America: An empire built on sand?

[Tony]

http://news.bbc.co.uk/1/hi/world/americas/3521691.stm ...full article


In the final episode of his six-part series entitled Age of Empire, the BBC's Jonathan Marcus examines the challenges which lie ahead for the world's greatest power.

Ellis Island in New York Harbour is like a giant railway station without any trains.

Its echoing halls and dormitories were once the first land-fall for thousands of would-be immigrants into the United States.

Its peak years of operation were between 1892 and 1924, and it is estimated that Ellis Island was the gateway for some 12 million people, whose descendants now make up over 40% of the country's population.



But economist Will Hutton told me of what he calls "the dark underside of the United States economy" - the condition of its international accounts.

Put bluntly it owes the rest of the world $3trn dollars, and that is debt which is increasing by $500bn a year.

Mr Hutton makes a persuasive case that America's current strength is built on other peoples' money and he fears that the US economic bubble will eventually burst.

"People simply aren't going to carry on lending America billions and billions of dollars and America's not going to carry on borrowing it," he told me.

In his view America's economic strength is "built on sand".


How likely is this scenario, and what will be the effects if and when the bubble bursts?

[Zero]

Well...nothing lasts forever, you know.
I can't see how an economy based on debt can be stable, but I'm no economist, so I can't "prove" it.

How much money is owed to the U.S., BTW?

[Michael Redman]

I don't understand his numbers, or the argument that flows from them. Who owes this money?

According to the CIA world factbook, the US has a GDP of about $10.5 trillion. The Federal budget is soon going to be somewhere around $2.5 trillion, of which the government is expected to borrow about $0.5 trillion, from what I gather from the news. The external debt was around $0.8 trillion a couple of years ago.

http://www.odci.gov/cia/publications/factbook/geos/us.html

The US economy is not based on borrowing. The government's borrowing is only a small portion of the total economy. The debt is large, but debt isn't going to cause anything to "burst", it just may slow things down while it's getting paid off.

The current government policy of lowering taxes while raising expenditures, hoping economic growth will solve the budgetary shortfall, is not going to work, but that' a different issue.

[aerocontrols]

The BBC is confusing the government's debt to (1) itself, (2) its citizens, and (3) foreign parties.

I believe that half of the (~$6 trillion) debt is owed from the government to itself (essentially, because we overpay into social security and spend that money out, replacing the cash with an IOU) and a quarter of the debt is owed to investors here in the States, and another quarter is owed to foreign investors.

So if the ratio continues to hold, our foreign debt will go up $125 million next year, not 'every year' as the BBC says. Actually, as Will "America shall fall" Hutton says, I should say. He's nothing if not consistent.

[mbp]

The article has nothing to do with the government's debt or budget deficit. It's about the trade deficit which is currently in the region of $500bn a year.

According to this (http://www.washingtonpost.com/wp-dyn/articles/A40854-2004Feb13.html) article in the Washington Post:
The trade deficit worries economists because it is such a large percentage of the overall economy -- about 4.5 percent of gross domestic product -- and the United States collectively has to borrow roughly that amount from foreigners to pay for the surfeit of goods purchased from abroad.

[Tmy]

What worries me is this phoney housing market. In my parts real estate has boomed the last few years. The avg price of a home in Mass. is reaching the $400k mark!!.

So many people are refinancing and dipping into home equity cause their homes are now worth so much. Thing is whos left to buy? Everyones being priced out. Owners are taking their equity and spending like Sultans. At some point things are going to crash.

[Tmy]

Which contries are running a surplus?

[Segnosaur]

Originally posted by Tmy
Which contries are running a surplus?

Canada is running both a trade surplus (http://cbc.ca/stories/2004/02/13/trade_040213) and usually has a budget surplus, or at least breaks even(http://www.canada.com/national/features/budget_2001/story.html?id=22321AD9-D791-476C-9F1A-BFE47D84948B)

Edited to add: even though we run surpluses, our unemployment rate and rate of economic growth lag behind that of the U.S.

