Could America Go Broke?

That’s the question that Washington Post columnist Robert Samuelson asks in today’s column. The very idea of the likes of the United States, Japan or Great Britain defaulting on their sovereign debt once seemed preposterous, he writes. It still seems far fetched. But it’s not so far fetched that people haven’t begun asking whether it’s possible.

Samuelson makes much the same case that I have:

The Congressional Budget Office reckons the Obama administration’s planned budgets would increase the debt-to-GDP ratio from 41 percent in 2008 to 82 percent in 2019. Higher interest rates would aggravate the debt burden. Anticipating higher rates, the CBO estimates annual interest payments on the federal debt at $799 billion in 2019, up from $170 billion in 2009. Even the size of exposed debt is unclear; adding Fannie Mae’s and Freddie Mac’s debts (effectively guaranteed by the government) to Treasury debt would raise the total sharply.

What happens, he asks, if interest rates turn sharply higher? That’s my point exactly, and I shall cite academic research in a forthcoming post buttressing my contention that the current global capital surplus will become a capital shortage as Baby Boomers retire and draw down their savings. Savings rates across the globe will tumble, and interest rates will climb.

Samuelson does raise an interesting question: How deeply into debt is it possible for an advanced economy to go before investors lose all faith in its ability to repay? He cites the example of Japan, which is running a 2009 budget deficit equivalent to 10% of gross domestic product. The national debt is approaching 200% of the national economy. Yet Japanese investors have snapped up 94% of the debt, and interest rates on government bonds have actually fallen. If the U.S. can sustain comparable levels of deficits and debt, there may be a lot more ruin left in us than I think.

It’s a point worth debating. But my hunch is that when the financial cataclysm comes, it will be global in nature. The great unraveling might well start in Japan and, in our globally interconnected economy, shock waves will transmit from one over-indebted nation to another with startling rapidity. There won’t be much warning. A better question would be, “Could the world go broke?”

We’re running out of time to prepare ourselves for the day of reckoning. Have fun, Bob McDonnell!

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34 responses to “Could America Go Broke?”

  1. Anonymous Avatar

    Here is a better article by economist Gary North.

    "The governments of every major nation are going to default on their debts. There are two relevant questions: (1) How? (2) When?…"

    The article is available here:

    http://www.lewrockwell.com/north/north778.html

  2. phooey on this.

    If you want to talk about REAL Problems….

    " Study calls Md. smart growth a flop"

    http://www.washingtonpost.com/wp-dyn/content/article/2009/11/01/AR2009110102470.html?hpid=moreheadlines

    Call the LAW!

  3. "Could the world go broke?"

    Well, one could argue the world already is broke.

    But, don't worry, as bad as it is here, it's much worse in other countries, particularly in terms of debt as a % of GDP;

    http://tinyurl.com/36xwgy

    This is a list of countries by gross (i.e. total) external debt and list of debt per capita.

    FYI…External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF and World Bank.

  4. Accurate Avatar

    These places (see Larry's link) exist because we (the people) WANT to live this way. Yes, some folks like to live like EMR wants us to, but it's not a large portion of the population and, as the article says "… smart growth is going to be complicated and expensive."

    My vision of the way EMR want us to live is the same as Halle Neustadt, which was a high-density, soviet-built city in East Germany that some urban planners once rated “the most sustainable city in the world." It was a city with lots of high rises and people did not drive very much. After the fall of the Berlin Wall, Halle Neustadt residents went out and bought cars, and soon after that about a third of them moved out to low-density suburbs. Today, many of Halle Neustadt’s high rises have been demolished.

    You can read more about it in the book titled The Ideal Communist City.

    As for the original posting, the debt doesn't matter, the messiah will wave his arms and it will all be okay. I've told you I don't like that man, nothing changed.

  5. Anonymous Avatar

    "…smart growth is going to be complicated and expensive."

    That's kind of a problem.

    If you really want to keep your green fields green, make farming profitable. The fastest way to do that is have a lot less farms.

