When George Bush responded to the US downturn by sending everyone a check with some money my first thought was that it might not be the right approach to solve the current issues in the US economy. My reasoning is that I think that the main problem the US face at the movement is that the federal government is heavily underfunded and that the world markets are starting to doubt the strength of the US economy due to the extreme level of debt the US has acquired. So splashing out money to stimulate consumers might alleviate things a little in the short term, it made the underlying problem of US state finances being horrendous bigger. While this problem was not completely ignored by analysts at the time, it was mostly mentioned as a byline. In fact I think that if I hadn’t been searching for mentions of it I might have missed those mentions all together.
Got reminded of my worries today when I came accross an article in a Norwegian paper discussing the Fannie Mae and Freedie Mac bailouts. The US federal government having to bail out Fannie Mae and Freddie Mac comes at the price of taking on even more debt at the federal level. And while I don’t doubt the need for the takeovers, I can’t help but wonder if by putting out one fire they have laid the foundation for a bigger one. The US defaulting on its debt would have rather overwhelming negative consequences for the world economy. And if that article is correct I am not alone in my worries, it seems a lot of the Asian countries which has up to know invested their trade surpluses into US bonds are getting cold feet and have started pulling out.
Don’t worry about the US governement, relative to the GDP, the US debt/deficit are not that big. It is still less than half what it was in the late 1940s.
The late 40s were an exceptional time, because of the huge debt run up to finance World War 2.
For the last 25 years, we’ve cycled between Republicans, who run up huge debt by cutting taxes but increasing total spending, and Democrats, who aren’t particularly progressive by European standards but who are much more fiscally responsible (Clinton left office with a budget surplus).
So it depends on who wins; if McCain takes power, and does what he says he’s going to do, sell your US assets, as the place is going to go bust, with deficits like you’ve never seen before (plus the humiliation of starting several new wars when the military is already overburdened with the existing wars). Obama’s options are limited, but at least he is not fiscally insane like McCain is.
Although the US Treasury took on a huge about of debt, it also took on a nearly-as-huge amount of assets. Of course, the problem that caused this is that huge minus nearly-as-huge is still a very large number, large enough that only the US government or a sovereign wealth fund could have taken the hit. But unlikely large enough to cause permanent damage.
Oh, and a government whose debt is defined in terms of its own currency can get out of the hole by deliberately creating inflation. That tends to help with trade deficits as well, but anyone with a fixed income is screwed. This is already happening to some extent, but the Chinese are messing it up by locking their currency to the dollar, something that can only be sustained for so long.
If you keep inflating your currency, other countries will loose trust in your currency. Meaning that they’ll try to replace their US Dollars with a more stable currency.
In current days that means that even more economic power moves to Europe, followed by prices in the US skyrocketing faster than US people’s salaries adapting to the new prices, etc.
That last one means that the difference between poor and rich will become even larger (there’s already a very big difference between rich and poor in the US).
More poor and poorer poor people will mean increased criminality, increased mixture of religion with politics and overall a less stable political system (more likely to have civil wars or small & big uprisings).
I think that if the US keeps inflating its currency, like it has been doing for the last few years, that the actual citizens of the US (the people to whom it matters) will have a far less secure future than if all security of all the US airports would be completely dismantled and their army 98% removed: they’d start killing each other instead of all those external (imaginary) treats that the US media has been making US citizens afraid of.
Not sure if that’s a good or a bad thing for me. I prefer the regime that has most nuclear weapons and the largest military spending of this planet to be stable. At least until we get rid all those weapons on this planet.
So at some point … you can stop the inflation. No need to keep enriching us Europeans. But thanks anyway.
The dot com bubble covers the last four years of the Clinton presidency and skews the statistics pretty badly. Same with ending the cold war during the Reagan years (wasn’t cheap).
