The Elephant in the Room?
I spent the last three days writing blog posts on economics without ever mentioning the “hot button” issue of the day: the United States Treasury running out of juice, and having to yet again raise its debt limit. For those with a short memory, or a lack of interest, here’s a figure of the U.S. debt, first in absolute terms:
And also as a proportion of GDP:
Certainly, U.S. debt is nothing like as high as some other developed nations like Japan, which packs a debt more than 200% its GDP. Yet the real political issue, and perhaps the one that receives the least media coverage is the total debt, public and private, which sits at $48 trillion, a whopping 300% of GDP. Why is that the real problem? Mainly that the massive increase in debt levels has not been followed by similar rises in income. A major part of our past growth was fictitious, built on excessive private borrowing, securitization and derivatives. Financial fairytales. We borrowed more to spend more, deluding ourselves that this was sustainable economic growth. Government has been as guilty on this as any other party; perhaps doubly so, because interest payments are funded ultimately through taxation, transferring wealth from the taxpayer to the bondholder. But what is really going on? America has been munching on a stupendous free lunch fuelled by debt ever since the Reagan administration. In the timeless words
of Robert Heinlein:
There ain’t no such thing as a free lunch
And just why hasn’t this lunch been free? Well that one is really simple: China. The economic model is that China manufactures goods at a lower cost than is feasible in America, Americans purchase goods with dollars, and China subsidizes U.S. debt from their mountainous pile of cash through purchasing U.S. Treasury Bonds. And what’s the problem with that? After all, goes the common argument, what is China going to do with a hundred million iPads? It can’t eat them. But the problem is not with China: the problem is with America. America principally manufactures three things: Treasury Bonds, consumerism and weapons. Those are the three ingredients which presently back the dollar, and which make the dollar the international reserve currency, and therefore the currency in which oil (the world’s principal commodity and form of energy) is traded.
But it wasn’t always like that. In fact, the dollar assumed the role of international reserve currency on the back of America being a manufacturing powerhouse, a hothouse for innovation, and creditor to the world. Only the second of these is presently true. If the value of the American currency is jeopardised by America’s addiction to debt, its failure to address structural economic problems, and its loss of manufacturing, why should China continue to supply America with cheap consumer goods, or anything at all? Last year, Russia and China abandoned the dollar for bilateral trade.
The love of a free lunch is a powerful force. Individuals, groups, and nations do not want to work hard for achievements when they can be gotten easily. America is a glutton for a free lunch, earned on the coat-tails of its former glory, on its status as the global reserve currency, on its military might. This nation exports pieces of paper and empty promises to Arabia in exchange for barrels of luscious, limited and crucial oil. That is a heist if ever I saw one.
The problem is that America’s creditors will one day need America less than America needs them. That day may have already come. China continues to strongly criticise the Federal Reserve’s monetary policy. These policies debase China’s holdings, and China has every right to demand it stop. There is a danger that American creditors will take action to express their disapproval, as they have always done throughout history, by instigating a trade war.
That’s why the debt ceiling is a dead issue. The live issue is America’s creditors response to America’s fiscal and monetary policies. And it doesn’t look happy.
Perhaps it would be good to return to a simpler politics. In the timeless words of Woody Guthrie:
“The national debit is one thing I caint figger out. I heard a senator on a radeo a-saying that we owed somebody 15 jillion dollars … If the nation is the government and the government is the people, then I guess that means the people owes the people, that means I owe me and you owe you, and I forget the regular fee, but if I owe myself something, I would be willing to just call it off rather than have senators argue about it.”