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The president’s stimulus package, which in the Senate version may top $900 billion, will require the United States government to go much further into debt to cover the cost of spending these hundreds of billions of dollars. The question is: Who is going to lend all this money to Uncle Sam?
The current decade Federal government debt has doubled, from $5.6 trillion in 2000 to more than $10.6 trillion at the end of 2008. As the chart below shows, almost $6.3 trillion or nearly 60 percent of the debt is held by the public (individuals, corporations, financial institutions, or foreign holders). The remaining $4.3 trillion or 40 percent is held by intragovernmental agencies (the Federal Reserve, the Social Security Fund, the Federal Employees Retirement Fund, and a variety of other government entities).  The Federal government is already tapping into all of the agencies, such as the Social Security Fund, that are currently running surpluses to siphon off funds to help cover its current expenditures. On the other hand, given the uncertainties in the financial markets, U.S. Treasuries have continued to appear as a relative safe haven for private investors.
However, the Congressional Budget Office has estimated that the Federal government will need to borrow at least $1.5 trillion dollars in the current fiscal year to cover the implemented and planned bailout and “stimulus” spending. To do this Uncle Sam has both to issue new debt and rollover existing debt that matures. It is questionable whether private individuals or corporations in the United States will have either the willingness or ability to finance deficit spending of this magnitude.
At the end of 2008, foreigners held more than $3 trillion or about 30 percent of the U.S. Treasury debt. China tops the list of these foreign holders, with more than $680 billion in its investment portfolio. Japan comes in second, holding $577 billions in U.S. government securities. Great Britain is third with Treasury holdings of $360 billion, followed by the leading oil exporting nations holding $198 billion in Treasuries, and Brazil and Russia holding respectively more than $129 billion and $78 billion. Despite the current economic crisis and the hit American financial institutions have taken during the last six months, foreign holdings of government debt has continued to grow. In November 2007, foreign debt holdings totaled $2.3 trillion, and crossed the $3 trillion mark in October and November of 2008, for a 30 percent increase over the 12 month period.(Japan, however, decreased its holdings of U.S. Treasuries by 4 percent during this time.) The question now is whether the U.S. government, with more than $1.5 trillion in deficit spending to finance in the current fiscal year, can continue to count on foreign lenders to pick up a large proportion of what these expenditures are going to cost . All the European countries are facing growing budget deficits of their own as their respective governments all go down the same stimulus spending path being followed by Washington. It is estimated that European Union nations will likely spend at least a combined total of $250-$300 billion on their own economic recovery programs in 2009. At the same time, the fall in oil prices has cut down on trade surpluses oil exporting countries will have to invest in the U.S. financial markets. The global recession is hitting China’s exporting revenues as well. Furthermore, the Chinese are becoming increasing leery of lending to the American markets. At the recent international meeting of bankers, businessmen, and bureaucrats in Davos, Switzerland, Chinese officials made clear their dissatisfaction with the American market, where they have suffered significant losses in banks and other financial institutions into which they had invested. In the last five months of 2008, the Chinese sold off almost half of the $46 billion is Fannie Mae and Freddie Mac bonds that they had purchased in the earlier part of the year. If foreign lenders do not come to the rescue, Uncle Sam will have to rely far more than in the recent past on the financial markets at home to finance its deficit spending dollars. A lot of new bank lending--with perhaps some of the billions already given by Washington to bailout many of these banks--will have to end up covering the federal government’s expenditures, rather than being available for private sector investment and employment creation. This amount of borrowing will inevitably put upward pressure on interest rates to attract that $1.5 trillion into the government's hands. It will further exacerbate the crowding out of private sector borrowing at a time when prospective profit margins will still be relatively weak. That leaves only one “solution” to Washington’s deficit funding problems: more monetary expansion by the Federal Reserve to provide the spending dollars and keep interests artificially below market-based levels. That can only set the stage for worsening price inflation and a new unsustainable investment boom.
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Your an idiot!
The Republicans like it because it will deplete the trust funds a little sooner, enabling them to complain that the Social Security and Medicare programs should be eliminated.
The Democrats like it because they are using the Medicare and Social Security Trust Funds (Other People’s Money) to pay for part of the stimulus program. I also find it interesting that the same Democrat Party that asked for a lock box to protect Social Security and Medicare Trust Funds in the 2000 election now has no difficulty raiding the same Medicare and Social Security Trust Funds to fund approximately $45-$50 Billion Dollars of the Stimulus legislation.
The continuing disregard for working and retired Americans on the part of the (old and new) ruling and media elite and aristocracy clearly comes through when they see no need to tell working Americans eligible for the $500/person reduction in FICA payments or Social Security and Medicare beneficiaries that the Social Security and Medicare Trust Funds that provide the retirement and medical benefits are paying for the program by short-changing the Social Security and Medicare Trust Funds by at least $45-$50 Billion Dollars.