Anyway, here’s putting some things into perspective. The dept to nominal gdp chart.
http://en.wikipedia.org/wiki/Image:Debt_to_Nominal_GDP_Chart.png
Also, US national debt as a percent of gdp is at the lower end of the scale when comparing to the other G8 countries, with only the UK being lower.
http://www.imf.org/external/pubs/ft/weo/2007/02/weodata/weorept.aspx?pr.x=6&pr.y=20&sy=2004&ey=2008&scsm=1&ssd=1&sort=country&ds=.&br=1&c=156%2C158%2C132%2C112%2C134%2C111%2C136&s=GGD_NGDP&grp=0&a=
National debt is an important part of the economy and isn’t some scourge that has to be eliminated to prevent the entire country from failing. It just has to be kept in balance. When bonds are sold, its as if investments are being made in the country. Anyway, the president isn’t in control of the budget.
Yeah, the debt is denominated in dollars, and so yeah, you do have the option of inflating it away. The fact that you can do these things, well, that’s a nice option to have. But to to go from “I CAN do this” to “I AM doing this”, well, now, that’s another story. You can get away with it once, at most, and nobody knows exactly how long your first try can last. When the rest of the world finally says “enough!” – and they certainly will at some point – you’ll see three things: (1) the end of the current global financial system, (2) the end of US budget deficits (one way or another), and (3) *probably* the end of the post WWII American foreign policy.
Each of these consequences will have up sides and down sides for the entire world, but nobody knows in advance who will end up in good shape and who will end up screwed, nor what fraction of people will end up in either group. Beware anyone who is certain about the outcome one way or another – they’re delusional – and especially beware anyone who expects the USA will get what it deserves. After 200 years on the rise, there’s a whole industry built around the idea that we’re finally on the way back down to earth. Most of it is wish-fulfillment.
Anyway and incidentally, I don’t think we’ll inflate away much of that debt, and I certainly don’t believe we’ll default on any of it. People make a lot of noise about the absolute size of the national debt, but as others pointed out here, by percent of GDP, many nations – ours and a lot of other major powers included – have dealt with worse. We’ll handle it when we have to.
Europe’s fundamentals are no more sound than the US’s, Philip. The UK’s housing market is shite, the “industrialized” nations all have massive public debt, trade deficits, unfunded liabilities (eg. France’s health care system), high unemployment, and negative population growth. The only way the EU has managed to stay solvent is by subsuming low-wage Eastern European countries into its amalgamation, and immigration. It’s why some EU leaders are lusting so publicly after Turkey…
I didn’t mention Europe’s fundamentals, Dominic.
You sort of implied it with “So at some point … you can stop the inflation. No need to keep enriching us Europeans. But thanks anyway.”
Also note that (huge) state debt is a normal economic status. Without it, world banking wouldn’t work at all. The entire political system would even collapse.
It’s all about creating money. First by printing and that way directly inflating currency (creating money out of thin air), then by raising interest on to-the-government lend money (thus inflating the currency even more).
Imagine the price of a house being two stones. What happens to the price of your house if I suddenly “create” a mountain of stones and I give the entire mountain away for free to your best friends? You think your house will still be worth two stones? No, it’ll soon be worth thousands of stones. Yet the people who are not your best friends will for the next year keep making 1/50th of a stone per month.
How will that affect your economy (of stones)? How will if affect the welfare of the people? “Creating money” is not the same as “creating wealth”: It’s just “moving wealth around”. Usually to “your best friends” (because you get to choose who can take stones from the mountain, who gets the most stones, who gets the stones first, and who can’t).
Now replaces “stones” with “money”, “friends” with “Halliburton’s CEO & co”, you with “The FED” and “mountain” with “world banks”.
In the end inflation gets paid by the citizens who didn’t see their salary getting adapted as quickly as prices went higher. Aka the hidden or inflation tax.
Starting a good war always helps to get a political green light to start creating more money this way. The military suppliers have to get paid, right? And at the same time you scare the shit those poor little citizens’s souls. Making them believe that without you, oh no without you, they’d be lost! More weapons! More soldiers! More action! More hard-line politics!