    RH

  6. How can we possibly go broke if all we have to do is print more money?

    I mean heckfire.. what's all this gloom and doom about anyhow?

    Here's a number I can understand though:

    " The national debt equates to $30,400 per person U.S. population, or $60,100 per head of the U.S. working population,[30] as of February 2008."

    http://en.wikipedia.org/wiki/United_States_public_debt

    I'm not sure I want to know what it is in Nov 09 though.

  7. James A. Bacon Avatar
    James A. Bacon

    RBV, fascinating chart. I hadn't seen those numbers before. Thanks for posting.

  8. well for once.. Accurate and I are not polar opposites…

    The problem with "Smart Growth" is this… developers keep leapfrogging over the areas that require Smart Growth until they get far enough out that Dumb Growth is allowed – and even welcomed.

    and of course, in order to "leapfrog", you need some major highway infrastructure … for commuting…

    "Smart Growth", mixed-use – has become a polluted concept because the entire purpose of Smart Growth was to actually reduce auto dependence by providing "places" where people could …."live, work, play, and shop" and when that "place" becomes live, play, and shop with "work" 30, 40, 50 miles distant… it is by definition auto-dependent.

    I'm not expressing a preference on my part – just pointing out that like a lot of things in the lexicon these days – it's moved form it's original meaning.

    and this is not an issue involving evil developers either.

    developers and builders either provide what the market wants – or they find another line of work.

    They could build a gazillion Smart Growth communities and they'd go broke if homebuyers could drive up the road 20-40 miles and get their dumb growth slice of heaven.

    There's one aspect of this that is the only reason why built "Smart Growth" can actually provide workforce housing for the folks that teach and care for the commuters kids, law-enforcement for their safe neighborhoods and a little known but obvious work segment that is as we have heard in other venues – 1/6 of our economy.. the medical and allied medical workforce.

    Will congestion and express tolling on these commuter roads change this?

    I doubt it.

    Accurate, what say you?

  9. Anonymous Avatar

    Warren buffet just spent 34 billion on an American railraod that hauls coal.

    We may wind up doing business at a different level than during the bubble(s) but hey, they WERE bubbles right?

    If you draw a least squares curve through the S%P 500 for the last 25 years it comes out about where we are now. there isn't much point in complaining about the bubbles and then complaining about how far down we've come since then.

    When America goes broke it won't be because we spent too much, but because we bought the wrong stuff.

    RH

  10. Anonymous Avatar

    "How can we possibly go broke if all we have to do is print more money?"

    Well, it was Nixon that separated money from gold, right? If you compare the price of oil to the price of gold, it has hardly gone up at all.

    RH

  11. Anonymous Avatar

    So we are like # 27 in rank by debt as a % of GDP. The countries above us are Norway, Sweden, France, Denmark, Portugal, Spain, Belgium, Finland, and UK.

    All countries that have more of a tendency to socialism than we do.

    RH

  12. Anonymous Avatar

    "…and when that "place" becomes live, play, and shop with "work" 30, 40, 50 miles distant… it is by definition auto-dependent."

    Nice mantra, too bad it isn't a fact. Most cars run more or less the same distance every year, no matter where they are garaged.

    RH

  13. Anonymous Avatar

    OK, so the average working stiff is going to have to work two full years to pay off his government debt.

    How long is he going to have to work to pay off his OWN debt?

    I'll bet it is a lot more than two years.

    RH

  14. Anonymous Avatar

    http://politicalcalculations.blogspot.com/2005/12/why-isnt-us-national-debt-per-capita.html

    Go here to see a graph of the Us debt per capita to income index. Looked at this way, we were many times worse of in 1947 after the war.

    RH

  15. J. Tyler Ballance Avatar
    J. Tyler Ballance

    The sky shall not fall.

    The earth shall not open in fissures and swallow you.

    We will move forward and prosper, IF we can move forward toward a MERIT based society. Today's economy is encumbered by too many artificial rules for who can be hired, promoted or fired. We have shackled our businesses with stupid laws that allow suzy creamcheese to bankrupt a company because she heard a dirty joke at work. That all has to be repealed.

