Debt of Gratitude

The population of the United States represents about 5% of everybody on earth but our GDP is about 1/4 of the world.  Are we 5% so much more wealthy than the other 95% or is something else afoot?  Currently the savings rate hovers between 0% and 1% even though consumer spending composes 70% of the U.S. economy.  How can U.S. consumers continue to spend so much money with such a low savings rate?  The answer is a four letter word: “debt.”

Consumers borrow from banks via credit cards, automotive loans, and home mortgages.  Governments, of course, do not use Visa or American Express but instead they sell bonds which are then offered on the open market and most commonly purchased by foreign powers… currently China holds about 22% of U.S. debt, Japan 19%, and the United Kingdom about 12%.

Every year the U.S. offers more bonds for sale because this is the only method we have to continue to spend money that we do not have.  Up until now, these countries have bought U.S. bonds which has allowed the U.S. to continue to spend with almost reckless abandon because countries like China and Japan have themselves become reliant on U.S. debt-driven consumer spending to buy their exports.  But how much debt is too much?

Working its way through Congress is a dramatically large spending bill that, as of this moment, is topping out at around $850 billion (with a “b”).  By the time the interest payments and future spending obligations are factored in economists estimate the total will be closer to $1.2 trillion (with a “t”)!  This is all being financed by the incursion of greater debt by the U.S.  In fact, the Treasury plans to sell $67 billion in debt in mid-February with more sales expected throughout the year.

Once the “stimulus” package becomes law the U.S. government will need to offer even more Treasury sales in order to finance even more debt.  How long will countries like China and Japan continue to buy these bonds and what would happen if they decide to not buy them?

The bigger threat to the U.S., aside from countries like China scaling back their purchase of U.S. debt is what can be called the “Nuclear Option” which comes down to that country liquidating its bond holdings.  Such a move would damage the Chinese economy (which is dependent on the U.S. consumer buying China’s exports) but it would cripple the American economy.  Such a threat was made as recently as August of 2007 by China.  While it is doubtful China would actually proceed with such a fireside sale, the point is more that they could if they wanted to… and this undermines America’s destiny.

Taknig the U.S. into even more debt to allow the U.S. consumer to continue with their unhealthy lifestyle so that we can continue to be a “consumer driven” economy is madness.  It is like somebody paying their Visa card off with their Mastercard and then paying their Mastercard off with their American Express card.  It cannot continue indefinitely and the $800 billion spending package the Democrats say we need (which of course is loaded with non-stimulating provisions like lawn care for the National Mall) is going to be financed by other countries.  The only real solution is to tell the American public they cannot continue to buy flat screen TVs or other items on credit and that the U.S. government needs to reign in spending, not going further into debt.

Spending your way out of a credit problem by taking on more debt is a bad longterm solution for this country.  President Obama (and many Democrats) criticized former President George W. Bush after 9/11 because he did not call for personal sacrifice as the costs of the war in Iraq and Afganistan mounted (currently this spending is still less than what the Democrats are proposing in Congress) but at least the ultimate goals of the wars in Iraq and Afganistan was to stabilize the region and bring democracy to those people while Obama’s plan will only lead to foreign powers having more leverage over this country and increasing our country’s debt.

Why is President Obama not calling for “sacrifice” now and why aren’t the same people who attacked Bush for not calling for sacrifice then not singing the same tune now..?