How U.S. debt threatens the economy

MSN Money ^ | 1/5/2006 | Roger Ibbotson

[Willie Green]

In 2006, look for a falling dollar and dropping bond prices, along with rising inflation and interest rates, as growing economies in China and India assert themselves.

You don't have to invest in China or India to be affected by the dramatic growth of their economies. And you don't have to be a politician to worry about trade and budget deficits. They're all interconnected, and they will all affect your pocketbook in 2006 and beyond.

Yes, the growth of the global economy has created tremendous opportunities for trade and investment -- and helped keep our economy growing at a healthy rate. But certain long-term problems are becoming more apparent as a result of the way goods and dollars flow around the globe. A few: The U.S. dollar, long-term bonds and financial firms may be in for a rough ride.

[Willie Green]

Snow urges Congress to raise debt limit

"I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country."

-- President Andrew Jackson - (1824)

"Of all forms of tyranny the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of plutocracy."

~ Theodore Roosevelt

[x5452]

What worries me is the debt of the average American to foreign banks.

[loreldan]

Time to claim that oil we went to war over. [only half-joking]

[The_Republican]

I share your concern. It is true danger to our Republic.

Unfortunately, since there is no one else who can consume like us, lenders have no choice but to continue lending. They survival depends on our borrowing.

However, at some point this is going to become unbearable.

[Roccus]

If you owe the bank $10,000 and can't pay, you're in trouble.
If you owe the bank $10,000,000 and can't pay, the bank's in trouble

[The_Republican]

Correct!!!!

[Eagles Talon IV]

You are correct. Unless some other nation rises to the level of America in the ability to consume, our debt will continue to be funded. For all of the naysayers the dollar is still the place of refuge in times of turmoil and will be for the foreseeable future.

[catpuppy]

As much as the writer trys to say "we're doomed," he can't help but acknowledge at the end of the article that "Overall, the market is strong and more reasonably priced today than it was a few years ago."

Yes there are "imbalances" but sending pieces of paper overseas in exchange for goods is not a bad thing. Those paper dollars eventually must come home where they help to finance our economy so that we can build more things, buy more stuff and exchange more paper for more useful things.

[Clintonfatigued]

"But what has changed over the last 25 years is that foreign governments, rather than U.S. citizens, have been buying this U.S. debt (in the form of Treasurys). Now, approximately half of this country's debt is held outside the United States, primarily by China, Japan and Southeast Asian nations."

And this is what's most worrisome. Debt is never good, but in and of itself, it's still of manageable size. But owing so much money to non-Americans compromises national sovereignty.

[Clintonfatigued]

What the article is saying, and you're acknowleging, is that the problem is still managable, and there is still time to take corrective measures. That doesn't mean it's a good thing.

[Roccus]

How will these other nations foreclose on this debt?
Will they have Kofi come and evict us?

[GeorgefromGeorgia]

One wonders if Government bankruptcy will every become a reality? It has been discussed for countries like Argentina.

[x5452]

I think what is far more of a problem and more of an immeadiate threat is the number of folks with massive credit card and mortgage debt to foreign banks. It's a serious drain on the economy.

[Eagles Talon IV]

"And this is what's most worrisome. Debt is never good, but in and of itself, it's still of manageable size. But owing so much money to non-Americans compromises national sovereignty."

They are purchasing our treasury bonds because it is safe. Funding our debt will allow Americans to continue to purchase what it is the world produces. I believe our economy in terms of world production of goods and services is about 22-23%. If America stops consuming all the other producing countries are in big, BIG trouble. This nation is the locomotive that pulls the economic train of the world.

[catpuppy]

The same concerns ("we're doomed!") were expressed in spades in the late 70's/early 80's when the Japanese were said to be buying up all of America's valuable real estate in exchange for the dollars we shipped overseas as we splurged on Hondas and Toyotas.

Today. we're still buying, Honda and Toyota are still building, but they are doing it HERE in plants they built with the paper we sent them and, as a big bonus, they employ Americans.

It is a good thing.

[Roccus]

And in the early 70's with the oil producing nations.

[RS]

"How will these other nations foreclose on this debt?
Will they have Kofi come and evict us?"

Nope, they will come over here and buy Pebble Beach and Rockerfeller Center ( then sell them back to us at 1/3 the price they paid in a few more years )

[Eagles Talon IV]

"How will these other nations foreclose on this debt?" WE often hear from the gloom and doomers that China (or whomever) could dump all its US holdings and devastate our economy. Sure but at what cost to them? Bonds are no different then stocks in that their value is determined by supply and demand. When the news from a certain company, say in this case America, is good, it's stock (debt instruments) are in demand due to their safety. When the news is bad the demand lessens and that will cause interest rates to rise on order to attract needed financing for our debt. However if China or any other holder of huge amounts of treasuries decides to unload them quickly the result would be a collapse in the value of these treasuries (excess supply vs demand) and a drastic reduction in the value of the creditor nations holdings.

As you say, we owe the world trillions of dollars and it is the world which is in trouble to a greater extent then are we.

[Eagles Talon IV]

"Nope, they will come over here and buy Pebble Beach and Rockefeller Center ( then sell them back to us at 1/3 the price they paid in a few more years" Ah yes, I remember that well. It just shows that when it comes to real estate expertise the Japanese make a wonderful automobile.

[Eagles Talon IV]

"Nope, they will come over here and buy Pebble Beach and Rockefeller Center ( then sell them back to us at 1/3 the price they paid in a few more years"

Ah yes, I remember that well. It just shows that when it comes to real estate expertise the Japanese make a wonderful automobile.