    Americans must not be expected to compete with workers from Communist China who are earning pennies per day. We must FORCE the multinationals to manufacture here, if they expect to have access to American markets. We MUST rebuild our strategic manufacturing base. The express route to doing that, is to require domestic manufacturing to be returned to America in exchange for access to our markets.

    We must use our tax structure to promote domestic investment and punish investors who invest in multinationals who do not manufacture the goods they sell here, in the United States.

    With increases in manufacturing efficiency, we should be able to go to a four day work week for some positions, and create job sharing in other positions, where some will only work three days per week.

    Life will throw changes at us and we will adjust. Some will see tough times and hunker down, others will see opportunities and become fabulously successful.

    As long as we NEVER trust the Republicans to lead our Nation, ever again, our citizens should be able to, not merely survive, but we shall flourish!

  16. Anonymous Avatar

    "With increases in manufacturing efficiency, we should be able to go to a four day work week for some positions, and create job sharing in other positions, where some will only work three days per week."

    Let's see with 10% unemployment we are already working four and a half days a week. And we all know that is just the unempolyment of those still looking for work: the real unemployment counting those underemployed, employed part time, and those who gave up looking, is probably more like 20%, so we already have a four day week.

    What you are talking about is not job sharing, it is unemployment sharing. I don't have a problem with 10% or 20% unemployment but I'd like to know WHEN I'm going to get my 10%.

    Yesssiree, lets just FORCE our competitiors to be uncompetitive; that way we can afford to buy more of their stuff.

    ????

    RH

  17. Accurate Avatar

    What say I?? Larry, you didn't disagree with me, are you sure you're not suffering from H1N1? I'm truly worried about you.

    Think about 'smart-growth' for a moment. You live, work, shop and play all in the same area. The area needs to be small enough that walking, biking and/or using light rail (maybe heavy rail) isn't a burden and is doable.

    So think about it. Let's see, if you worked in a retail store that would work, but how many of us would make enough money working in a retail store? If you were a professional like a lawyer, maybe an insurance agent, possibly even a dentist, yeah, it could work. Now let's talk about welders … um, not as easy. Ditto most tradesmen, not so easy. If it's a professional like an engineer, it's a toss up, but probably not. Someone who has to go to special place (can you say NASA for Houston) – really not going to work, mostly because you can't/don't build enough rail to get you (generic you) to where you need to go.

    Add to that, if you are making the money that engineers can and do make, do you REALLY want to have to depend on rail to get you where you want to go? Maybe, but I really don't think so.

    There will always be a segment of the population that will like living in those conditions, but it's a small percentage. Most of us have grown up being able to go where we want, when we want, a freedom that once tasted isn't easily given up.

    EMR wants us all to live like they did in Halle Neustadt. Note, that after the wall fell, some people did stay. I would have been one of the ones who left, FAST. If Obama gets his cap-and-tax bill passed ALL our costs for EVERYTHING, to heat and cool our homes, gas for our cars, the cost of getting goods to stores will all SKYROCKET. And even then I won't want to live in Halle Neustadt.

    To the doctor Larry, to the doctor.

  18. Anonymous Avatar

    "While GOP aides cautioned that the draft was still being refined, the general approach expands state-based high-risk insurance pools for Americans with pre-existing health problems, permits trade associations to organize to purchase group insurance, imposes caps on medical liability lawsuits and allows health insurance companies to sell policies across state lines. Most of these ideas — particularly efforts to reform medical malpractice laws — were left out of the Democratic approaches."

    The democrats should move immediately to incorporate all of these ideas. They are not particularly earth shaking ideas, but because of that they won't do much harm either.

    If America does go broke, it will be on health care. Instead of driving a car to the poorhouse, we'll go in a wheelchair.

    RH

  19. re: "Smart Growth"

    " but how many of us would make enough money working in a retail store? "

    but why are their only lower-paid jobs available "locally" and one must drive greater distances to a higher paying job?

    a retail job .. virtually all commercial retail are not jobs in the sense of creating something to sell but rather just providing goods and services to rooftops.

