change all over the Middle East! They cite the pullout of Syria from Lebanon as their proof! Hundreds of years of Muslim politics simply ended the day Bush showed up bearing democracy. Man, we Americans are gods I tell you!

[mrcfo]

the fact that China and Japan holds the most American reserves and pretty much funded the Iraq invasaion gives you an indication of the state of the American cash flow. isnt the USA also one of the biggest debtors in the UN??

[yoMAMA]

the fact that China and Japan holds the most American reserves and pretty much funded the Iraq invasaion gives you an indication of the state of the American cash flow. isnt the USA also one of the biggest debtors in the UN??

the U.S is the most leveraged country on the planet.

so much for an economic "superpower".

[John0101]

the fact that China and Japan holds the most American reserves and pretty much funded the Iraq invasaion gives you an indication of the state of the American cash flow. isnt the USA also one of the biggest debtors in the UN??

Because the U.S. national saving rate is close to 0 the United States needs to finance its present consumption by borrowing abroad. The Treasury (not the central bank) issue bonds, T-bills, etc... brought by countries with higher saving rates (Japan, Europe, Canada). These countries hold most of Americans foreign debt yet this sort of thing is not uncommon in international finance.

No one really knows how the present twin deficits are going to affect long term future economy. But some facts are known, our future consumption will be lowered (we have to save more in the future, nonimal interest rates WILL RAISE) because we are trading our future consumption for present consumption. We have no real insight on the magnitude of decrease in future consumption.

All the blame can't be placed on the Bush administration, China been keeping the Yuan undervalued against the dollar for years and placed quite a bit of burden on american companies. Japan and Europe could do better lowering their savings rate so they can stop financing America's consumption (they're enjoying the kick to their GNP).

Allan Greenspan, the Chairman of the Federal Reserve (the central bank) recently commented and conveyed worry about the twin deficits.

[yoMAMA]

washingtonpost.com
Foreign Investment's Flip Side
U.S. Trade Deficit Swells Along With Consumption, Debt

By Paul Blustein
Washington Post Staff Writer
Friday, February 25, 2005; Page A01

Every other night or so, the calls start pouring in from Asia to the homes of Peter Leonard and several traders he supervises at Nomura Securities in New York, jolting them awake sometimes as often as five times a night.

The calls come from places such as Tokyo, Shanghai, Hong Kong and Singapore, where investors want to buy U.S. mortgage-backed securities, which are essentially giant packages of mortgages on thousands of American homes. Such sleep disturbances have roughly doubled in the past year, according to Leonard, reflecting the sizzling demand among Asian money managers for a piece of the U.S. mortgage market.

The interrupted slumber of Nomura's New York mortgage traders is one small facet of the rapidly rising flow of foreign money into U.S. financial markets. This torrent of capital from overseas has become indispensable fuel for the U.S. economic engine, helping to keep interest rates low.

But the influx of capital has an ominous flip side -- the ballooning U.S. trade deficit, which soared 24 percent in 2004, to $617.7 billion. The dollars spent by Americans on Japanese cars, Chinese televisions and other imported goods end up in the hands of foreigners, who plow them into U.S. Treasury bonds and other securities like the ones sold by Leonard and his fellow traders.

Therein lies a serious worry for many economists: As the deficit mounts, so does America's overall indebtedness to foreigners, which now totals about $3 trillion. That would be less troubling if the money streaming in from overseas were helping to finance a boom in productive assets such as factories and machinery.

But to the contrary, economic data show historic highs in the proportion of U.S. spending on consumption and housing. Not only is the United States piling up debt, it is doing so while consuming at record levels.

"It's like, 'I'm going to Bermuda with the credit I'm racking up on my credit card,' rather than, 'I'm going to school and putting my school books on my credit card,' " said Catherine L. Mann, a scholar at the Institute for International Economics.

That dark perspective is at odds with the position often taken by Bush administration officials, among others, about the trade deficit (or current account deficit, as its broadest measure is called). The gap, according to the administration, should be viewed in a more positive than negative light, given the eagerness with which foreigners supply funds to the United States.

As Treasury Secretary John W. Snow put it in an op-ed piece in the Financial Times a few months ago: "The deficit reflects foremost the strengths of the U.S. economy -- high productivity, strong U.S. growth relative to growth abroad, and the relative attraction of investing in our robust, dynamic economy, which has the deepest and most resilient capital markets in the world."