The deliberate refusal to advise the public as to the raid on Social Security and Medicare Trust Funds is a very sad commentary on the part of the Democrats and Republicans in Congress, the Administration, and the blustering news outlet pundits who profess to care for working and retired Americans.
The problem that remains now is how to implement this discipline on the individual level, business level and government level.
I use Dewey and Bently's Knowing and the Known model of inquiry to manage my own affairs financially and in daily living. There is a humble and self correcting quality to this way of being psycologically that could serve all folks well.
The current financial dilemma we now find ourselves in did not happen overnight, thus we should not expect, nor would it necessarily be a good thing, to expect that a "quick fix" combination of bailout and stimulus will right the sunken ship of state and finance.
One thing is certain, the more government involves itself in "the fix," ultimately the more that involvement will exascerbate the problem.
The principle reasons for our current problems are essentially twofold: extremity vs. moderation in all things, and a quest for instant gratification to satisfy some longing.
Each player in the equation...the general public, the US government, and private sector business and industry are all culpable to one extent or another.
The premises of human nature had set in at warp speed, to a) have it now, fix it now, control it now...
Families and individuals have resisted moderation in spending, and borrowed and spent themselves into trouble.
Commercial banks, eager for faster and larger profits, accelerated revolving credit lending, and granted residential mortgages to individuals who largely stood little chance of repaying according to schedule, and thus found their lending portfolios bloated with non-performing loans. A bit of old fashioned prudence could have averted much of that, and an under-informed and undisciplined general public, disregared caution and bought more home, cars and goods than they could reasonably afford.
Manufacturers and retailers, also eager for faster and bigger profits, engaged Madison Avenue ad agencies to hype their goods with "don't think; buy it now" blitz campaigns, and the public, glib and undisciplined, gladly obliged.
Government, ever hopeful the public is either to ignorant to notice, or anxious to reap a sales tax windfall, further encouraged, aided and abetted unrivaled undisciplined spending, both the public's and certainly their own.
Since all segments of society are culpable to their own extent, then each segment must self-police as well as encourage all components outside of themselves to be likewise more prudent, realistic and reasonable.
Human nature, however, is often neither realistic nor prudent, if not a bit downright devious and/or dishonest. It is this latter propensity that we all need to guard against, while we soul-search and re-structure for a sustaining sounder economy.
If roughly 77% of economic health and growth centers around consumer spending, then the public should continue to spend, but with some significant changes. Savings, in a "pay yourself first" mode, should be set aside regularly, and become a disciplined, regimented practice. Spending should not become rashly discretionary, but prudent and well-thought out. Borrowing should only be on an "as needed," rather than an "as wanted" basis, and families should generally learn to get along on a lot less. Buy and spend competitively....shop carefully and prudently. Upgrade your car if necessary, but if you have a Ford and Chevy income, stay in that market, under-buy if necessary, and keep debt service to about 30% of your take home pay, after taxes, savings and home mortgage or rent payments. Then you should have enough left to pay all other household expenses, and still have something leftover for entertainment.
The private sector needs to re-think a few things, too. Like over-compensating senior management beyond what may be reasonable, like investing in infrastructure, research and development, like discouraging perks like stock options for CEOs and other senior managers, and corporate aircraft, like forecasting for realistic, sustainable growth, like discouraging indiscriminate buying to an often naive public, like not over-expanding...."over-anything" is imprudent and asking for trouble.
Last, and far from least is government...government with a voracious and unbridled appetite for taxing, borrowing (nationally and globally) and spending, spending, spending..!
I confess to being jaundiced where government is concerned, and I guess it is the nature of many, if not most, politicians, to be cavalier when it comes to spending money,
but at some point, they must! Giving too much money to government is like giving too much candy to a little child. They just can't resist spending it, and worse, wasting it.
How to stop the unbridled borrowing/spending? First and foremost, the public and private sectors have to insist upon it. They..WE... all must learn to become self-sufficient, educated to the ways of the world, our country and the nature of government, at every level. We cannot afford public ignorance and naivete. If ours continues to be a country operating under the principle of government "of the people, for the people, and BY the people" then "the people" need to be conscious and interested in what the government does. If it over-spends, either seemingly prudently or altruistically, it must be cautioned and discouraged from doing so...if it exacts more laws, thereby eroding implied and expressed freedoms and liberties,this must be resisted,
and government must encourage self-sufficiency and personal self-reliance and resourcefulness.
Only with moderation in all things and service before self, can we regain fiscal health and responsibility along with sustainable economic growth.
Bob Simmons
resimmons@spiritcom.net
All hypothetical though, I'm thinking that world govts. may just remain on the 'power path' we seem to be on -- increasing socialism, just keep those TV's and beer taps running and the populations just might may not notice until it is too late to turn back if it is not already.
I di wish I could be more optimistic about this.
Thanks Richard for your work.