CNBC had an interesting debate about the extent to which the US is or is not too much in debt. It was a strange exchange because clearly the US owes a lot of money but it boiled down to whether the amount of equity US investors own offsets the debt that we have. It was kind of a theoretical balance sheet discussion.
On the we have too much debt side was Peter Schiff from Euro Pacific Capital and on the equity is bailing us out side was Charles Biderman from Trim Tabs. His lead point was that the value of our holdings in foreign equity increased by over $1 trillion in 2005 compared to a $700 billion increase in the balance of payments deficits.
Biderman said we own more foreign assets in equity holdings than foreign investors own in our debt. Schiff said that is not true. It seems to me that an organization like CNBC would have been able to dig up the numbers but segment moderator never chimed in. I don't know the actual numbers and if anyone does and wants to leave a comment that would be great.
Biderman's point, whether numerically accurate or more of a it's not as bad as it seems nugget, seems like more of an academic, economic point than a real world point to me.
Your owning foreign stocks does not have an obvious direct benefit where the government's debt is concerned, at least I don't see it. Theoretically your owning foreign stocks could domino to eventually benefit the government having to much debt but I think this could be a reach.
I am having trouble coming up with a good analogy but does your having no mortgage and $600,000 in a 401k help you brother who has $20,000 saved and is living paycheck to paycheck?
I'm it would be easy for an economist to shoot down my thoughts on this matter but I am not hanging my hat on buying ADRs will solve our debt problem.
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9 comments:
The perma-bull argument claiming the national debt is not that big an issue are hanging their hats on the debt as a percentage of GDP. No problem, they say, as long as it's in the 7% range (John Rutledge is in this camp). The real problem is the interest payments on the debt, and that can be inflated away by printing more money.
As much as the bulls want to say that inflation was tame this month and under control, etc., the real endgame is the national currency being wasted away to worthless. Probably long after we're all dead, so who cares.
I know this doesn't really clear things up, but I felt compelled to respond to your post.
I am far from a perma bull and have most of my assets abroad.
But national debt is NOT a problem. Very roughly the US owes 38-40% of GDP in tresury notes. These are owned by foriegners and domestic lenders.
Another 38-40% of GDP is owed to social security. But that is not real debt - yet. One day in the future it will be sold to pay social security recipients.
Ok where are we. We currently are at owing 40% of GDP and heading for 80% of GDP in a few decades.
Europe and japan currently owe 80 to 170% of GDP currently and heading for who knows where in a few decades.
Can the us handle owing 80% of GDP? Well the US owed roughly 100% of GDP after world war II and the sky did not fall.
A sophisticated economy like the US needs to increase treasury notes as much as it needs to increase the money supply. We desperately need treasury notes for secure investments for individuals, insurance companies, pension funds, etc.
A few years deficit is not that significant, but over the long haul it is better to keep defict increases below 3 to 3.5% of GDP.
The national debt IS a problem.
In the past this country was a manufacturing powerhouse leading the world in nearly every aspect.
Today this country has been gutted like a fish, losing substantially all of our manufacturing base and a sizable portion of our IT and engineering expertise. We will be nothing but a society of Doctors, Lawyers, Teachers, Nurses, and service workers who all depend on someone else making a living to generate their paychecks. Right now that someone else is the housing ATM and the last remaining hulk of what we were 10 years ago.
We are approaching Hubbert's peak in oil and many minerals. Debt is not going away but offsetting asset bubbles will. It took the dollar almost 100 years to lose 90% of it's purchasing power up until now. Some believe it will lose 90% again within a decade. It will be different this time.
Loosing are manufacturing base is a problem, but that is a different topic.
Approaching Hubbert's peak in oil and many minerals is a problem if it is happening. I do not know and wish I did so I could invest more wisely, but again that is a different topic.
US National debt is only 40% of GDP. Less than half what it was after world war II as a percentage of GDP. Less than half as much as many other industrialized nations as a percentage of GDP.
Of course the news just quotes the total number and it is bigger, but that will always be true. It is like sitting around talking about when candy bars were $0.05 instead of analyzing the situation.
