Public Debt Owed to Foreigners has Doubled
Since 2000
The Trumpet/Philadelphia Church of God
September 22, 2005
The United States government is relying more and more heavily on the
kindness of foreigners and former enemies to finance its deficits. Some time
soon, that fact is going to bite us.
Two nations, Germany and Japan, effectively control the world's
credit, providing more than half the world's "surplus'
savings. If they ever decided to stop lending to their prime debtors, Britain
and the United States, the world economy would quickly change. This fact should
send shivers down the spines of anyone who knows history.
The U.S. government is relying more and more heavily on the kindness of
foreigners and former enemies to finance its deficits.
Since 2000, the percentage of U.S. public debt owed to foreigners has
doubled. As of July, foreigners held just over $2 trillion, or 44 percent, of
federal public debt outstanding. Japan alone now holds more than $680 billion;
China, $242 billion; United Kingdom, $160 billion; and Caribbean Banking
Centers, $103 billion (U.S. Department of the Treasury).
As of August 15, the total national debt of the United States was $7.9
trillion. In other words, every man, woman and child in the United States owes
more than $26,500 in federal debt. And that is just the federal debt, which
does not include the $53 trillion hidden debt that USA Today says the
"federal, state and local governments need immediately—stashed
away, earning interest, beyond the $3 trillion in taxes collected last
year—to repay debts and honor future benefits promised under Medicare,
Social Security and government pensions' (Oct. 3, 2004). Added to
personal debt, the article estimates the hidden debt weighing on each
household's obligation as taxpayers to be about $473,000!
All this debt makes the United States vulnerable to foreign political and
economic leverage. When you are a debtor, others are able to exert pressure on
you. In essence, debt makes you more vulnerable to coercion.
This kind of pressure was demonstrated in 1997 when former Japanese Prime
Minister Ryutaro Hashimoto wondered publicly about what would happen to the
American economy if Japan diversified and began to sell some of its then $300
billion in U.S. treasury securities (remember, Japan now owns more than $680
billion). Following Hashimoto's remarks, the Dow Jones Industrial Average
suffered its largest single-day loss since the crash of 1987. Aids to Hashimoto
quickly responded by saying the remarks were not intended as a threat.
But what if, at some point, America's debtors did want to influence
U.S. policy? In a potential conflict between China and Taiwan, would China
stand idly by, holding $242 billion, if the United States was to interfere to
protect democratic Taiwan? On the other hand, would Taiwan simply hold its $72
billion if China attacked it and America did not come to its aid?
How about if China and Taiwan were to peacefully reunite? Together they
would control $314 billion of U.S. debt. Since China also effectively controls
Hong Kong, you can add in an additional $48 billion of U.S. debt, for a grand
total of $362 billion.
That is no small amount of potential economic or political influence!
Unfortunately, the U.S. government did not learn from Prime Minister
Hashimoto's remarks and the subsequent reaction of the dollar and the
stock markets. Eight years on since the Hashimoto incident, the United
States' indebtedness to foreign nations has continued to expand to the
extent that even little South Korea can exert enormous pressure on
America's markets. On February 22, the Bank of Korea, America's
seventh largest lender, holding $53.1 billion, announced that it planned to
diversify reserves out of U.S. dollars (Bloomberg.com, February 22). That same
day the dollar fell sharply, bonds dropped, and the Dow plunged over 174
points.
Unhappily for America, it seems like more and more nations are starting to
diversify their reserves out of U.S. assets. One way a country reduces its
exposure to reserves of another nation is by selling that nation's bonds;
in other words, selling that nation's currency. When a country sells
dollars, it increases the dollar supply relative to demand, causing the value
of the dollar to drop.
When the Royal Bank of Scotland released a survey in January showing that
central banks were increasing euro holdings, the dollar dropped a half percent
against the euro. In the survey, 70 percent of 56 central banks said that they
increased exposure to the euro currency. Fifty-two percent also said they
reduced their exposure to the dollar. According to billionaire investor George
Soros, central banks of oil-exporting countries in the Middle East, along with
Russia, are diversifying out of the dollar and spurring the dollar's
decline (ibid.).
Falling demand for U.S. treasuries could have a significant effect on the
U.S. economy.
If foreigners even slow their purchases of U.S. treasuries, the economic
effect could be dramatic. The U.S. must take in roughly $2 billion a day in
foreign investment to finance its current account deficit (Washington Times,
April 16). If foreigners become more reluctant to invest in U.S. treasuries,
the dollar will fall.
This would have a two-pronged effect on the U.S. economy.
First, a falling dollar would increase the cost of imports, giving rise to
inflation. Any goods manufactured in foreign countries, whose currencies are
increasing in value versus the dollar, would become more expensive. This might
make it especially tough on companies like Wal-Mart, which sell mostly
foreign-produced goods.
Second, if the dollar falls too much, the Federal Reserve would be forced to
raise short-term interest rates in an attempt to support it. A rising
short-term interest rate could start to close the gap between the short-term
and long-term bond yields, causing the yield curve to flatten or invert. In the
past, an inverted yield curve (i.e. short-term interest rates being higher than
long-term rates) has preceded every recession since the middle 1960s except for
one (Economist, June 7).
A recession, with its associated economic slowdown and subsequent job
losses, could threaten the housing bubble. For many two-income families, all it
would take is for one wage earner to lose his or her job before the family home
would become unaffordable. An increase in houses on the market accompanied by
decreased demand would cause prices to plummet. This scenario is even more
disturbing when one considers that much of the recent U.S. economic expansion
has been fueled by increasing house prices and subsequent mortgage
refinancing.
The American economy is losing its resiliency. The country is selling its
independence to foreigners—and with no personal savings, Americans will
have much less to fall back on in the event of a world investment shift.
America is falling from its seat of power and will be replaced on the world
scene—just as Britain was toppled and every other empire that has
dominated the world. That is the main lesson America is forgetting: The nation
is proving to be no different than any other nation that has risen to power and
then fallen.
America's ballooning debt will contribute to the greatest fall in history.
At some point, the huge increases in American debt will help to convince
foreigners that America is not a safe place to invest in. If America is ever
considered economically unsafe for foreign money, that money will rapidly
disappear. And once the foreign money is gone, it will leave Americans with a
mountain of debt that cannot be easily repaid.
Prepare to greatly reduce your standard of living now.
In reference to America's trade deficit and debt, Morgan Stanley's
chief economist, Stephen Roach, made headlines with comments delivered at a
private gathering in Boston. According to the Boston Herald, Roach suggested
the United States has less than a 10 percent chance of avoiding economic
Armageddon. "Roach sees a 30 percent chance of a slump soon and a 60
percent chance that ‘we'll muddle through for awhile and delay the
eventual Armageddon'' (Nov. 23, 2004).
To Roach, it's not a matter of if—but when.
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