I don't think many people give this issue serious attention, but has the potential to create havac on future interest rates, stock markets and on the housing market.
This is one of the best articles I've read on this topic.
It's almost like watching a freight train coming while someones on the tracks with their headphones on facing away from it. People are yelling at the guy but he's too absorbed in his own world..... until it's too late.
I had to cull the article due to posting limitations.
Experts Warn Debt May Threaten Economy
By ROBERT TANNER, AP ONLINE
You owe $145,000. And the bill is rising every day. That's how much it would cost every American man, woman and child to pay the tab for the long-term promises the U.S. government has made to creditors, retirees, veterans and the poor.
And it's not even taking into account credit card bills, mortgages - all the debt we've racked up personally. Savings? The average American puts away barely $1 of every $100 earned.
Our profligate ways at home are mirrored in Washington and in the global marketplace, where as a society America spends $1.9 billion more a day on imported clothes and cars and gadgets than the entire rest of the world spends on its goods and services.
A chorus of economists, government officials and elected leaders both conservative and liberal is warning that America's nonstop borrowing has put the nation on the road to a major fiscal disaster - one that could unleash plummeting home values, rocketing interest rates, lost jobs, stagnating wages and threats to government services ranging from health care to law enforcement.
David Walker, who audits the federal government's books as the U.S. comptroller general, put it starkly in an interview with the AP:
"I believe the country faces a critical crossroad and that the decisions that are made - or not made - within the next 10 years or so will have a profound effect on the future of our country, our children and our grandchildren. The problem gets bigger every day, and the tidal wave gets closer every day."
Federal Reserve Chairman Alan Greenspan echoed those worries just last week, warning that the federal budget deficit hampered the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. He criticized the nation's "hesitancy to face up to the difficult choices that will be required to resolve our looming fiscal problems."
The epidemic of American indebtedness runs from home to government to global marketplace. To examine it, let's start at home.
Americans used to save, but no longer. Back in the 1950s, a generation of Americans who had survived the Depression and Second World War saved roughly 8 percent of their income. The savings rate rose and fell slightly over the decades - it went as high as 11 percent and as low as 7 percent during the "greed is good" 1980s - but now those days are only a memory.
In the charge-everything start of the new millennium, savings have plummeted: to just 1.8 percent last year, below 1 percent since January and at zero in the latest estimate from the Bureau of Economic Analysis.
The lack of savings is mirrored by a rise in debt. In 2000, household debt broke 18 percent of disposable income for the first time in 20 years, meaning debt eats almost $1 in every $5 American families have to spend after they get past the bills that keep them fed and housed. (That figure hasn't dropped. Credit card debt alone averages $7,200 per household.)
Many people take comfort in the rising value of their homes, and its spurred record home-building and buying, with new construction making places like Las Vegas the fastest-growing in the nation. But a home translates into wealth only when you sell it - and there's a vigorous debate over whether the housing boom is becoming a bubble that will burst.
A few years ago, government finances were the strongest they've been in a generation. Then came a turnaround - and a stunningly quick one. The budget surplus of $236 billion in 2000 turned into a deficit of $412 billion last year. The government had to borrow that much to cover the hole between what it took in and what it had to spend; a difference that's called the federal deficit.
Blame the bust of the dot-com boom, the ensuing recession, President Bush's federal tax cuts, the Sept. 11 terrorist attacks and the subsequent wars in Afghanistan and Iraq.
But bigger worries lie ahead.
The nation's three biggest entitlement programs - Social Security, Medicare and Medicaid - make promises for retirement and health care (for the elderly and the poor) which carry a huge price tag that balloons as the population grows and ages.
Add it up: current debt and deficit, promises for those big programs, pensions, veterans health care. The total comes to $43 trillion, says Walker, the nation's comptroller general, who runs the Government Accountability Office. That's where the $145,000 bill for every American, or $350,000 for every full-time worker, comes from.
Simply hoping for good times to return won't erase numbers like that, Walker says.
"There's no way we're going to grow our way out of our long-range fiscal imbalance," he says, adding that the country must re-examine tax policy, entitlement programs and the entire federal budget.
"I really do not believe the American people have a real idea as to where we are and where we're headed, and what the potential implications are for the country if we don't start making some tough decisions soon," he says.
The trade deficit - the difference between what America imports and what it exports - is the highest it's ever been, both in absolute numbers and in comparison to the size of the economy.
As a society, Americans are on track this year to spend $680 billion more on foreign goods such as Chinese-made clothes, Japanese-made cars and Scandinavian cell phones than overseas buyers do on American goods. The crush of arriving, Asian-made products recently spurred the Port of Los Angeles to switch to 24-hour operations.
