Mike Larson’s excellent series — Six Steps to Financial Doomsday — continues today with his insightful examination of how America is now choking on foreign debt. Do NOT miss a single issue in this outstanding series! — Kevin Kerr |
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Our big reliance on foreign debt began in the year 2000. Back then, Washington owed foreigners a total of $1 trillion.
The single largest loans came from Japan. In fact, at that time, the U.S. borrowed more from Japan than from Germany, the U.K., OPEC and China COMBINED!
Our leaders had already spent everything they brought in through taxes and other fees, but that wasn’t enough. They wanted to spend more.
So they borrowed everything they could from U.S. citizens. But that still wasn’t enough.
So the U.S. government borrowed much, much more from overseas — this time mostly from China.
And as a result, Washington now owes foreign investors over FOUR TIMES MORE than it did in 2000.
And today, China’s central bank is the supreme authority that decides on the fate of more loans to the United States than any other country in the world.
We have literally sold our birthright
— our right to control our own destiny —
to foreigners!
China now owns $1.16 trillion of our bonds. Japan owns $912 billion. The OPEC countries who keep us addicted to their oil hold another $230 billion.
All told, foreign investors own a hefty 47 percent of our marketable Treasury securities!
Result: In some ways, we’re no longer in charge of our own destiny! We’re at the mercy of our creditors!
And those creditors are unforgiving: They’re already cutting off other profligate countries like Greece, Ireland, and Portugal, and they’re in the process of doing so to Italy and Spain. France could be next, and I can only wonder how long it’ll be until WE’RE in the crosshairs!
In fact, you can already see investors backing away from our markets. Private, foreign buying of our long-term bonds plunged $18.3 billion in June.
That was the biggest drop in history, eclipsing June 2000’s $16.5 billion dump. If this keeps up, the only way we’re going to continue to attract investors is by offering higher interest rates — MUCH higher.
What are our so-called “leaders” doing in response? Are they taking drastic steps to fix the problem? No! They’re making things worse, by giving Uncle Sam the authority to run up even more debt — as much as another $2.8 trillion thanks to the debt ceiling authorization in August. It’s despicable!
Look, Greece’s 10-year note yield surged from 6.1 percent to 17.7 percent when its foreign creditors decided to pull the plug. Ireland now has to pay 9.6 percent to borrow for 10 years, up from 4.6 percent. Portugal pays 10.2 percent, up from 4.1 percent.
That’s terrible news for the European banks holding those countries’ bonds. Worse, the fallout from those increases is now clearly spreading throughout the euro zone!
On Monday of this week, we learned that the euro-zone’s GDP growth slowed precipitously in April, May and June — up just 0.2% since the first quarter of the year.
Export revenues plunged 4.7% in June, a huge one-month drop … manufacturing growth slumped in July … and economic confidence slumped to the lowest in almost a year.
Worst of all, Germany — Europe’s largest economic engine by far — reported its economy grew only 0.1% in the second quarter. Or in plain English, its recovery has almost ground to a halt!
Then yesterday, German chancellor Angela Merkel and French President Nicolas Sarkozy put the kibosh on rumors that the European Union might float Eurobonds to finance even more bailouts!
Not only that. They also made it clear that the EFSF — the European equivalent of our TARP slush fund — will not be expanded, which leaves heavily indebted Italy and Spain twisting in the wind.
Make no mistake: Europe’s great debt crisis is about to go critical mass — and when it does, you’ll get a telling sneak preview of what you can expect right here in the States, as well!
After all, the U.S. economy is already slowing precipitously. Higher interest rates would almost surely kill any economic growth that’s left – and they would leave the U.S. stock market a smoking ruin.
And remember: All of this is just the preamble to the ultimate catastrophe — the historic, world-changing event that will soon alter all of our lives forever.
It is now speeding toward us like a runaway freight train — so be sure not to miss tomorrow’s issue of Money and Markets for more!
Best wishes,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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It is a Catch 22, though. Cut spending, money the economy could use to recover, and the economy gets worse and revenues decline offsetting the spending cuts.
Probably time to default and let the whole pyramid collapse, and lets return to a lifestyle of the 19th century.
Get out of those cities and plant a garden.