America's attraction for foreign capital can be readily discerned in the streets of Washington, where a number of buildings have been sold to foreigners in recent months. A group funded by Middle Eastern investors recently bought 901 F St. NW for $56 million, German money was behind the purchase of 2100 M St. NW for $95 million, and other foreign investors bought a portfolio of properties, including 5225 Wisconsin Ave. NW, for a sum in the $200 million range, according to Bill Collins of Cassidy & Pinkard, a real estate services firm involved in some of the transactions. A survey of global real estate investors last year showed that the United States continues to rank as the No. 1 country for "stable and secure" property investments, with Washington as foreign investors' top city.

But the administration's critics see plenty of reason to be uneasy about the trade deficit, which is approaching 6 percent of gross domestic product as measured by the current account, the highest percentage of any major industrial country in modern times.

"There's always the question when you look at a current account deficit -- is it a sign of strength, because capital is pouring into your country, or is it a sign of concern?" Lawrence H. Summers, Snow's predecessor during the Clinton administration, told a panel at the World Economic Forum in Davos, Switzerland, last month. "If you look behind the 6 percent of GDP deficit, there's a lot to make you worry," because foreign money "is financing consumption, not investment" in plants and equipment.

Furthermore, he added, much of the investment by businesses in the United States is going into real estate, which does not generate the production of goods for export that are needed to help shrink the trade gap. At some point, he warned, sentiment among foreign investors could turn against America's deteriorating fundamentals, triggering a sharp sell-off in U.S. stocks and bonds that would threaten to throw the economy's expansion into reverse.

"Will those risks ever come home to roost? One can't predict with great confidence," said Summers, who is now president of Harvard University. "Will they come home very soon? Probably not. If you keep taking them, will they eventually catch up with us? I worry that they will."

An analysis by economists at Goldman, Sachs provides data to bolster Summers's point: Consumption and spending on residential buildings are a much larger share of the U.S. economy "than has historically been the case," the firm noted in a report to clients last month. Taken together, spending on consumer goods and housing has totaled nearly 76 percent of GDP in the past couple of years, compared with an average of about 69 percent of GDP over the past half-century. Given that the trade deficit is also at an all-time high, "these imbalances place the economy on a path that is ultimately unsustainable," the report said.

Among the factors helping to spur spending on housing is the same factor causing sleep deprivation among the Nomura traders -- the surge in demand from Asia for U.S. mortgage-backed securities, which has been led by China's central bank. As Asians buy these packages of mortgages from U.S. financial institutions, they effectively add to the pool of capital available for Americans to finance their homes.

"If you think about it, there are a lot of homeowners who are having money lent to them by Beijing," said Steven Abrahams, a senior managing director at Bear, Stearns & Co. who specializes in the mortgage market. "These are big, complex markets, but the involvement of the non-U.S. investor in the mortgage market has certainly helped keep mortgage rates lower than they would be without their presence. It means that American homeowners end up paying a little less to own a home."

That is no cause for worry, maintained Arthur B. Laffer, one of the gurus of the supply-side economics movement. "You would clearly rather have capital lined up on our borders trying to get into our country than trying to get out," Laffer wrote in an article on the Wall Street Journal's editorial page last month. "Growth countries, like growth companies, borrow money, and the U.S. is the only growth country of all the developed countries. As a result, we're a capital magnet. . . . That's why we have such a large trade deficit."

But other economists argue that it all depends on how the influx of capital is used. The large trade gap the United States ran in the late 1990s posed relatively little concern because the money being borrowed from abroad was helping to fund a major surge in investment by business, said Nouriel Roubini, an economist at New York University.

In 1999 and 2000, spending on buildings, structures and equipment -- the portion not spent on residential housing -- was about 13.5 percent of GDP. By contrast, in 2002 through 2004, that figure fell to about 10.25 percent of GDP.

Also crucial, Roubini and others contend, is the type of capital the country is attracting.

Direct investment by foreigners in U.S. companies and operations -- the building of auto plants in the South, for example, or the takeover of Chrysler Corp. by Daimler-Benz AG -- has dropped precipitously. In 1999 and 2000, foreign direct investment averaged about $300 billion annually; in 2003, it shriveled to about one-tenth that amount, and in 2004, it rebounded only to $91 billion in the first three quarters.