    When we say that small business provides the majority of jobs – are we talking about businesses that sell goods and services to rooftops or are we talking about small businesses that produce goods and services that are necessary and needed by other bigger businesses that in turn sell goods & services regionally, nationally and worldwide?

    Producing and selling a network widget or a power steering unit for a car or even a drug that fights baldness is not the same as selling hoodies and underwear to folks living nearby.

    We do all of this economic development stuff and after all is said and done – there is no " this is how you get Toyota or Intel to build a plant near you" Book.

    It's all seat-of-the-pants "lets make a deal" that determine where Toyota or Intel (or for that matter DOD) locates and it has virtually nothing at all to do with whether or not that locality supports Smart Growth.

    As long as that urban area has a beltway and significant transportation infrastructure.. it qualifies… and the decision is not usually tied to how a locality does land use decisions for rooftops.

  20. Anonymous Avatar

    Just because someone names a certain kind of development as "Smart Growth" doesn't mean that smart people will necessarily buy into it.

    I could sink a bunch of money into making my place a "Smart Farm" but it won't mean squat if it isn't successful.

    Someone needs to do some serious economics on the subject of smart growth. Or, we can just slap on a bunch of tolls in a futile atttempt to make the current growth unsucessful. That approach will backfire and you will et MORE of what you don't want.

    RH

  21. Anonymous Avatar

    "In 2007, 45% of renters (compared with 30% of owners) paid more than 30% of their income for housing."

    RH

  22. but renters are not in debt – right?

  23. Anonymous Avatar

    How can a blog post of 'Could America Go Broke' turn into a smart growth discussion ? Fiddle away why Rome burns why don'tcha' as long as we have smart growth but a loaf of 'Zimbabwe' bread will be $250 US if you can find one….

  24. well I'm just not sure what happens when a country "goes broke" to be honest.

    How about someone do the top 10 reasons why we can't have the US "go broke"

  25. Anonymous Avatar

    Well, going broke is a matter of what you waste your money on, plus, how much you actually make.

    Sooner or later someone is going to have to pick up and move something or build something. Smart growth seems to have forgotten that.

    RH

  26. Anonymous Avatar

    "but renters are not in debt – right?"

    Neither is a mortgage holder – as long as his equity is greater than the outstanding mortgage balance.

    There is a big difference between borrowing money and being in debt.

    RH

  27. isn't debt an obligation that you owe – regardless of your income?

    so a renter is not in debt but a homeowner is..

    no?

  28. Anonymous Avatar

    How to go broke, part II.

    —————————-

    "That big new wind farm in Texas, to be financed and supplied by the Chinese, is giving New York senator Chuck Schumer fits.

    Sen. Schumer is afraid the $1.5 billion project, a 600-odd megawatt wind farm in west Texas, will be partly underwritten by federal clean-energy funds. That’s money meant to jumpstart not just clean energy in the U.S.—Texas hasn’t seceded yet—but also clean-energy jobs in the U.S.

    Sen. Schumer asked the Energy Department to reject any request from the developers of new wind farms for the 30% cash-in-hand grant offered by Washington. The Obama administration has already handed out more than $1 billion under the program, part of the stimulus package—mostly to European wind-farm companies."

  29. Anonymous Avatar

    Study calls smart grwoth a flop.

    Why call the law?

    If the study is right, then smart grwoth is a flop and we shoud stop wasting money and effort on it.

    If the study is wrong, then smart growth is still a success and a mere study doesn't matter.

    Only problem is that the study is written by leading proponents of the smart grwwth philosophy. They don't say that smart growth is a failure, not at all. They say the program as implemented has been a failure: not enough incentive to apply comply and not enough punishment for not complying.

    What they really want is more money to implement their ideas, and more restrictions on land where their ideas are not implemented.

    And thee is NOTHING in there about how to pay these new taxes or apply these new punishments in a way that protects everyone equally.

    Now you can call in the law,

    Because what they are proposing is a greater degree of stealing: more carrot for some and more stick for others.