As those military suppliers’s CEOs get paid, they quickly convert the cash into really rare things (money is not rare), like (but not only) oil. Making them more powerful (at this point money gets converted into power: if you own something that is rare but that everybody needs, people will obey you. Period). It’s a well hidden way, termed “free markets in a capitalistic system ruled by democracy”, to forever stay in power (obviously you need to let the people elect a puppet and call him *cough* president *cough* every four years. Else they (the people) might get suspicious – you need to give ’em candy! Make them think they’re in charge! Make it a mass media event! Let the entire world know about it! -).
The entire point is to keep people silent, and “happy enough”. The point is to make people stop caring about it. Give them Paris Hiltons and Britney Spears all over their television screens. Keep them busy thinking about unimportant things. Make sure they don’t start thinking about the really important stuff. DO make sure they don’t start thinking for themselves. Very bad if that happens.
Meanwhile the market responds to the newly created money: inflation starts. Prices go up, salaries stay the same for at least a year (for the vast majority of people). In the end, and that way, the normal citizens are paying for this (war).
At this point the rich and elite Americans start buying houses, gold, paintings, whatever they can get that will survive the inflation.
As soon as the market is more healthy, they’ll convert those assets back into money. With the profits they buy luxury like mansions and Ferraries. The US citizen goes back to sleep, back to work in the morning.
He has paid for all this. But he doesn’t know. Paris Hilton is on television! She showed a tit! Whoaa! Lawsuit!
Ian&Dominic: before I “imply” things (you have an enormous imagination, Ian. Good for you, but you don’t seem to know what I do and what I don’t imply): it’s indeed the same way of doing economics in Europe. Just replace FED with ECB.
Argh … s/your best friends/my best friends (and several other places, where I obviously got the context ‘you’ vs. ‘me’ wrong)
“I didn’t mention Europe’s fundamentals, Dominic.”
No, you didn’t. You suggested that people will move from the overvalued, inflated US dollar to a somehow “more stable” Euro without mentioning Europe’s lack of fundamentals, Philip.
What’s more reckless is that you insinuated the the US was on a path that might lead to civil war. Of course, one can just as easily refer to the growing societal and political instability in Europe (cf. last summer’s Muslim riots in France), which is a direct consequence of the EU’s over-reliance on immigration and new member states to sustain its economy.
Pot, kettle, black.
You know, in conversation, misimplications happen. Whether the speaker or the listener is at fault is in the eye of the beholder. When somebody points out you might have made one, you can take it as a helpful suggestion, or you can call them crazy. I guess we know how you felt about it.
That’s … quite a lack of understanding the situation that happened in Paris and Villiers-le-Bel.
What happened in Paris (I’ll start with that one) had far more to do with very bad city planning, than with over-reliance on immigration. In fact are most European countries trying hard to stop immigration from non-European countries (unless you are going to have a stable job in Europe, and this requires an invitation and a guarantee by the future employer, you wont get a European passport).
For example: we are trying to to invite a Ukrainian (which is even part of Europe, right?) to the Maemo summit in Berlin. Can you believe that it’s not even certain that his visum will be accepted? Not even after an invitation by Nokia. That illustrates how over-reliant European countries are to immigration.
With bad city planning I mean that Paris let it happen that poorer immigrants (like it or not, I don’t like it either, but usually immigrants are poorer than native French people) all started living near each other, creating their own culture. Eventually they formed little “cities” inside of the bigger city “Paris”. A.k.a ghetto formation.
The people living in these area, where they live is quite easy to figure out by an employer, increasingly get rejected for most (all) jobs. Just because they live there. And the schools in that area, as poverty increases, get worse and worse in quality. Adding to the problem (and the reason why employers reject them).
In the end you end up with a non-integrated society inside a city that doesn’t get accepted anywhere and that has no opportunities and no future whatsoever.