Nearly two decades ago, the country fretted over a trade imbalance equal to 3.1 percent of the overall economy, or the gross domestic product. It's more than twice as big now, roughly 6.5 percent.
Here's how economists, from former Federal Reserve Chairman Paul Volcker to former Clinton Treasury Secretary Robert Rubin to analysts at the International Monetary Fund, explain the danger: Americans, who go into debt to keep living a life beyond their means, are spending more and more of that borrowed money to buy goods from overseas.
At the same time, the government provides more services to the public than it can afford to - and goes into debt to cover the cost.
Other nations actually purchase that debt, in the form of U.S. Treasury bonds and notes. Those bonds have increasingly been snapped up not just by private investors but by foreign banks. Japanese investors hold the most U.S. debt, but China has been buying more than any other country in recent months.
The biggest trade deficit is with China, too, at $162 billion. Japan is next, at $75 billion.
In a very real sense, the U.S. economy is dependent on the central banks of Japan, China and other nations to invest in U.S. Treasuries and keep American interest rates down. The low rates here keep American consumers buying imported goods.
But the lack of fiscal discipline in the United States is undermining the value of the American dollar, thereby lowering the value of the U.S. Treasuries in foreign banks. As the dollar's value drops, other nations' willingness to keep investing cannot last, says Nouriel Roubini, an economics professor at New York University.
If those banks reduced their dollar holdings or were simply less willing to invest so much, it could spark a sharp fall in the value of the dollar. And that could create a host of economic problems.
Economists and business leaders are closely watching China's decision last month to uncouple the value of its currency, the yuan, from the dollar and tie it instead to a basket of different currencies. The move could make the dollar's position less exposed to a quick shift by international investors - or it could spur those investors to look elsewhere and leave the United States' position more precarious.
In the end, Roubini, Walker and others say, disaster is still avoidable, but it's going to require the American people and the country's leaders to clean financial house - to reduce the federal deficit and the trade deficit. Global economics may drive some changes: if Japanese cars cost more, for example, Americans may buy less-expensive GMs.
If not, the future poses some frightening what-ifs:
What if the dollar plummets? Do stocks follow? How about pensions?
What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?
How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.
How would government, which depends on the taxes of a strong economy to operate, keep all its promises?
Roubini says time is critical because the worse debt becomes, the more vulnerable America is to shocks in the global economic systems - another spike in oil prices, another major terrorist attack, another major military conflict.
"We're living beyond our means," Roubini says, "and we have to get our act together."
This is one of the best articles I've read on this topic.
It's almost like watching a freight train coming while someones on the tracks with their headphones on facing away from it. People are yelling at the guy but he's too absorbed in his own world..... until it's too late.
I had to cull the article due to posting limitations.
Experts Warn Debt May Threaten Economy
By ROBERT TANNER, AP ONLINE
You owe $145,000. And the bill is rising every day. That's how much it would cost every American man, woman and child to pay the tab for the long-term promises the U.S. government has made to creditors, retirees, veterans and the poor.
And it's not even taking into account credit card bills, mortgages - all the debt we've racked up personally. Savings? The average American puts away barely $1 of every $100 earned.
Our profligate ways at home are mirrored in Washington and in the global marketplace, where as a society America spends $1.9 billion more a day on imported clothes and cars and gadgets than the entire rest of the world spends on its goods and services.
A chorus of economists, government officials and elected leaders both conservative and liberal is warning that America's nonstop borrowing has put the nation on the road to a major fiscal disaster - one that could unleash plummeting home values, rocketing interest rates, lost jobs, stagnating wages and threats to government services ranging from health care to law enforcement.
David Walker, who audits the federal government's books as the U.S. comptroller general, put it starkly in an interview with the AP:
"I believe the country faces a critical crossroad and that the decisions that are made - or not made - within the next 10 years or so will have a profound effect on the future of our country, our children and our grandchildren. The problem gets bigger every day, and the tidal wave gets closer every day."
Federal Reserve Chairman Alan Greenspan echoed those worries just last week, warning that the federal budget deficit hampered the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. He criticized the nation's "hesitancy to face up to the difficult choices that will be required to resolve our looming fiscal problems."
The epidemic of American indebtedness runs from home to government to global marketplace. To examine it, let's start at home.
Americans used to save, but no longer. Back in the 1950s, a generation of Americans who had survived the Depression and Second World War saved roughly 8 percent of their income. The savings rate rose and fell slightly over the decades - it went as high as 11 percent and as low as 7 percent during the "greed is good" 1980s - but now those days are only a memory.
In the charge-everything start of the new millennium, savings have plummeted: to just 1.8 percent last year, below 1 percent since January and at zero in the latest estimate from the Bureau of Economic Analysis.
