Tuesday, June 27, 2006
Hard landing or soft splat?
Brad Setser:
With gross debts of nearly $8.6 trillion at the end of 2005 – nearly 70% of US GDP (the end 2005 estimate is mine; the formal data will be out soon) and an estimated 2005 net international investment position of around $3.2 trillion (25% of GDP), the US is increasingly vulnerable to an interest rate shock. Most US lending to the world is in dollars and is tied to US rates – generating offsetting income should US rates rise. But the US would still be hurt on its net debt, and borrowing abroad to invest in equities and the like would be less profitable. With a net (interest bearing) debt position of $4 trillion (gross debts of $8.6 trillion v $4.6 trillion in external lending), a big rise in rates would really hurt. And even a little rise can have an impact. The 2005 interest rate was around 3.6%. It will go to 5% or more. That would push interest payments on existing US debts up by $65b – and the US is adding about a trillion in new debt a year.
The best case is the US cannot reduce its current account deficit no matter what. So, the rest of the world has to continue to loan us money so we can buy stuff we'll never pay for.
At least, until they don't.
Comments:
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"The Debt Depression," in my estimation, is both imminent and unavoidable. The evidence is mounting: the suburban landscape is already littered with failed enterprises and bankrupt chains (Chi-Chi's, Frank's Nursery and Crafts, Levitz - you name it, it's insolvent). Who is at fault? American capitalists - whose addiction to wealth bears an uncanny resemblance to a drunkard's addiction to alcohol - surely bear some responsibility. The common man - gluttonous, profligate and bloated - is also at fault. But the primary culprit is the "American Dream" itself. This "Dream" - which defines success solely in material terms -COMPELS otherwise intelligent people to amass extraordinary amounts of debt. The lavish house, the extravagant auto, the large-screen TV - MUST have them, or the "Dream" is unfulfilled. Hence, we borrow...and borrow, and borrow, and borrow. In our frenzy to achieve this supposed "Dream" we have created a nightware - one which will persist for some time to come.
# posted by 
: 6/28/2006 08:01:00 AM
: 6/28/2006 08:01:00 AM
Actually, Anonymous, the American Dream was not only possible, but effective, back when we still had a progressive tax scale.
Now it's not possible for most Americans, even with two-plus jobs per family.
Now it's not possible for most Americans, even with two-plus jobs per family.
I think the profligacy of the middle class Anonymous refers to is the result of a statistical illusion. There was plenty of waste in days of yore. We wasted the lives of minorities and handicapped people and women and young men sent to war. We wantonly destroyed national treasures like our air and land.
On the individual level, the Fifties were a time of lots of booze, pills, and secret abortions. Unlike the Little House on the Prairie vision of schools, they were mostly rote learning, really soul-killing stuff. Many teachers were bullies.
We actually do a far better job of conserving resources. People work much longer hours than they used to. And spouses work.
What has happened is that as a result of short-term financial stresses, we monetized many services, like child care, and found that it was not cost-effective. Businesses found that it was convenient to force employees to move, so the support networks people had collapsed. I'm writing this much too quickly to frame the issue properly (other duties impinge), but perhaps you can get my drift.
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On the individual level, the Fifties were a time of lots of booze, pills, and secret abortions. Unlike the Little House on the Prairie vision of schools, they were mostly rote learning, really soul-killing stuff. Many teachers were bullies.
We actually do a far better job of conserving resources. People work much longer hours than they used to. And spouses work.
What has happened is that as a result of short-term financial stresses, we monetized many services, like child care, and found that it was not cost-effective. Businesses found that it was convenient to force employees to move, so the support networks people had collapsed. I'm writing this much too quickly to frame the issue properly (other duties impinge), but perhaps you can get my drift.
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