Put that on fire by getting a boy killed by the police … and that’s what happened in Paris.
That’s not the same as over-reliance on immigration.
http://en.wikipedia.org/wiki/2005_civil_unrest_in_France
It was probably the same kind of reasons in Villiers-le-Bel. Or those riots were simply inspired by the 2005 riots in Paris. To correlate that to over-reliance on immigration is quite a … misunderstanding of what happened. In my opinion.
In fact, if anything, are the new member states *exactly not* improving the economy of Western Europe. Although in a few years they might, indeed. Right now, absolutely not.
Obviously, I don’t mean that Ukrania is part of the European “Union”. Before somebody misunderstood that.
You’re missing the point…
The united states government doesn’t have any money. It publishes Treasury Bonds, which are “bought” on the market. Some of those are paid for in foreign currency (that helps), but most are bought by the privately managed “Federal Reserve” Banks .
When one of those 12 banks buys a treasury bond, say for 100 USD, it creates that value in some computer, somewhere and puts it on the market. The actual cost of doing this is much less than the stated 100 USD.
As time goes, interests accrue on the 100 USD, for instance the 30 year bond features 4.5% interest, which means that when it get repaid, the lender will get 104.5 real USD in its coffers.
you do the math… 104.5 – 0.5 (say, the cost of creating those 100 USD) = 104 USD profit.
now, when I say “repay”, don’t expect the government itself (say GWB) to repay that personally.
those things get repaid through the work of the Internal Revenue Service (a bureau of the US Treasury) that forces people living in the US to pay taxes.
so..
you elect a government, who elects for some reason to go to war, and puts out a ton of bonds for a value of 3.5 (at the current time) trillion USD to pay for it.
this means, roughly, a profit of… 3.657 trillion USD for the shareholders of the Federal reserve banks, at the expense of the people of the US.
The US will always be solvent, as long as there isn’t a revolution there to tell those bankers to shove it and go to hell (and I don’t really see that happening)…
PS: the ECB (European Central Bank) works the exact same way…
Just remember that after the U.S. Gov’t announced the bailout of Fannie Mae and Freddie Mac, Asian markets rose on exhuberance because a lot of foreign money is in real estate or in packaged investments that include or rely on a real estate component.
The American federal debt isn’t even at 1/2 of 1 year’s GDP. It will take some time to dig ourselves out of it, but many of us with a new home and a new car have a much greater debt-to-income ratio than the U.S. government.
@greg
Not really, as your entire money supply is based on debt, contracted with the shareholders of the Federal Reserve.
see, theres a huge difference between a “Federal Reserve Note” and a “United States Note”. The first one is based on debt, the other one is based on reserves stored in the Treasury’s coffers.
see
http://en.wikipedia.org/wiki/Federal_reserve
http://en.wikipedia.org/wiki/United_States_dollar
sxpert, how does anything you’ve said contradict anything Greg said?
There’s no evidence that the US government is insolvent. We’ve been creating and paying off debt for the entire history of the country. That there’s a lot to pay off in the coming decades, and that a lot of it was created for reasons that you don’t like, is a bummer. So what.
> More poor and poorer poor people will mean increased criminality, increased mixture of religion with politics and overall a less stable political system (more likely to have civil wars or small & big uprisings).
This is actually a good point. While it is easy to believe that something like this isn’t possible, we’ve seen it happen to the Western world in the last 100 years: my grandparents lived through it when economic issues ripped Europe apart in the form of World War I and II and the Great Depression damaged the economy so badly.
What I don’t get is why so many Europeans seem so gleeful about the issues facing America. First, many of these issues are shared. Second, of the Western powers, it is those on the European continent that know best how bad things can get.
@ian
that’s wrong in fact.
there has been a period in the history of the US when the country really experienced proper growth not based on debt.
see
http://www.themoneymasters.com/quotations.htm
for more information
Um, I didn’t say all growth was based on debt. I said we’ve always created debt and paid it off. The methods have changed but the facts haven’t. The US was the largest debtor nation on earth for most of its history.
