The problem is that the US economy is so embedded in the global economy (or vice versa) that the outfall could be disastrous.
Ed Weick ----- Original Message ----- From: <[EMAIL PROTECTED]> To: <[EMAIL PROTECTED]> Sent: Tuesday, July 15, 2003 8:39 AM Subject: Re: [Futurework] Ringing the tocsin for America Keith, If the US were to go bankrupt, this might be one of the best things to happen to the world. The world cannot afford America. I truly believe that George Bush realizes this and is doing what he can, in his power, to reduce the drag of the US on the rest of the world. Bill On Tue, 15 Jul 2003 10:43:58 +0100 Keith Hudson <[EMAIL PROTECTED]> writes: > When a country goes bankrupt and cannot pay dividends to its > bond-holders > (usually foreignors), it says: "Sorry, we can't pay. We're shutting > up > shop." This is what Argentina did -- one of the latest in a long > string of > examples during the last century -- but its government survived, > albeit in > ramshackle condition. However, when an "advanced" country, which has > made a > statutory contract with its citizens to look after them in their old > age, > or ill-health, says, "Sorry, we can't pay", then government itself > loses > its validity altogether. > > One of the most eminent financial-economist historians in the world, > Niall > Ferguson, is saying that America is heading towards bankruptcy. > Together > with Laurence Kotlikoff, he rings the tocsin in the following > article in > today's FT. It seems to me that something quite stupendous is going > to be > required of consumer spending at a rate that will rescue the > financial > situation of America (and the rest of us, of course!): > > <<<< > THE FISCAL OVERSTRETCH THAT WILL UNDERMINE AN EMPIRE > > Over the past 20 years the Medicare budget has risen five times > faster than > the defence budget and that trend seems likely to continue > > Niall Ferguson and Laurence Kotlikoff > > > Toppling three tyrannies within four years is no mean achievement. > Since > 1999, despotic rulers in Serbia, Afghanistan and Iraq have been > ousted as a > result of US military intervention. What makes this so remarkable is > that > it comes little more than a decade after a wave of anxiety about > American > "overstretch". Many former Cassandras now hail the country as the > world's > hyperpower -- if not a new empire. > > The irony is that the overstretch thesis is about to be vindicated > just > when conventional wisdom considers it discredited. But this > overstretch has > almost nothing to with the US's overseas military commitments. It is > the > result of its chronically unbalanced domestic finances. > > In just five years' time, 77m "baby boomers" will start collecting > Social > Security benefits. In eight years they will start collecting > Medicare > benefits. By the time they are all retired in 2030, the US will have > > doubled the size of its elderly population but increased by only 18 > per > cent the number of workers able to pay for their benefits. > > Economists regard the commitment to pay pension and medical benefits > to the > elderly now and in the future as part of the government's "implicit" > > liabilities. But these liabilities are no less real -- indeed, are > far > larger -- than the explicit obligation to pay back the principal > plus the > interest on government bonds. In fact their size is such as to > render the > US government in effect bankrupt. > > The scale of this implicit insolvency was exposed this summer by > Jagadeesh > Gokhale, a senior economist at the Federal Reserve Bank of > Cleveland, and > Kent Smetters, former deputy assistant secretary of economic policy > at the > US Treasury. They compared the present value of all the revenue the > government can expect to collect in future with the present value of > all > its future expenditure commitments, including debt service. The > shortfall > was a staggering $44,000 billion (�27,000 billion). In compaison, > the > federal debt -- $6,500 billion -- is small change. > > The official reaction to this report was simply to bury it -- a > natural > response given the awesome scale of the problem. But investors > cannot > afford simply to go into denial. > > One possible inference might be that future federal deficits are > likely to > be larger than forecast and that this spells the end of the recent > bond > market "bubble". After all, a widening gap between revenues and > expenditures is usually filled either by selling more bonds or by > printing > money. Either response implies a decline in bond prices and hence a > rise in > long-term interest rates. > > Is that what is happening right now? In recent weeks, long-term bond > yields > have risen sharply while the yield curve -- which had become more or > less > flat by the late 1990s -- is now sloping more steeply upwards. The > spread > between yields on 10-year bonds and index-linked bonds with the same > > maturity has also widened slightly, suggesting a rise in > inflationary > expectations. > > Yet the markets' reaction seems modest, given the size of the fiscal > crisis > facing the US. One possible reason why yields remain at levels not > seen > since the 1950s is that there are strong deflationary pressures at > home and > abroad. Overcapacity generated during the 1990s boom, investor > pessimism in > the wake of the bust, consumer anxiety about job losses -- all mean > there > is a lot of slack in the US economy. Alan Greenspan, Federal Reserve > > chairman, has said deflation is a worry. > > The truth is that we are in uncharted waters. Previous fiscal crises > were > not like this because most of a government's liabilities took the > form of > official bonds, not statutory pledges to pay benefits. Investors are > used > to a world in which governments in fiscal trouble can allow > inflation to > erode the real value of their debts. But even a significant jump in > inflation would do little to solve America's fiscal crisis. > > First, much of the government's tradable debt is of short maturity > -- > indeed fully a third of it is due to mature within a year. That > makes it > harder to inflate away, because any increase in inflationary > expectations > will force the government to pay much higher interest rates when it > seeks > to renew these short-dated bonds. Second, Social Security benefits > are > protected against inflation via an annual inflation adjustment. > Medicare > benefits are also in effect inflation-proof because the government > unquestioningly pays whatever bills it receives. > > So what is going to happen? According to Profs Gokhale and Smetters, > the > only ways to eliminate the fiscal imbalance are to increase taxes or > slash > spending. But neither of these things will happen soon. On the one > hand, > the Bush administration is ideologically committed to tax cuts. On > the > other hand, Medicare and Social Security constitute the "third rail" > of > American politics: any candidate for office who touches them is > guaranteed > to receive a violent, possibly fatal, shock. > > So the president faces a tough dilemma. Political expediency rules > out > fiscal reform; but if the bond markets foresee a spiral of deficit > finance, > sooner or later they will mark down the price of US treasuries with > a > vengeance. And rising yields will only increase the cost of rolling > over > the government's explicit debt. > > No one can say for sure how the crisis of the US welfare system will > be > resolved. What is certain is that the harder it gets to pay for the > most > politically sensitive items of the federal budget, the more tempting > it > will be to cut the rest. What could be more "discretionary" than the > cost > of governing far away countries such as Kosovo, Afghanistan and > Iraq? > > For this reason, the latest Department of Defense green paper -- > which > projects a levelling off of the total US defence budget at 3.5 per > cent of > gross domestic product -- may prove optimistic. Over the past 20 > years, the > Medicare budget has risen five times faster than the defence budget > and > that trend seems likely to continue. > > In short, the colossus that bestrides the world has feet of clay. The > > latent fiscal crisis of the US welfare state implies at best an > empire run > on a shoestring; at worst a retreat from nation-building as swift as > the > original advance towards it. > > --------------- > Niall Ferguson is Herzog professor of financial history at the Stern > School > of Business, New York University. Laurence Kotlikoff is professor > of > economics at Boston University. A longer version of this article > will > appear in the autumn issue of The National Interest > > Financial Times 15 July 2003 > >>>> > > > Keith Hudson, 6 Upper Camden Place, Bath, England > > > _______________________________________________ > Futurework mailing list > [EMAIL PROTECTED] > http://scribe.uwaterloo.ca/mailman/listinfo/futurework > > ________________________________________________________________ The best thing to hit the internet in years - Juno SpeedBand! Surf the web up to FIVE TIMES FASTER! Only $14.95/ month - visit www.juno.com to sign up today! _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://scribe.uwaterloo.ca/mailman/listinfo/futurework _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://scribe.uwaterloo.ca/mailman/listinfo/futurework