[mbp]

Germany typically has a large trade surplus. More than 100 billion euro a year or something like that.

I have no idea if the US' current trade deficit is a serious problem or not.
But an unusual thing about the American foreign debt is that most of it is owed in the US' own currency. So it could theoretically be payed back easily by just printing more money. Although that would have other consequences as well.

[Michael Redman]

I think I'm starting to understand. From mbp's link:The growing reluctance of foreigners to continue pouring money into the United States on such a vast scale is evident in the fall of the U.S. dollar against other currencies, which began in early 2002 and has picked up speed in recent months. If foreigners holding U.S. Treasury bonds and other assets suddenly decided to unload them en masse, the damage to the U.S. economy could be enormous. And even if the dollar's decline is gradual, that will adversely affect U.S. living standards, because it will increase the cost of the imported products. However, the article goes on to state that a weakening dollar increases exports and slows imports.

It's nice that Bush wants to do something about job loss to other countries, though:Then yesterday, the White House Office of Management and Budget announced an initiative to roll back regulations that the administration says have raised the cost of manufacturing in the United States. So, instead of refusing to buy products produced through environmentally destructive and human exploitive means, protecting US manufacturing and giving incentive to other coutries to improve their practices, Bush want us to join China and India, and bring down the standard of living of American workers to the point where we compete with these foreign workers.

Why do people vote for this guy?

[Tmy]

Originally posted by Michael Redman
So, instead of refusing to buy products produced through environmentally destructive and human exploitive means, protecting US manufacturing and giving incentive to other coutries to improve their practices, Bush want us to join China and India, and bring down the standard of living of American workers to the point where we compete with these foreign workers.

Well its working.

Nowadays its the unions that are the bad guys. And whenever soemone goes on strike or complains about low benefits, the public opinion is "you should be thankful you have a job".

Were being programed to be peasants.

[Grammatron]

Originally posted by Tmy


Well its working.

Nowadays its the unions that are the bad guys. And whenever soemone goes on strike or complains about low benefits, the public opinion is "you should be thankful you have a job".

Were being programed to be peasants.

I don't know which public's opinion that is. The opinions I heard about the strikers -- I also share these opinions -- is that they want more while doing less. And if you look at the agreement they reached it's extremely selfish considering the "heroic: we're fighting for you" strike they appeared to have. The current works don't pay anything for three years, the new workers earn less AND have to pay around $40 a month for a basic health care plan.

Is it really such a bad opinion to have that people should earn higher wages and benefits versus getting them simply by having the same job for many years?

[Zep]

Originally posted by Tmy
Were being programed to be peasants. So who's being programmed to be the lords of the manor?

[Tmy]

Originally posted by Grammatron


I don't know which public's opinion that is. The opinions I heard about the strikers -- I also share these opinions -- is that they want more while doing less. And if you look at the agreement they reached it's extremely selfish considering the "heroic: we're fighting for you" strike they appeared to have. The current works don't pay anything for three years, the new workers earn less AND have to pay around $40 a month for a basic health care plan.

Is it really such a bad opinion to have that people should earn higher wages and benefits versus getting them simply by having the same job for many years?

ARe you talking about a specific strike?

Whats the alternative. The company gives benefits to know one and replaces the workers with cheaper new employees as soon as the others get too expensive.

[Tmy]

Originally posted by Zep
So who's being programmed to be the lords of the manor?

Big business of course. They can do as they please, so long at the stock increases its OK! Everyone is fine with busniesses makeing big profits, but if the worker wants to make a decent wage, well hes worse than Hitler.

For example the almost Verizon strike. Those selfish evil employees wanted to keep their health insurance as is. The poor downtrodden Verizon Co. complained it cost too much (even though they made quite a nice profit that year.)

In the end there was no stike. Verizon continues to survive to this day.

[Grammatron]

Originally posted by Tmy


ARe you talking about a specific strike?

Whats the alternative. The company gives benefits to know one and replaces the workers with cheaper new employees as soon as the others get too expensive.

Yes. The employees adopt new skills and move up, change jobs or become too expensive to be bagging groceries.

