| So…you can't run a country indefinitely on federal borrowing and consumer debt? Who knew??? |
| In hindsight, many economists say, the United States should have recognized that borrowing from abroad for consumption and deficit spending at home was not a formula for economic success. Even as that weakness is becoming more widely recognized, however, the United States is likely to be more addicted than ever to foreign creditors to finance record government spending to revive the broken economy.
Source: "Chinese Savings Helped Inflate American Bubble" By MARK LANDLER - NY Times - December 25, 2008 “One thing seems probable to me,” Peer Steinbrück, the German finance minister, said recently. “The U.S. will lose its status as the superpower of the global financial system.” At another time, that remark might have sounded like mere nationalist bluster. Right now, it doesn’t seem so ridiculous to ask whether 2008 will come to be seen as the first year of a distinctly non-American century. At the heart of the troubles, both short term and long term, is debt. Debt helped create the housing bubble and has now left almost one of every six homeowners with a mortgage larger than the value of their home. Debt built up, and then laid low, modern Wall Street, where firms borrowed $30 for every $1 they owned. And in the coming years, debt will constrain the United States government, as it copes with the combined deficits created by the Bush administration’s policies, the ever-more expensive financial rescue and the biggest item of all, Medicare for the baby boomers. In essence, households, banks and the government have already spent some of their future earnings. The current crisis marks the point at which the bills begin to get paid. The debts run up in recent years are particularly unfortunate, because they stole resources from the future without laying the groundwork for future growth. “If you told me we were spending like crazy to build schools and send everyone to college, that would have infinitely different implications than borrowing like crazy to finance current consumption,” said Christina Romer, an economist at the University of California at Berkeley. Schools, roads, airports and the medical system, as well as the country’s energy policy, all appear to need significant fixing, and yet there will be less money to fix them than there was 5 or 10 years ago. With the coming explosion in Medicare costs, the federal budget deficit could eventually get so large that foreign investors would get spooked. They might then decide that other economies were safer bets and shift more of their lending there. Were that to happen, and the United States struggled to attract financing, the country would face a whole new crisis. Source: "A Power That May Not Stay So Super" By DAVID LEONHARDT - NY Times - October 11, 2008 We are where we are today because we went on a credit binge and we’re now paying the price. Because it was the biggest credit binge the world has ever been on, a lot of wealth is going to be wiped out. Now what you’re witnessing is the market re-evaluating and re-pricing every asset in the world, without mercy, telling each stock, bond and bank what its value is in a post-credit binge world. Source: "The Post-Binge World" By THOMAS L. FRIEDMAN - NY Times - October 11, 2008 |
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