America's debt addiction

You load sixteen tons, and what do you get?
Another day older and deeper in debt.
Saint Peter, don’t you call me, ’cause I can’t go;
I owe my soul to the company store.

From a well-known song of the 1950s
(Wikipedia, Google);
hear the song
in its definitive rendition by Tennessee Ernie Ford
here.
To hear TEF sing all the lyrics, click here.

A generally useful book
dealing with geopolitical consequences of excessive debt is
The Rise and Fall of the Great Powers by Paul Kennedy.

2004

2004-12-06-Roberts

Collapsing Case For Free Trade
By Paul Craig Roberts
The American Conservative, 2004-12-06

2008

2008-12-26-NYT-China

Chinese Savings Helped Inflate American Bubble
By MARK LANDLER
New York Times, 2008-12-26

“Usually it’s the rich country lending to the poor.
This time, it’s the poor country lending to the rich.”

[An excerpt; emphasis is added.]

By the yardsticks that appeared to matter most — prosperity and growth —
the relationship between China and the United States
seemed to be paying off for both countries.

Neither had a strong incentive to break an addiction:
China to strong export growth and financial stability;
the United States to cheap imports and low-cost foreign loans.

2008-12-28-NYT-Goodman

Printing Money – and Its Price
By PETER S. GOODMAN
New York Times Week in Review, 2008-12-28

[An excerpt; emphasis is added.]

Some argue that the moment for sobriety is long overdue,
and postponing it further only increases the ultimate costs.
“Our government doesn’t have enough spare cash
to bail out a lemonade stand,”
declared Peter Schiff, president of Euro Pacific Capital,
a Connecticut-based trading house.

“Our standard of living must decline
to reflect
years of reckless consumption and
the disintegration of our industrial base.
Only by swallowing this tough medicine now
will our sick economy ever recover.”

2009

2009-01-01-Ignatius

It's Time To Pay The Bills
By David Ignatius
Washington Post, 2009-01-01

[An excellent column.]

2009-01-30-NYT-Davos

Global Worries Over U.S. Stimulus Spending
By NELSON D. SCHWARTZ
New York Times, 2009-01-30

[Emphasis is added.]

DAVOS, Switzerland —

[1]
Even as Congress looks for ways to expand
President Obama’s $819 billion stimulus package,
the rest of the world is wondering how Washington will pay for it all.

[2]
Few people attending the World Economic Forum
question the need to kick-start America’s economy, the world’s largest,
with a package that could reach $1 trillion over two years.
But the long-term fallout from increased borrowing by the federal government,
and its potential to drive up inflation and interest rates around the world,
seems to be getting more attention here than in Washington.

[3]
“The U.S. needs to show some proof
they have a plan to get out of the fiscal problem,”
said Ernesto Zedillo, the former Mexican president
who helped steer his country through a financial crisis in 1994.
“We, as developing countries,
need to know we won’t be crowded out of the capital markets,
which is already happening.”

[4]
Mr. Zedillo said that Washington, unlike most other countries,
had the option of simply printing more money,
because the dollar was a reserve currency for the rest of the world.

[5]
Over the long run, that could force long-term interest rates higher
and drive down the value of the dollar,
undermining the benefits that come with its special status.

[6]
Until now, most fears about surging government debt have focused on
borrowing by European countries like Spain, Greece and especially Britain,
which is also in the midst of a sizable bank bailout.
That recently forced the British pound to a 23-year low against the dollar.

[7]
While the dollar’s status as refuge in a time of turmoil
should prevent that kind of sell-off for now,
a number of financial specialists warned that
if fundamental factors like
the lack of American savings and bloated budget deficits
did not change,
the dollar could eventually fall sharply.

[One would hope that it is not just the “financial specialists”
who are worring about those issues.
Unfortunately, much of the American public
puts short-term self-interest ahead of those long-term, general issues.]

[8]
“There aren’t that many safe havens,”
said Alan S. Blinder, a Princeton economist
who is a former vice chairman of the Federal Reserve in Washington,
explaining why the dollar’s status as a reserve currency
is unlikely to be threatened.