[Tmy]

Originally posted by Grammatron


Yes. The employees adopt new skills and move up, change jobs or become too expensive to be bagging groceries.

Or they get fired and end up on unemployment or welfare since they cant find comprable work live off. So what if they put years into a company.

[Grammatron]

Originally posted by Tmy


Or they get fired and end up on unemployment or welfare since they cant find comprable work live off. So what if they put years into a company.

And the company paid them fairly for those years.

[Hutch]

FWIW, at http://www.house.gov/tanner/foreignholdings.htm, foreign countries hold about $1.46 trillion in US Government Securities, which is, according to the site, about 34% of the total debt the USG owes to the public.

So there is a considerable amount owed to oversea interests by the US Government. Does it qualify as a house of sand? I simply don't know enough economics to know.

[phildonnia]

Originally posted by Michael Redman
..., Bush want us to join China and India, and bring down the standard of living of American workers to the point where we compete with these foreign workers.

Why do people vote for this guy?

I hate Bush too, but this argument about "bringing down the standard of living" was always specious, and still is. Ross Perot made it a cornerstone of his campaign, and his dire predictions have all failed to materialize.

Here's the fallacy: That the "standard of living" is best measured by how much money you make. It would be better to think of how much you can get.

Today you can buy a television with a day's pay. You can talk to a customer service representative for free. Your standard of living is higher, as a direct result of an economy that includes foreign workers.

Lets look at the job situation: Twenty years ago, you could get a good job as a data-entry person. Has this position been shipped overseas? Sure, because it's an inadequate use of a highly educated and highly paid American employee. Now you'd probably be designing databases.

Someday your job, and my job will all be sent overseas. And while this frightens me, I do believe that American technology machine will ultimately provide something even more challenging and rewarding for those willing to reinvent themselves.

In the end, no free-trading nation will do well unless the biggest consumer nation on the planet buys into it. Thus, free trade ensures that everyone's success is tied to the standard of living of American workers.

[Tmy]

Originally posted by Grammatron


And the company paid them fairly for those years.

Great, let the company live off of minimum wage workers. Soon enough no one is left who can afford their product. Then company goes down because of their own greed.

Hank Ford paid a good wage so his workers could affordhis cars. Worked for him.

Not everyone in the country has a Harvard MBA. The world needs ditch diggers, but ditch diggers need a living wage.

[shanek]

Originally posted by Tony
How likely is this scenario, and what will be the effects if and when the bubble bursts?

Pretty likely, as it is with any country that runs a fiat currency and controls the flow of money, allowing it to finance itself with debt and inflation.

[Grammatron]

Originally posted by Tmy


Great, let the company live off of minimum wage workers. Soon enough no one is left who can afford their product. Then company goes down because of their own greed.

Hank Ford paid a good wage so his workers could affordhis cars. Worked for him.

Not everyone in the country has a Harvard MBA. The world needs ditch diggers, but ditch diggers need a living wage.

I'm sorry, when did minimum wage enter this conversation?

[TillEulenspiegel]

Na , Your thinking of Florida.

[Tony]

Originally posted by shanek


Pretty likely, as it is with any country that runs a fiat currency and controls the flow of money, allowing it to finance itself with debt and inflation.

What would be a solution? And are there any viable alternatives to the fiat currency?

[Tmy]

Originally posted by Grammatron


I'm sorry, when did minimum wage enter this conversation?

ShaneK made me do it!:p

[shanek]

Originally posted by Tony
What would be a solution? And are there any viable alternatives to the fiat currency?

Absolutely! Simply make money a store of value again. Tie it to the price of gold and/or silver. Works wonders.

For more detail than you could ever want on this, read The Economics of a Pure Gold Standard by Mark Skousen.