Actually, wait.
This is going to turn into one of those gold standard arguments, isn’t it?
There isn’t enough time in the world to talk about the gold standard on the internet. Save it for some other sucker.
mschaef: “What I don’t get is why so many Europeans seem so gleeful about the issues facing America”
I used the words “wish fulfillment” earlier for this exact reason. I did not mean to accuse anyone here of doing it, so please nobody take it that way. Everybody but that gold standard guy here seems very reasonable to me.
But certainly it’s a very common issue in the press. A whole industry exists around the idea that America is finally going to fall apart for reason X, where X just happens to correspond to whatever peeve of the author’s that America violates. Sometimes their peeves are nonsense, sometimes they aren’t. But if there’s a pattern at all it’s that they all – every single one of them – were wrong in the long run.
Incidentally I find it extremely irritating to see this behavior mimicked by Americans (who ought to know better) when talking about China. It’s more and more common to see Americans irrationally predicting the end of China, frequently by the same arguments that our cousins across the Atlantic make about us. It’s wish-fulfillment at its worst and utter nonsense. America works to the extent it focuses on what works. China is doing the same now. Neither is going away as long as that focus exists.
“Incidentally I find it extremely irritating to see this behavior mimicked by Americans (who ought to know better) when talking about China. ”
I wholeheartedly agree. In fact, it reminds me of the Japan-bashing of the 1980’s.
Yeah, exactly!
Actually, I’m embarrassed that I didn’t think of this before, but a much better example (for this weblog anyway) would have been all the Europe-bashing that a lot of Americans did in the last decade or so. With the US booming on and off since the 90s, all while France and Germany stagnated, many a triumphant op-ed was written about the failings of their systems. Don’t hear much of that these days, do we?
@Ian: Still, it’s a matter of trust. If the non-US portion of the planet trusts the United States, and invests their energy in it, then the United States and its economy will prosper.
If the non-US portion of the planet no longer trusts the United States, and, therefore, no longer invests their energy in it, then the United States and its economy will destroy itself inside out.
The question a lot of Europeans have on their mind is: for how much longer?
It’s quite unique that two rather large super-powers are increasingly becoming more and more important: China and Russia. It’s getting quite hard to ignore this, too.
Also Europe is increasingly depending on those nations for its own wealth and supplies. Also this is rather new (although not entirely unique).
And now after so many years the World Wars are over, two/three generations have emerged, most of our youth doesn’t know about the details of WOII anymore. Both youth in the US and in Europe. And the speed at which people are forgetting the events is just *amazing* too. Both in the US and in Europe. After a failure in Vietnam, after a failure in Iraq two. After a failure in Afghanistan. After a failure on that so-called “war on terror” (whatever that was about, and especially Europeans are not buying it). After economic collapses. Mostly in the US and also in Europe. And note about the economic ‘troubles’ that most of the European media and experts put the blame on the US’s economy (so with prices for food and oil increasing a lot, here in Europe, that adds to anti-US feelings among Europeans too).
How much longer can this go on? Really?
Only thing the guys in charge at the US seem to think is that having more nukes and a larger war-machine is going to safe us all.
Europeans don’t buy that, at all. They *know* that if this situation worsens to the point of a WOIII, which is increasingly likely, that Europe will *again* be the battlefield.
Why would Europeans buy it? You’ll really have to give the most awesome reason imaginable. The false reason of “because … freedom this, freedom that” is no longer accepted. For example. People here are quite aware that big wars go together with massive raping, mass murdering, destruction and other unpleasant “side effects” of “collateral damage”.
It’s either finding a way to make this planet of humans work, or continuing towards some sort of military solution (which wont be a real solution for Europeans).
Phillip:
Your comment contains a lot of ideas – I’d like to respond to all of them but it’s probably too much for an exchange in the comments of a weblog.