[9]
Instead,
it is the dollar’s long-term value against other currencies
that is vulnerable.
“At some point, there may be so much Treasury debt,
that investors may start wondering if they are overloaded in dollar assets,”
Mr. Blinder said.

[10]
While the focus in Washington has been on
putting together a stimulus package that will attract broader political support
when it comes up for a vote in the Senate,
here in Davos the talk has been about
the coming avalanche of Treasury debt needed to pay for the plan
on top of the bailout measures approved last fall,
like the $700 billion Troubled Asset Relief Program or TARP.

[11]
The stimulus was approved Wednesday by the House without Republican support,
and could grow larger — mostly likely with additional tax cuts —
to attract a bipartisan coalition.

[12]
American officials maintain they are aware of the challenge.
A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that
once the stimulus plan achieved its intended affect,
the United States would
“restore fiscal responsibility and return to a sustainable economic path.”

[She most likely is sincere, but even so one may question her predictive ability.
She presumes two things:
that the stimulus package will achieve its intended effect, and
that then the political system will show the self-discipline
that it has so sorely hitherto lacked.
A cynic would suggest filing that along with “the check is in the mail.”
By the way,
when was the last time the U.S. was on a “sustainable economic path”?
You can vote for what you think killed that;
I would vote for

1. the fiscally toxic combination of
   the Medicare/Medicaid welfare programs established in the 1960s with
   the unbounded ability of the medical profession
   to keep finding new ways to spend unbounded sums on health care,
   and


2. globalization.

]

[13]
Ms. Jarrett, a confidante of both President Obama and his wife, Michelle,
is the highest-ranking administration official at Davos.

[14]
To be sure, Congress and the White House
will ultimately need to refill the government’s coffers,
but how they might do that
is barely on the radar screen in Washington at this point.

[15]
“Even before Obama walked through the White House door,
there were plans for $1 trillion of new debt,”
said Niall Ferguson,
a Harvard historian who has studied borrowing and its impact on national power.
He now estimates that some $2.2 trillion in new government debt
will be issued this year,
assuming the stimulus plan is approved.

[16]
“You either crowd out other borrowers or you print money,”
Mr. Ferguson added.
“There is no way you can have $2.2 trillion in borrowing
without influencing interest rates or inflation in the long-term.”

[17]
Mr. Ferguson was particularly struck by the new borrowing because
the roots of the current crisis lay in an excess of American debt
at all levels,
from individual homeowners with subprime mortgages
to Wall Street banks who let their balance sheets balloon.

[18]
“This is a crisis of excessive debt,
which reached 355 percent of American gross domestic product,”
he said.
“It cannot be solved with more debt.”

[19]
While Mr. Ferguson is a skeptic of
the Keynesian thinking behind President Obama’s plan —
rather than borrowing and spending to stimulate the economy,
he favors corporate tax cuts —
even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley
have called on the White House to quickly address
how it will pay for the spending in the long-term.

[20]
“It’s huge,” the chairman of Morgan Stanley Asia, Mr. Roach, said.
“President Obama has now laid out a scenario of
multiyear, trillion-dollar deficits.”

[21]
To make matters worse, he said,
the United States “is a savings-short, deficit economy.
When we decide to borrow,
we’re asking lenders from around the world to step up and give us the money.”

[22]
The stimulus is widely expected to pass, but once it does, Mr. Roach said
the focus would shift to
“who foots the bill and what is the exit strategy.
We don’t have the answer to either question.”

[23]
Mr. Zedillo, who remembers how Mexico was forced to tighten its belt
when it received billions from Washington
to keep its economy from collapsing in 1994,
was even more blunt.

[24]
“People are not stupid,” Mr. Zedillo said.
“They see the huge deficit, the huge spending, and wonder what comes next.”

2009-11-23-NYT-Wave-of-Debt-Payments-Facing-US-Government

Wave of Debt Payments Facing U.S. Government
By EDMUND L. ANDREWS
New York Times, 2009-11-23