[Michael Redman]

Originally posted by phildonnia
I hate Bush too, but this argument about "bringing down the standard of living" was always specious, and still is. Ross Perot made it a cornerstone of his campaign, and his dire predictions have all failed to materialize.The administration is talking about rolling back regulations to allow American manufacturing to compete by making it cheaper to employ Americans. (That means that things like minimum wage, occupational safety, health insurance and retirement coverage, pollution controls, etc.) This isn't a specious conclusion, it's the intent of the action. It's quite different than the market effect of free trade.Someday your job, and my job will all be sent overseas.Mine isn't going anywhere. Good luck, though. I hope you're right about the ability of our economy to create good jobs. All I see is Wal-Mart.

[specious_reasons]

Originally posted by Hutch
FWIW, at http://www.house.gov/tanner/foreignholdings.htm, foreign countries hold about $1.46 trillion in US Government Securities, which is, according to the site, about 34% of the total debt the USG owes to the public.

So there is a considerable amount owed to oversea interests by the US Government. Does it qualify as a house of sand? I simply don't know enough economics to know.

Just FYI.

The last time I researched this (about 3 years ago), the Social Security Trust Fund held about 21% of the US debt, and that percentage slowly but consistently increases from year to year.

The current numbers should be easy to find. At the time, I found them right off the Social Security webpage.

[SRW]

Originally posted by Tmy


ARe you talking about a specific strike?

Whats the alternative. The company gives benefits to know one and replaces the workers with cheaper new employees as soon as the others get too expensive.


What is happening is the unions are protecting mediocrity, with all the seniority rules and mass raises workers have no incentive to upgrade their skills.

If Unions really cared about keeping jobs in the US, they would spend more money and effort, on worker retraining, and less on political campaigns.

[epepke]

Originally posted by aerocontrols
The BBC is confusing the government's debt to (1) itself, (2) its citizens, and (3) foreign parties.

I believe that half of the (~$6 trillion) debt is owed from the government to itself (essentially, because we overpay into social security and spend that money out, replacing the cash with an IOU) and a quarter of the debt is owed to investors here in the States, and another quarter is owed to foreign investors.

So if the ratio continues to hold, our foreign debt will go up $125 million next year, not 'every year' as the BBC says. Actually, as Will "America shall fall" Hutton says, I should say. He's nothing if not consistent.

I looked this up. It's not too hard with Google, and everything's published.

About half of the ~7 trillion debt, ~3 trillion is of the category of intragovernmental debt, so you are right. Most of this involves social security, so you're right about that too.

Of the remaining ~4 trillion, ~3 trillion is held by foreigners, about ~1 trillion by official governmental agencies, and the rest by private individuals.

However, at least the article as presented was stupid, whether or not the economist one, because this debt isn't like owing money on your credit card; it's like owning shares in the United States as if it were a corporation. Because shares in the United States are (or at least used to be) perceived as good investments, lots of governments like to hold them. Then they can use them as collateral for doing other financial business.

Not to put to fine a point on it, but if you show up at a Swiss bank with a truckload full of Mexican pesos, they're just going to laugh their butts off. (Which is practically the only kind of joke the Swiss actually get.) But if you have some American T-bills or securities, it's a different story.

[The Central Scrutinizer]

I'm not worried. We have politicians who will solve the problem.

[aerocontrols]

Originally posted by epepke


I looked this up. It's not too hard with Google, and everything's published.

About half of the ~7 trillion debt, ~3 trillion is of the category of intragovernmental debt, so you are right. Most of this involves social security, so you're right about that too.

Of the remaining ~4 trillion, ~3 trillion is held by foreigners, about ~1 trillion by official governmental agencies, and the rest by private individuals.


I wish you would link me up with your source.

I get this (http://www.fms.treas.gov/bulletin/b43ofs.doc) Word document via The Treasury (http://www.publicdebt.treas.gov/opd/opdfaq.htm) website.

It appears to leave some wiggle room, but lists the amount of our 6.7 trillion debt in foreign hands as 1.4 trillion.

This (http://www.brillig.com/debt_clock/faq.html) site lists the amount of the national debt owed to foreign sources as 22.7%, but the source is really the same as the earlier link, except for being slightly dated. (1998)

The only way I can see to get from 1.4 trillion to 3 trillion is to assume that foreign private investments (non-governmental, I suppose?) are lumped in with all other private investments in our debt, and that foreign amounts are a very big chunk of that.

