Joined: 11 Feb 2004 Posts: 20 Location: Sterling, MA
Posted: Wed Oct 19, 2005 8:29 am Post subject: The Coming Global Recession
Hi Forum folks,
Here's an article from the Hong Kong edition of China Daily that I found really interesting. You may also.
I included the text of the article, instead of just the link, since many newspapers archive articles for a period of time and then remove them from public web access.
I think it is time that we should take a serious look at the possibility that the US is going to take us down towards a worldwide recession in one or two year's time.
It is well known that the US is the world's biggest economy, taking up about 30 per cent of global GDP, but it is now also the world's biggest debtor country. According to the most authoritative person on this subject, the US Comptroller General David Walker, who audits the federal government's books, the tab for the long-term promises the US Government has made to creditors, retirees, veterans and the poor amounts to US$43,000 billion, US$145,000 per US citizen, or US$350,000 for every full-time worker.
And this figure does not even take into account all the personal debts such as credit card bills and mortgages. With a low interest rate of 1 per cent running for the past three years in a row, savings plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero in the latest estimate from the Bureau of Economic Analysis. In 2000, household debt broke 18 per cent of disposable income for the first time in 20 years. Credit card debt alone averages US$7,200 per household.
The US Government indebtedness is financed this way: The US now runs a trade deficit roughly 6.5 per cent of its GDP and the gap is widened every day. Its citizens are spending ever more on foreign goods, and with the US dollar as the international currency, the US Government just prints money to finance the deficit. And with this money, central banks in the surplus countries purchase most of the US Treasury bonds as currency reserve.
By now, Japan is the largest creditor of the US Government, and the Chinese mainland has been a fervent buyer for the last few years. As for Hong Kong, most if not all of our reserves are in US dollar denominated assets. The US Government in turn uses this foreign borrowed money to finance as much as 90 per cent of the federal deficit which stood at US$412 billion last year. The federal deficit is expected to be running at about US$2 billion a day at the moment.
Put it simply, the Americans have been living way beyond their means for much too long. On top of this, the Bush Administration is cutting tax at least three times while fighting an expensive war in Iraq, which has already cost the country US$700 billion, and currently progressing at US$5.6 billion per month. Now the US economy is dependent on the central banks of Japan, China and other nations to invest in US Treasuries and keep American interest rates down. The low rates keep American consumers snapping up imported goods.
Any economist worth his salt knows that this situation is unsustainable. This includes the country's economic guru driver Alan Greenspan, who recently warned his countrymen that the federal budget deficit would hamper the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. Now he may have to add two more worries: soaring oil prices and cyclones.
The US is now clearly in huge trouble, economically, socially, politically, and internationally. The Bush Administration bungled big in cyclone Katrina's aftermath in New Orleans, and then a minor rerun from Rita in Houston, and this will trigger the general outburst of people's dissatisfaction with the government, leading to great internal turmoil lasting for many years. In all likelihood, long-term interest rates are going to rise, and the greatest property bubble the world has witnessed is going to burst in the next one to two years.
The countdown is in progress, and there is no way that anybody can do anything to reverse it either by short-term measures such as fiscal and monetary policy, or through long-term reform of tax policy, entitlement programmes and even the entire federal budget. This is as inevitable as gravity, and it will take place under a new and inexperienced chairman of the Federal Reserve Board. I do not want to sound alarmist, but I see very bad omens.
To make things simple, let us just examine some key economic issues raised by some economists:
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 a government, which depends on the taxes of a strong economy to operate, keep all its promises?
To us, the good news is that when the country is in deep trouble, the US will not have the energy to pick on China. Even when it is necessary to start another war to divert people's attention, it would pick one much smaller in size and weaker in strength, like Iran. This will provide a much more amicable environment for China to make good use of its "period of strategic opportunity" till 2020 for the country to pass through a turbulent zone between per capita income of US$1,000-3,000.
But in the short term, now the US not only sneezes, and all symptoms indicate that it is going to suffer from a SARS-like trouble, the whole world should take extra precaution not to get infected. One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. Once, when a country like South Korea dumps the dollar, the still unsold US Treasuries in the asset column of Asian central banks - US$2,000 billion according to some estimates - will collapse. The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries' exports to America will dry up, which in turn will spread the global economic downturn like wildfire.
After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market. The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.