The national debt is LOW on a historical basis. If you want to switch topics to manufacturing or consumer mortgage debt maybe we will agree there is a problem. Everything is not perfect, but do not let people confuse you about the facts.
Could you please explain how you are getting 40% as the GDP to national debt ratio. 2005 GDP was ~13 tril. and 2005 national debt was ~8 tril. That's more like 60%. Also, this number seems meaningless considering that the GDP:debt ratio in 1928 was about 18%, and we all know what happened in 1929. So the situation now is 3x worse if you insist on using that stat.
The real problem is: what is all that borrowed currency being spent on?
By issuing treasuries like it's going out of style, the feds are devaluing the dollar. Ok. So this is basically equivalent to a flat-rate tax on the econominc production of all dollar holders... The federal government gets to spend pre-inflated currency (niiice...), and as that currency passes on, its value decreases (pretty sure that's what I get paid!)
[An aside.... This is true when the bond PURCHASER is the US Federal Reserve. Of course when the purchaser is a foreign central bank, they purchase that dollar debt with newly-minted currency of their own, devaluing their own currency. Both currency devaluations affect the trade balance between parties that use the two currencies, and... well I digress. In any case, it's a "complex system," and cannot be understood by only looking at one or two aspects of it.]
So issuing debt, far beyond multiples that would indicate that the debt is being used just to "smooth out" cash flow, allows the US Federal machine to continuously command lots and lots of resources, beyond what is willingly supplied to them by we the citizens. Ok, well I'm not really complaining yet. (maybe I should be?)
What is this mass of resources being spent on, day after day? Things that will generate returns in the future? Infrastructure? Or what?
I think that it's mostly spent on maintaining mechanisms that perpetuate the future ability of the fed to borrow further, heh!
The famous petro-dollar cycle, for example.
Which explains why it appears to be so necessary to borrow trillions to ensure the dominance of the "friendly" oil and gas industry, which is so intertwined with the federal machine. I see the image of two clasping hands with interlocking fingers.
And why Putin, obviously aware of "the way things work", nationalized the major Russian O&G entities as soon as he could.
So, net results? Well, individuals have less control over their (I mean our) own economic production. And... people in power get to benefit from a hidden tax on... everyone else. But on the other hand, for one thing, we get subsidized, cheaper energy, and plastics! So we can burn through it faster than a crackhead with a $5 bill... I guess that's good, right?
Adam Smith where are you?
Sheeeit did this post make any sense? I'm in a rush, gotta get drunk by 8pm. Happy St.P's day!
I would highly recommend you folks read this article by Jubak on MSN. I respect his opinion and would encourage you to read it. His way of explaining this topic benefits a wider audience.
http://moneycentral.msn.com/content/P146110.asp
Neil,
The 40% was simply an estimate from memory the actual number is closser to 37% I believe. I didn't want to get accused of understating the number when I poining out the debt was low.
there is another large percentage owed to social security. But you are correct the total is not 80% it is closser to 66%. But the money owed to social security is not real debt. It is US treasury notes owned by the US government. It is like owing your self money.
Decades from now the social security debt will be sold in the market but not yet. When it is sold it will be real debt.
I do not know what the US debt ration was in 1929. I will have to trust your number of 18%, but that is my point. US debt did not cause problems in 1929 and it is not causing problems today. US debt was low then and is low today.
Consumer debt on the other hand was very high in 1929 and is ver high today. But I'm still not expecting a crash.
My point is that US treasury debt is not a problem at all. We have problems with trade deficit (read the jubak article above). We have problems with excessive mortgages and other consumer debt. But, the real US federal debt outstanding is way below other countries and way below US debt after world war II as a percentage of GDP
There is simply no way that having such a large debt can possibly be a good thing. When foreigners purchase US debt it leads to net capital outflow because the total return on the bond (interest + principal) is greater than the purchase price paid to the US treasury.
When you combine the capital outflow from debt service (which is taken out of the US economy via taxes) with that from the trade deficits you can see that enourmous amounts of capital are flowing out of the US, and not being replaced.
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