[a_unique_person]

There is no problem, the whole amount owed is American $, and there are plenty of printing presses to make more of them.

[epepke]

Originally posted by aerocontrols

I wish you would link me up with your source.


Ask and ye shall receive.

Although it requires me to use a Windows machine, and I dislike putting a Windows machine within grenade-throwing distance of a network. But the US Gov seems to have a definite Microsoft bias, but whatcha gonna do?

The intergovernmental loan stuff is from

http://www.publicdebt.treas.gov/opd/opdpdodt.htm

The bit about foreign holdings is from

http://www.fms.treas.gov/bulletin/index.html

About halfway down the page there's a link that says International Financial Statistics, and it downloads a file called b43ifs.doc.

This has a bunch of tables. At the top of the document, it describes numbers in milllions of dollars.

About halfway down is Table IFS-2--Selected Liabilities to Foreigners.

Now, I'm only using WordPad, so it might be munged, and I might be misinterpreting the table, and I might be crazy, but when I scroll down and look at the last non-projected entry, which is July 2003, the first digit sure as hell looks like a '3' to me. In total, it looks amazingly similar to 3,655,209, which is, from the notice at the top, that many milllions of dollars.

And when I look over to the right, to the official institutions column, the first digit sure as hell looks like a '1' to me, with the same number of digits following it.

[shuize]

Originally posted by The Central Scrutinizer
I'm not worried. We have politicians who will solve the problem.

That's one of the funniest things I've read on JREF in months.

[The Don]

If "foreigners" hold U.S. government bonds they do so in order to gain a return on their investment. This return and the capital value of the bonds are measured in US$. If the dollar falls (as it has done recently) these investors experience a negative return in their own currency (the value of my fixed-interest U.S. investments has fallen by 15% in £).

The danger is that these foreigners may be tempted to re-patriate their money, further decreasing the US$ value relative to their own currency. This in turn may compel more foreign investors to consider repatriating their funds further lowering the $ value.

In order to attract customers for bonds, the US government will have to provide higher interest bonds, increasing the cost of borrowing, with the resultant increase in taxes/increase in debt/reduction in spending any one of which could have a negative impact on growth in the U.S. economy.

The fall in the $ will also cause the price of imported goods to rise increasing the inflationary pressure and pressure on way costs. This is the way that hyperinflation could start (though it is incredibly unlikely).

The increased cost of imported goods WILL provide an incentive for U.S. based producers to both satisfy home consumption and to export at a competitive price. In due course the $ will find an acceptable equilibrium level for the trade imbalance to be supportable (for example the U.S. is a major exporter of "invisible earnings" such as financial services which may not be relfected in the trade imbalance).

This is exactly what happened in the U.K in the 1970s and resulted in:

- a significant and permanent devaluation of the £ relative to other major currencies
- a complete restructuring of the labour force and industry
- major pain in the process

Although a cataclysmic failure of the U.S. ecomnomy is of course possible, it is more likely that a different equilibrium point will be found after a period of pain.

[Chaos]

Originally posted by The Central Scrutinizer
I'm not worried. We have politicians who will solve the problem.

Boy, you have politicians who ARE the problem.

[Drooper]

Originally posted by Tony
http://news.bbc.co.uk/1/hi/world/americas/3521691.stm ...full article






How likely is this scenario, and what will be the effects if and when the bubble bursts?

I don't usually like to exagerate, but Will Hutton is a moron.

He proclaims himself as an economist, but is one of the worst I have ever encountered.

Look at his track record. He wrote a tome called "The State We Are In". It was written in the early 1990s as the UK economy was in recession. In it he proclaimed how the UK economy was going to go down the tubes (sounds familiar doesn't it?).

What did happen? The UK economy has arguably been the best performing economy in the world since then; low and stable unemployment, low and stable inflation, reasonable budget and current account balances.