Anyway I think you are absolutely right that it’s about trust. It’s not like the organizations bailed out this weekend were insolvent – they were paying their bills. But they got bailed out anyway because nobody believed they’d continue to be able to, and the lack of faith in their future finances was making their current finances worse. The bailout averted a potentially vicious cycle.
However I think to extend that problem to the entire government of the USA is probably premature. The government’s asset to debt ratio, while not good, is nowhere near as bad yet. It *does* have to get cleaned up eventually, but “eventually” is not “now”. And even if it were “now”, it’s actually quite abile to do so, again because the scale of the problem is historically smaller than many nations, including our own, have dealt with.
One thing that bothers me about all this pessimism is that we’ve tended to become myopic. But look, not 8 years ago we were in historic surplus and much better loved in most of the rest of the world. That’s not that far back, and doom-saying aside, not that much has changed here. In terms of international reputation, I think it’s largely the same, and you’ve already made my point for me. Viet-Nam happened, Afghanistan happened, Iraq happened, a lot of other shitty things in between happened. So, you know, how’d it work out for us and Europe? We got over it and got better. We’re all still here. The reason we all got better – the entire West – is that our way of life works better than everyone else’. We fuck up because we’re humans, but our systems deal with it, so we get over the Viet-Nams and Iraqs. Budgets get re-balanced when they have to. Wars can end when they have to. Everybody goes back to work and eventually the bad times are lost in history. This stuff from the last 8 years is not going to tank the country even if it *should*. There’s no morality in causality.
I agree with Phillip.
It’s all about “trust”, if the world economy suddenly stops “trusting” the US dollar. it gets deprecated.
But “trust” is not exactly the right word, perhaps you don’t have any other option. Perhaps the US is strategically controlling a commodity that the rest of the world needs, like oil.
The US forces oil produces to denominate in USD, and so it forces most of the rest of the world to use their currency. If you try to sell in another denomination, well, look at Irak, Iran and Venezuela. (http://en.wikipedia.org/wiki/Petrodollar_warfare).
This is probably what allows the US to have as much debt as they wish.
While that may contribute to the dollar’s ridiculous stability (other currencies would have tanked long ago), a simpler explanation is simply that the USD is the world’s reserve currency. Japan, China, Russia, and the Gulf States all use the USD as a backup in case their own currencies go wild; as long as they maintain huge dollar portfolios they have a vested interest in preserving the dollar’s value. At some point it has to stop, and watch out when it does. But until then the US gets to punch way above its weight.
Ian: yes, but that’s circular. Those countries wouldn’t use USD as a backup if it wasn’t a sable, and it wouldn’t be stable if it wasn’t used as a backup.
The truth is that there is something else that is anchoring the stability. It’s arguable what that is, but I don’t swallow the official fancy explanations. Under normal circumstances (a free market, if such thing exists), the value of the USD would be much lower, but something is forcing it to have an inflated value.
If that something is gone, those countries would switch the backup currency as fast as possible before they loose any more “money”. It’s only a matter of time.
Felipe: “yes, but that’s circular. Those countries wouldn’t use USD as a backup if it wasn’t a sable, and it wouldn’t be stable if it wasn’t used as a backup.”
Completely agree that it’s circular now! There’s a wide consensus that large economies keeping the USD as their almost exclusive reserve and pegging to the USD can’t go on doing so.
But the circumstances under which they made the decision to peg the USD and keep it as their primary reserve were very different from today. It wasn’t *always* circular.
There’s now at least 1 and possibly 2 other currencies that are externally stable enough to serve that purpose, and this is the first time that’s been the case since the decline of the British Empire. The reasons people use the USD as a primary reserve have declined. The shocking resilience of the USD is not a sign of the health of the currency. It’s a sign of the rest of the world kicking and screaming to avoid an upset in the global financial system. It won’t go on forever. Just as long as change can profitably be avoided.