Replacing much of the private foreign capital during the past few years has been the purchase of hundreds of billions of dollars in U.S. Treasury bonds by foreign central banks, especially Japan's and China's. Their buying of Treasurys has been motivated in large part by financial operations aimed at keeping their currencies from rising, thereby ensuring that their nations' exports remain competitive.

"Far from saying the external deficit is a sign of strength, given that it is going primarily to finance consumption, it is primarily a sign of weakness," said George Magnus, chief economist with UBS Investment Research in London. "And given that roughly half of the financing has come from foreign central banks, it's a classic sign of weakness."

Administration officials counter that the data for the past few months suggest that all these worrisome factors are starting to create a trend in a healthier direction.

"Investment growth has been quite strong in the U.S. over the past year," said Kristin J. Forbes, a member of the Council of Economic Advisers, noting that although business spending on plants and equipment still isn't where it was in the late 1990s, the previous period was inflated somewhat by the technology bubble. As for capital inflows, she added, the most recent figures show that "over two-thirds of the inflows have come through private purchases, not official sources like central banks."

Economists like Magnus remain unimpressed. "A lot of people think this is courting some sort of financial crisis at some point," he said. "When that will happen, of course, is hard to say."

© 2005 The Washington Post Company

meanwhile, while the country is going broke, wall street big shots are awarding themselves record amounts of $$$$$. (http://yahoo.reuters.com/financeQuoteCompanyNewsArticle.jhtml?duid=mtfh8500 4_2005-03-07_22-56-41_n07504427_newsml)

[Yeahman]

the fact that China and Japan holds the most American reserves and pretty much funded the Iraq invasaion gives you an indication of the state of the American cash flow.
Actually it tells us more about the intentions of China and Japan in maintaining a weaker currency.

[John0101]

Actually it tells us more about the intentions of China and Japan in maintaining a weaker currency.

the yen floats

[yoMAMA]

the yen floats

but the bank of japan does massive amounts of buying of dollars on the open market....... :biggrin:

[John0101]

but the bank of japan does massive amounts of buying of dollars on the open market....... :biggrin:

o, dirty float

but yea, with a savings rate of 30% they're holding lots of u.s. assets

[VV o n g B a]

if u think about it, students lately have been getting bigger and bigger loans for longer stays at college. is this too not financed by foreign countries? if so, then we ARE building capital and lots of it. knowledge capital. this is precisely the type of capital needed to compete nowadays, not manufacturing plants and equipment.

the problem is that fewer foreign students are coming and they comprise a big share of science and engineering graduate degrees.

[imturok]

"There's always the question when you look at a current account deficit -- is it a sign of strength, because capital is pouring into your country, or is it a sign of concern?" Lawrence H. Summers, Snow's predecessor during the Clinton administration, told a panel at the World Economic Forum in Davos, Switzerland, last month. "If you look behind the 6 percent of GDP deficit, there's a lot to make you worry," because foreign money "is financing consumption, not investment" in plants and equipment.

Do not worry, when the investors decide the US cannot pay back what she consumes, they will ask the US citizens to work for it. The decficit means Bush is creating future jobs for the generations to come.

[Shuriken]

GREENSPAN'S WARNING ON DEFECIT IGNORES HIS ROLE IN ITS GROWTH


by Ronald Brownstein


Is he kidding?

That's the only possible reaction to Federal Reserve Board Chairman Alan Greenspan's conclusion last week that the massive federal budget deficit accumulated under President Bush was "unsustainable." Declared Greenspan: "The principle that I think is involved here … [is] that you cannot continuously introduce legislation which tends to expand the budget deficit."

That would be an entirely reasonable — even urgent — warning from someone who didn't bear so much responsibility for the problem he's describing. Greenspan lamenting higher deficits is like New York Yankees owner George Steinbrenner complaining about inflated baseball salaries.

Let's recap. When Bush was elected, the nation had enjoyed three consecutive years of federal budget surpluses under President Clinton. The Congressional Budget Office projected that the government was on track to amass surpluses large enough to pay off the publicly held national debt by 2008. That would make the nation debt free for the first time since the presidency of Andrew Jackson.