David Lazarus
San Francisco Chronicle
Sunday, November 27, 2005
Last month, the national debt reached yet another miserable milestone, passing the $8 trillion mark for the first time. As of last week, the United States was $8,084,858,891,735.31 in the hole, according to the Treasury Department.
And it'll only get worse. Brian Riedl, chief budget analyst at the conservative Heritage Foundation, said the Bush administration is expected to return to Congress within the next few months to ask lawmakers -- once again -- to raise the nation's debt ceiling so we can borrow even more.
"A debt of $8 trillion is certainly a daunting number," Riedl told me. "I'm not sure we'll ever pay it off."
You heard right. The top number cruncher at the Washington think tank that's arguably friendliest to the Bush administration has come to the conclusion that our debt has gotten so out of hand, it may never go away.
At best, Riedl said, the national debt will be held to "a manageable level" as a percentage of the overall economy and thus won't completely ruin us.
But that too might be wishful thinking.
The federal budget deficit is now $319 billion. In other words, we had to borrow an additional $319 billion this year just to make ends meet, which is why the total amount owed by the government is higher than ever.
Riedl estimates that the annual budget shortfall will reach $873 billion 10 years from now. Two years after that, he predicts, the annual deficit will hit $1 trillion.
By the time that happens, Riedl's calculations show the national debt doubling to about $16 trillion, or a staggering 74 percent of the country's projected gross domestic product of $21.5 trillion.
"And it continues to worsen after that," Riedl said as he scrutinized his spreadsheet. "After 2017, we'll be looking at deficits of $2 trillion a year."
Imagine if your family carried a credit card balance from month to month and let it get bigger and bigger. That's what our government is doing.
"Long term, the deficit and debt projections are completely unsustainable," Riedl said. "Eventually, taxes will have to go through the roof or spending will be cut."
There's the rub. The fiscal recklessness of the Republican-controlled White House and Congress can't go on forever. At some point, the credit card bill comes due. And when that happens, we'll have to find some way to pay for this mess.
So what's President Bush doing (aside from, perversely, cutting taxes)? According to Treasury Department figures, the Bush administration has been aggressively passing out IOUs to foreign interests.
In fact, Bush has borrowed more money -- $1.05 trillion -- from foreign governments and banks since taking office than all other presidents combined.
From 1776 to 2000, the nation's first 42 presidents borrowed a combined $1.01 trillion from foreign interests, official statistics show. In just five years, Bush has out-borrowed them all.
A Treasury spokeswoman confirmed that the numbers are indeed correct. She declined to comment on the ramifications of the administration's overseas borrowing.
"It's a big red flag," said Robert Bixby, executive director of the Concord Coalition, a bipartisan budget watchdog group. "We're turning to the rest of the world to finance us on a massive scale."
The danger, of course, is that if foreign governments and banks decide that they're tired of holding our IOUs, interest rates would skyrocket as the nation is forced to beg for high-priced handouts elsewhere.
"We're creating a huge vulnerability," Bixby said. "It's mortgaging our future to someone else."
This has become a core issue for the Blue Dog Coalition, a group of 35 economically conservative Democrats who form a voting bloc in Congress.
"The seriousness of this rapid and increasing financial vulnerability of our country can hardly be overstated," Tennessee Rep. John Tanner, a Blue Dog leader and member of the House Ways and Means Committee, said in a statement.
"The financial mismanagement of our country by the Bush administration should be of concern to all Americans, regardless of political persuasion," he said.
The Bush administration, which has not vetoed a single spending bill (or any other bill) since taking power, has repeatedly countered such criticism by blaming Congress for unchecked spending.
"Our problem with the deficit is not that we're under-taxed," Treasury Secretary John Snow told an interviewer earlier this year. "Our problem is we spend too much. And the focus has to be on controlling spending and getting the spending growth under control.
"We're going to continue to be tight and disciplined on spending, and we're going to continue to keep the American economy going the right way," he said. "So the revenue side, the government's revenues, continues to grow."
When Bush took office, the debt ceiling for federal borrowing was less than $6 trillion and hadn't been raised since 1997.
Last year, Bush signed into a law an $800 billion increase in the debt ceiling to $8.2 trillion -- the third time in as many years that a higher credit limit has been required by the free-spending administration.
A senior administration official told reporters in September that $8.2 trillion soon won't be enough either.
"We think the first quarter next year is when we expect to hit the existing debt limit," Treasury Undersecretary Randal Quarles said.
He quickly added: "The administration remains committed to reducing the deficit."
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