The lack of savings is mirrored by a rise in debt. In 2000, household debt broke 18 percent of disposable income for the first time in 20 years, meaning debt eats almost $1 in every $5 American families have to spend after they get past the bills that keep them fed and housed. (That figure hasn't dropped. Credit card debt alone averages $7,200 per household.)
Many people take comfort in the rising value of their homes, and its spurred record home-building and buying, with new construction making places like Las Vegas the fastest-growing in the nation. But a home translates into wealth only when you sell it - and there's a vigorous debate over whether the housing boom is becoming a bubble that will burst.
A few years ago, government finances were the strongest they've been in a generation. Then came a turnaround - and a stunningly quick one. The budget surplus of $236 billion in 2000 turned into a deficit of $412 billion last year. The government had to borrow that much to cover the hole between what it took in and what it had to spend; a difference that's called the federal deficit.
Blame the bust of the dot-com boom, the ensuing recession, President Bush's federal tax cuts, the Sept. 11 terrorist attacks and the subsequent wars in Afghanistan and Iraq.
But bigger worries lie ahead.
The nation's three biggest entitlement programs - Social Security, Medicare and Medicaid - make promises for retirement and health care (for the elderly and the poor) which carry a huge price tag that balloons as the population grows and ages.
Add it up: current debt and deficit, promises for those big programs, pensions, veterans health care. The total comes to $43 trillion, says Walker, the nation's comptroller general, who runs the Government Accountability Office. That's where the $145,000 bill for every American, or $350,000 for every full-time worker, comes from.
Simply hoping for good times to return won't erase numbers like that, Walker says.
"There's no way we're going to grow our way out of our long-range fiscal imbalance," he says, adding that the country must re-examine tax policy, entitlement programs and the entire federal budget.
"I really do not believe the American people have a real idea as to where we are and where we're headed, and what the potential implications are for the country if we don't start making some tough decisions soon," he says.
The trade deficit - the difference between what America imports and what it exports - is the highest it's ever been, both in absolute numbers and in comparison to the size of the economy.
As a society, Americans are on track this year to spend $680 billion more on foreign goods such as Chinese-made clothes, Japanese-made cars and Scandinavian cell phones than overseas buyers do on American goods. The crush of arriving, Asian-made products recently spurred the Port of Los Angeles to switch to 24-hour operations.
Nearly two decades ago, the country fretted over a trade imbalance equal to 3.1 percent of the overall economy, or the gross domestic product. It's more than twice as big now, roughly 6.5 percent.
Here's how economists, from former Federal Reserve Chairman Paul Volcker to former Clinton Treasury Secretary Robert Rubin to analysts at the International Monetary Fund, explain the danger: Americans, who go into debt to keep living a life beyond their means, are spending more and more of that borrowed money to buy goods from overseas.
At the same time, the government provides more services to the public than it can afford to - and goes into debt to cover the cost.
Other nations actually purchase that debt, in the form of U.S. Treasury bonds and notes. Those bonds have increasingly been snapped up not just by private investors but by foreign banks. Japanese investors hold the most U.S. debt, but China has been buying more than any other country in recent months.
The biggest trade deficit is with China, too, at $162 billion. Japan is next, at $75 billion.
In a very real sense, the U.S. economy is dependent on the central banks of Japan, China and other nations to invest in U.S. Treasuries and keep American interest rates down. The low rates here keep American consumers buying imported goods.
But the lack of fiscal discipline in the United States is undermining the value of the American dollar, thereby lowering the value of the U.S. Treasuries in foreign banks. As the dollar's value drops, other nations' willingness to keep investing cannot last, says Nouriel Roubini, an economics professor at New York University.
If those banks reduced their dollar holdings or were simply less willing to invest so much, it could spark a sharp fall in the value of the dollar. And that could create a host of economic problems.
Economists and business leaders are closely watching China's decision last month to uncouple the value of its currency, the yuan, from the dollar and tie it instead to a basket of different currencies. The move could make the dollar's position less exposed to a quick shift by international investors - or it could spur those investors to look elsewhere and leave the United States' position more precarious.
In the end, Roubini, Walker and others say, disaster is still avoidable, but it's going to require the American people and the country's leaders to clean financial house - to reduce the federal deficit and the trade deficit. Global economics may drive some changes: if Japanese cars cost more, for example, Americans may buy less-expensive GMs.
If not, the future poses some frightening what-ifs:
What if the dollar plummets? Do stocks follow? How about pensions?
What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?
How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.
How would government, which depends on the taxes of a strong economy to operate, keep all its promises?
Roubini says time is critical because the worse debt becomes, the more vulnerable America is to shocks in the global economic systems - another spike in oil prices, another major terrorist attack, another major military conflict.
"We're living beyond our means," Roubini says, "and we have to get our act together."