Greenspan had reliably supported this fiscal discipline under Clinton. But after Bush's election, Greenspan bent to the prevailing wind. Within days of Bush's inauguration, he gave his seigniorial blessing to tax cuts in testimony before the Senate Budget Committee.

As Bruce Bartlett, a leading conservative economist, wrote at the time: "With Greenspan's support … the last substantive barrier to tax reduction has evaporated." And Congress, with Greenspan's critical reassurance, passed the largest of Bush's massive tax cuts that year.

Greenspan built his argument for tax cuts in 2001 largely on his concern that the projected surpluses would be too large, allowing the government not only to extinguish the debt but also to accumulate financial assets, such as stocks and bonds.

That always seemed a dubious notion. But if that concern was legitimate, it seemed to be pretty well resolved by the time Bush came back for another tax reduction in 2003. The federal budget had already fallen back deeply into deficit under the weight of Bush's 2001 tax cuts, the economic slowdown and the cost of responding to the Sept. 11 terrorist attacks. Rather than falling, much less falling too fast, the national debt was rising again.

Against that backdrop, surely the great voice of fiscal restraint would counsel caution about burdening future generations with more debt through more tax cuts.

Well, sort of. Greenspan, to his credit, said the second round of tax cuts shouldn't be passed without offsetting spending reductions. But he never seriously pushed Congress to reconsider the initial tax cuts passed on the obsolete assumption of vast surpluses.

Even today, Greenspan endorses even more borrowing for Bush's Social Security private investment accounts (if not quite as much as Bush wants), and points at spending cuts as the principal answer to the debt trap that he helped to create.

Taken together, Greenspan's advice paints him more as an activist committed to shrinking government than a dispassionate banker counseling fiscal prudence.
Tax cuts, of course, aren't the only reason Washington is drowning in debt again. But no one should minimize their impact.

One recent study by the Center on Budget and Policy Priorities, a nonpartisan research group, found that of all the federal policy changes since 2001 that had enlarged the deficit, tax cuts contributed 48%, followed by increases in defense and homeland security at 37%, and domestic spending at 15%.

The best estimate is that over the next 75 years, Bush's tax cuts will cost $11 trillion — about triple the projected Social Security shortfall over the same period that Bush has labeled a crisis.

Greenspan really earned a place in the annals of chutzpah when he raised the impending costs of baby boom retirements as a principal reason why Washington should tackle its deficits. It isn't exactly a news bulletin that large numbers of baby boomers will be retiring at the end of this decade, or that this will swell the costs of Medicare and Social Security.

These trends were well known when Greenspan endorsed tax cuts in 2001. And yet by doing so, he helped sabotage America's best chance to reduce the burden of those costs for future generations.

Let's recap again. Clinton's plan was to use the projected federal surpluses to pay down the national debt. That would have significantly reduced, and eventually eliminated, federal interest payments on that debt (now running just under $180 billion annually). Then he proposed to use those savings to help fund Social Security.

That wouldn't have solved the problem of an aging society entirely: the exploding costs of Medicare would almost certainly have demanded tougher efforts to control medical costs, as well as reduced services and more taxes. But Clinton's fiscal strategy represented a good-faith effort by today's taxpayers to lighten the load on their children.

Instead we increased their burden. After voting ourselves lower taxes and more services (such as the Medicare prescription drug benefit), we have virtually guaranteed that future generations will need to raise their taxes.

As Greenspan noted last week, today's young people face the prospect of exploding interest costs (projected to exceed $300 billion by 2010) to fund our rising debt — even as our retirement and the unrelenting rise in healthcare costs saddle them with soaring bills for Medicare, Medicaid and Social Security.

Sure, the kid doesn't make the bed, but doesn't that seem a little severe?

Greenspan last week described this slow-motion crisis as if he were some concerned bystander. But in the federal government's financial crackup, Greenspan's more like the guy at the party who handed the car keys to a drunk. Now, after the wreckage, he's sad. But we'd all be better off if he had spoken up when it could have done some good.