    RH

  30. Anonymous Avatar

    isn't debt an obligation that you owe – regardless of your income?

    so a renter is not in debt but a homeowner is..

    no?

    No. Particularly not with mortgages which are "no recourse" contracts.

    As long as your house is worth more than the mortgage you own two things, one on each side of the balance sheet.

    You own your home on one side and you own your part of the contract to pay money on the other side. As long as you add them up and the sum is greaer than zero, you are not in debt.

    Suppose your income goes to zero and you can no longer make the contractual payments, you still only owe the balance on the loan: it is not tied to your income.

    Theroretically, the bank could take your home, sell it, deduct their costs plus what they are owed on the debt, and they would still owe you money.

    Naturally, they arrange things so their expenses are high and you get nothing, but theoretically….

    Or, you can quick, sell the house, pay off the balance and pocket the difference.

    But, if they (the bank) cannot cover their costs plus the loan balance, then you don't owe them a cent: you are not in debt. All they get is whatever comes out of the house.

    Debt, therefore is an UNSECURED loan. A secured loan like a mortgage is a temporary trade of one kind of property for another, on which you pay rent. A car loan is a mixed bag becasue it is not a no recourse loan. If you default on you rcar and the lender can't cover the debt via repo, then you still owe the money, and that part of the loan is debt: money you are honor bound to pay.

    The home owner rents money and he is his own landlord. He is no more in debt becasue he rents money than the renter is because he rents a home. Probably less,in fact.

    The renter pays a landlord to borrow money for him. If the individual homeowner is in debt then so is the individual renter.

    The renter borrows in chunks, via his landlord. At the end of each chunk or term, he can walk away and owe nothing, just as the homeowner can wind up owing nothing.

    On the other hand, if the renter breaks his lease, he now has an unsecured debt, and the landlord can come after him for the amount of that debt, which the renter is honor bound to pay.

    RH

  31. Anonymous Avatar

    Bottom lne is that I am not "in debt" unless I owe more than I own.

    RH

  32. so how does that concept work with the US and China?

  33. Anonymous Avatar

    Another way to go broke:

    Panasonic spent as much for SANYO as buffet spent for BN. That means panasonic makes most of the nickle Hydride batteries used in hybrids and has 30% of capacity for lithium Ion batteries.

    And the bigegest wind generator manufacturors are not US firms either.

    And neither are the largest solar manufacturors PV or Solar thermal.

    And this isn't a matter of exprting US jobs, these jobs were never here.

    RH

  34. Anonymous Avatar

    so how does that concept work with the US and China?

    Good question. I don't know.

    China owns bonds, which say we promise to pay x numbr of dollars every month until Y date when we will pay back the note, in dollars.

    The notes are "secured" by the full faith and credit of the US treasury. But the treasury can print money, and the dollars aren't guaranteed to be worth anything, as they once were.

    We can eventually pay back the notes with dollars worth a tenth of a yen, and still keep our "promise".

    At that point Americans won't be able to afford to buy anything overseas and we will have to make everything we need at home. And pay each other like coolies to do it.

    If that happens, your 401 k is toast, literally.

    But our goods will look very cheap to foreigners, just as chinese goods look cheap today.

    So, I think they have a piece of paper that says we owe them a piece of what the "treasury" produces. The treasury gets that money by taxing what we produce.

    So the net present value of the treasury is a percentage of our future production. As long as we think our future production is enough to keep the net present value of the treasure at more than we owe, the it shouldnot be a problem.

    Groveton thinks it IS a problem because we are projecting unrealistic profits, and we will never be able to produce our way out of debt.

    ——————————

    The genius of wampum was that anyone could "print" money. All you had to do was fnd the right shells, polish them, drill holes, and string them.

    But, to do that, you had to give up whatever else you might be doing. If you wee good at collecting skins, you would be better off to do that and trade for wampum, and then trade the wampum for food.

    So there was an implicit and real trade off between value and worth, between benefit and cost.

    RH

    Groveton: is that half way right?

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