What a twit.
:rolleyes:

[Reginald]

Originally posted by Drooper


I don't usually like to exagerate, but Will Hutton is a moron.

He proclaims himself as an economist, but is one of the worst I have ever encountered.

Look at his track record. He wrote a tome called "The State We Are In". It was written in the early 1990s as the UK economy was in recession. In it he proclaimed how the UK economy was going to go down the tubes (sounds familiar doesn't it?).

What did happen? The UK economy has arguably been the best performing economy in the world since then; low and stable unemployment, low and stable inflation, reasonable budget and current account balances.


What a twit.
:rolleyes:

He will claim he was accidentally holding the graph upside down.

[Tmy]

Originally posted by SRW



What is happening is the unions are protecting mediocrity, with all the seniority rules and mass raises workers have no incentive to upgrade their skills.

If Unions really cared about keeping jobs in the US, they would spend more money and effort, on worker retraining, and less on political campaigns.

And thats different from management??

Why resent the bagger who makes $X dollars a year and not the CEO whos making 30x $X dollars a year. Is the CEO working 30x harder??? Can't they hire a CEO who makes less than 30x $X dollars.??

[BillyTK]

Originally posted by Drooper


I don't usually like to exagerate, but Will Hutton is a moron.

He proclaims himself as an economist, but is one of the worst I have ever encountered.

Look at his track record. He wrote a tome called "The State We Are In". It was written in the early 1990s as the UK economy was in recession. In it he proclaimed how the UK economy was going to go down the tubes (sounds familiar doesn't it?).

What did happen? The UK economy has arguably been the best performing economy in the world since then; low and stable unemployment, low and stable inflation, reasonable budget and current account balances.


What a twit.
:rolleyes:
So he didn't foresee a Labour govt. successfully turning round the economy ;). Back then, I doubt if anyone did...

[Drooper]

Originally posted by BillyTK

So he didn't foresee a Labour govt. successfully turning round the economy ;). Back then, I doubt if anyone did...

:D Very good.

In fact you will find many people did forsee this, me included (the contemporaneous evidence for that claim that appeared in the media).


His problem is that he is such a idealogically driven Socialist, that he makes a very poor economist.

His analysis was so flawed because his reasoning was that the dramatic reforms of the Thatcher era undermined the economy, where they did in fact transform it for the better (in spite of considerable temporary disruption, reogranisation, social dislocation).

The Labour Governemtn inherited a marvellous legacy from the Tories (including many changes they would have liked to made themselves, but never would have been able to. e.g. abolishing the massive subsidy to the coal mining industry, privatising many publically owned companies reforming labour laws).

So the economic performance in the UK over the 1990s was pretty much down to the fact that the new Labour Government didn't do anything meaningful form an economic policy perspective. They made the Bank of England independent for Monetary Policy purposes (so they didn't in fact have anything to do with monetary policy. They continued with Tory fiscal policy, after being handed a rudely healthy Budget. They fought off calls from the left wing of their party to nationalise various industries, to increase taxes, to introduce new labour laws in defence of Unions. In effect the economy was on Tory autopilot for the first 3 years at least.

Unfortunately, the Labour Government is gradually unravelling some of this - increasingly so as they stay longer in power.

[BillyTK]

Originally posted by Drooper


:D Very good.

In fact you will find many people did forsee this, me included (the contemporaneous evidence for that claim that appeared in the media).


His problem is that he is such a idealogically driven Socialist, that he makes a very poor economist.

His analysis was so flawed because his reasoning was that the dramatic reforms of the Thatcher era undermined the economy, where they did in fact transform it for the better (in spite of considerable temporary disruption, reogranisation, social dislocation).
My emphasis
Temporary? Within the M25 border maybe :p

[Drooper]

Originally posted by BillyTK

My emphasis
Temporary? Within the M25 border maybe :p

Much of the north has been transformed for the better with remarkable effect.

:p :p

[BillyTK]

Originally posted by Drooper


Much of the north has been transformed for the better with remarkable effect.

:p :p
Much like your signature :p :D

[Tmy]

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