[Jung Rhee]

I just accidentally came across the following interesting news today, which is also related to the topic of this thread. I am not familiar with the sources, either USnewswire or "the leading private INTELLIGENCE service"~ STRATFOR. What do you think about the below report? I found it inaccurate regarding the current state of China's economy. "Looking ahead, the STRATFOR Decade Forecast for the period 2005-2015 sees China's economic growth continuing to decline" They use the word continuing to decline there shows that they are either biased or plain wrong on their previous 10 years prediction.



http://releases.usnewswire.com/GetRelease.asp?id=43923

"China's Economic Bubble about to Collapse, Experts Warn

3/7/2005 7:01:00 AM


--------------------------------------------------------------------------------

To: National Desk, Business Reporter

Contact: Jason Deal, 512-744-4309, for Stratfor

WASHINGTON, March 7 /U.S. Newswire/ -- China's furious economic growth in recent years has created a bubble economy that is on the verge of collapse, according to Strategic Forecasting Inc. (STRATFOR), a leading private intelligence service.

In its latest Decade Forecast report, STRATFOR says China's economy is already on life support - with an estimated $500 billion in bad debts threatening its banking system, rapidly rising unemployment, rampant government corruption and mismanagement, and foreign investment dwindling.

"Capital flight by Western investors has already begun," the 2005-2015 Decade Forecast notes. Asian investors have been stepping in to fill the gap, "but they will be unable to sustain adequate levels of investment for very long."

The rush of foreign investment in recent years masked the Chinese economy's underlying weaknesses, STRATFOR states, but this will not last. "Already there is dissent forming in the international community and the need for quicker profits is driving companies and investors to look elsewhere."

Looking ahead, the STRATFOR Decade Forecast for the period 2005-2015 sees China's economic growth continuing to decline, leading to an increase in internal tensions, social upheaval and violence, which the central government in Beijing may be unable to control after 2008.

For media inquiries, interview requests, or to receive a media copy of the 2005-2015 Decade Forecast, contact Jason Deal at 512- 744-4309 or via pr@stratfor.com. For all other inquiries, including purchase of the Decade Forecast and other special reports, please visit: http://www.stratfor.com/ad_decade.php.

http://www.usnewswire.com/

-0-

/© 2005 U.S. Newswire 202-347-2770/"

[B]

Greenspan last week described this slow-motion crisis as if he were some concerned bystander. But in the federal government's financial crackup, Greenspan's more like the guy at the party who handed the car keys to a drunk. Now, after the wreckage, he's sad. But we'd all be better off if he had spoken up when it could have done some good.

If I remember correctly, I think Greenspan was against Bush's massive tax cuts to reduce budget deficit. To be fair, Greenspan has warned against the tax cuts and the budget deficits and even the possible deflation and inflation :smile: all along since Bush became the president.

[Grasshopper]

the fact that China and Japan holds the most American reserves and pretty much funded the Iraq invasaion gives you an indication of the state of the American cash flow.

Yes the cash is flowing INTO America.

The high US reliance on foreign debt holders is brilliant and serves a US advantage. Here's why.

By drawing in foreign debt holders the US traps competator's capital in safe but insanely low yield securities. This takes capital AWAY from investments that could be made in foreign industries competative with the US.

Plus this frees up US capital to be invested in much higher yield activities which combined with superior US creativity, flexiblity and risk taking serves to give the US a competative advantage over other nations.

To me PERSONAL debt in America is a bigger problem.

isnt the USA also one of the biggest debtors in the UN??

The US is the biggest "creditor" to the UN. The UN is essentially financed by the US and Japan as far as I know.

The UN is for the most part a parasitical, unproductive and reactionary status quo supporting fraud.

I'm sure John Bolton will be reminding them of that fact. :biggrin:

[Faithless]

jEsus, how close are we to defaulting?

Bush: Raise the debt ceiling, cut social programs, and spend more for the war.

The debt limit bill is the fourth such measure required since Bush took office five years ago. If approved, the latest version would mean that the debt had grown over that span from about $6 trillion to $9 trillion - about $30,000 for every man, woman and child in the United States.

Likely Vote to Up National Debt Looms (http://www.wjla.com/news/stories/0306/310871.html)

From ABC 7 Wednesday March 15, 2006 9:48pm

Washington (AP) - Senate Republicans cast symbolic campaign-season votes Wednesday to increase spending for border and port security - one day before a likely vote to increase the national debt by an additional $781 billion, to $9 trillion. The uncomfortable vote to increase the debt is the fourth since President Bush (website - news - bio) took office, and it comes as Republicans struggle to pass a budget plan for next year. GOP leaders have already dropped Bush's plans for tax cuts and curbs to Medicare, but now his cap on appropriated spending is in danger as well.