On August 7, former Federal Reserve Bank Chairman Alan Greenspan told NBC’s “Meet the Press”, “The United States can pay any debt it has because we can always print money to do that.” Can print? The dollar has fallen 30% since 2000. Government debt promises will technically be kept, but with worthless green paper. People who rush to the “safety†of Treasuries are making a big mistake.
Chuck C
Money is required for most commerce. It only becomes ‘worthless’ when commerce stops. The other slight condition is that most of the dollars used are not ‘American’ but are ‘Reserve bank’ dollars. The fees and interest required to ‘borrow’ the money into existence is one of the taxpayers largest expenses.
Ed
No comment
Isn’t it interesting that the wealthy Western nations of the world are in such turmoil WHEN THEY HAVE NEVER BEEN RICHER!! By capitalizing the GDP (like the way we use fundamental analysis to determine corporate valuations) it is undeniable that we have never been richer. So why is the financial system leading the larger economic system towards catastrophe?
Mike, I believe your argument is fundamentally flawed. Since the Clinton administration the empirical data refute the old assertion that the budget deficits are an independent variable in the macroeconomic accounting identity. They used to assert that the budget deficit and net private savings were the independent variables and that the trade deficit was the dependent variable. However, during the second term of the Clinton Administration, the trade deficit worsened dramatically year after year while net private savings went negative to offset that growing trade deficit AND caused a federal budget surplus. That data clearly show that the budget deficit does not effect the outcome of the trade deficit, but THE OPPOSITE.
The lesson that should be learned from that empirical data is that the ONLY way to reduce the federal budget deficit is to reduce the trade deficit AND reduce net private savings (aka force corporate America to either reinvest their excess retained earnings or pay them out as dividends). The idea that Congress can force a balanced budget will only send the economy into a deep recession…which leads to reduced tax receipts and the vicious circle of deficits is NOT solved!
Appropriate tax policy will again force corporations to reinvest or pay out their excess retained earnings in order for them to avoid a high excess earnings tax with some real teeth. Appropriate tax policy regarding excess retained earnings is CRITICAL.
Appropriate tax policy and/or a dollar losing Forex value is the way to reduce the trade deficit. I agree with you that choosing the latter and weakening the dollar is a less desirable way to go. That means we must implement appropriate tax policy.
TAX POLICY. TAX POLICY. TAX POLICY. Bernanke and Fed policy are only reacting and are not the issue.
I was reading this thing about prison life after/while researching whether it was legal or not to feed prisoners feices;b(yuk) any way prisoners are very well looked after I found out inthe us any way.I’m from Australia and was and still am looking at ways to make prisoners work for the State because they cost so much. I found that they should be made to work for there food like every body else does in the outside world as well and especially fro special privelages like tuck shop. Latter I noticed articles saying prisoners were sueing for ‘bad’ food and not enough of it, overcrowding, whats next I am asking? Getting tough on prisoners(?) should be called getting tough on crime.
Ooh they have shops inside…no shops in country! Prison life seems a breeze. They don’t work, get feed pretty much whatever they want, and sit around all day bludging off the publics taxes. Get thinking christ sakes.
Kill the christian.
Since 1913 (98 years) we all have been enslaved with illegal income taxes!! There is NO LAW we have to pay them. Along with illegal income taxes The Federal Reserve is a SCAM created by foreign bankers on U.S. soil which is NOT part of the U.S. Federal Government!!
Guess what else? JFK ended The Federal Reserve 5 months before his murder Executive Order 11110
http://www.john-f-kennedy.net/thefederalreserve.htm
Recently people including former IRS agents have been found NOT guilty of either failing to file or not paying income taxes. How can this be? No juries asked to see the law before. See Aaron Russo’s America: Freedom to Fascism http://video.google.com/videoplay?docid=-1656880303867390173
JFK really tried to warn us of untold evil. Why were you(we) never taught this speech in school, and who had the power to suppress it. (JFK BEGGED THE MEDIA TO ALERT THE AMERICAN PEOPLE, “THE MEDIA DID NOTâ€)
The President Who Told The TRUTH
http://www.youtube.com/watch?v=RaH-lGafwtE
Never wavering for decades always telling it like it is,. The media (ignores) him on purpose because they are beyond afraid…
Ron Paul 2012.