After the expected vote Thursday, Democrats and moderate Republicans may succeed in adding $7 billion in spending for education and health care research to a GOP-driven plan for the budget year that begins Oct. 1.

If successful, that would break through Bush's requested cap on the amount of money available for spending bills.

The debt limit increase is an unhappy necessity; the alternative is a first-ever default on U.S. financial obligations. The Senate devoted just two hours to the topic Wednesday evening, with only one Republican participating. Action on the debt limit is overshadowing the weeklong debate on the GOP's budget blueprint.

Also, it comes as Republicans try to convince their supporters that they are getting serious about restraining spending.

Yet, in a series of budget votes this week, Republicans approved symbolic increases for politically sensitive programs such as education, port security and veterans' benefits while distancing themselves from Bush's proposal in an election year.

The debt limit bill is the fourth such measure required since Bush took office five years ago. If approved, the latest version would mean that the debt had grown over that span from about $6 trillion to $9 trillion - about $30,000 for every man, woman and child in the United States.

"We are plunging deeper and deeper into debt and it is increasingly financed by foreigners," said Sen. Kent Conrad of North Dakota, top Democrat on the Senate Budget Committee. "We keep on spending, we keep on cutting taxes, we keep on funning up the debt."

The chairman of the Senate Finance Committee, Sen. Charles Grassley, R-Iowa, said Bush's tax cuts account for just 30 percent of the debt limit increases required during his presidency. Revenue losses from a recession and new spending to combat terrorism and for the war in Iraq are also responsible, he said.

As for the $781 billion increase in the debt limit, Grassley said: "It is necessary to preserve the full faith and credit of the federal government."

On the budget, the blueprint is a nonbinding measure proposing tax and spending guidelines for the next five years. GOP-sponsored spending increases approved Wednesday include $1 billion for port security, $900 million for grants to local law enforcement agencies, $2 billion for immigration enforcement and $1.3 billion for community development block grants.

But it is up to the Senate Appropriations Committee to make the actual spending decisions. Also, the overall amount spent on programs funded by Congress each year through appropriations bills would not increase.

The increases would be financed by a more than 1 percent across-the-board cut applied to every program subject to annual renewal through appropriations bills. In the case of defense, a $3 billion increase pushed through on Tuesday by Sen. Jim Talent, R-Mo., would turn into a cut of about $4 billion.

Many of the spending increases were aimed at undermining similar efforts by Democrats - financed by tax increases - and were typically pushed by GOP senators facing tough re-election races.

For example, Sen. Rick Santorum, R-Pa., who won a 60-38 vote to restore a $1.3 billion cut proposed by Bush to the community development block grants program.

Wednesday's developments came on top of moves Tuesday to add funds for defense, special education and veterans' benefits.

All told, Republicans have endorsed about $11 billion in additional spending for selected accounts.

More substantively, Sen. Arlen Specter, R-Pa., appears poised to win an increase of $7 billion in new money for education and health research. That amount would break Bush's $873 billion budget cap for 2007, which represents the most significant vestige of fiscal discipline remaining in Senate Budget Committee Chairman Judd Gregg's budget.

The underlying Senate budget plan is notable chiefly for dropping Bush's proposed cuts to Medicare and for abandoning his efforts to expand health savings accounts or pass legislation to make permanent his 2001 tax cut bill.

Unlike last year, when Congress passed a bill trimming $39 billion from the deficit through curbs to Medicaid, Medicare and student loan subsidies, Senate GOP leaders have abandoned plans to pass another round of cuts to mandatory programs whose budgets go up each year as if on autopilot.

But Gregg's measure reignites last year's battle over allowing oil drilling in an Alaskan wildlife refuge because it would let Senate leaders bring a drilling measure to the floor under rules blocking a filibuster by opponents.

The GOP blueprint was not assured of passage on Thursday.

Already, four Republicans - Mike DeWine and George Voinovich of Ohio, Norm Coleman of Minnesota and Lincoln Chafee of Rhode Island - have declared their opposition. Two more GOP defections would sink the budget, assuming every Democrat and Vermont Sen. Jim Jeffords, an independent, vote against it.

[uhhden]

time for me to watch "HA HA HA America" again.