Back in February I wrote that the United States would be in a heck of a fix if foreign creditors decided to stop loaning us money. Now there is convincing evidence that foreigners are starting to see United States government bonds as chancy investments and U.S. stocks as poor investments.
Today’s Washington Post has an article titled Bearish on Uncle Sam. If it is not alarming it should at least be ringing a few bells. For example the article notes that a September 9th auction for $9B in long term U.S. Treasury Bonds failed to attract any international investors.
In addition U.S. stocks in general are looking a lot less attractive to foreigners. The Post reports that stock purchases by foreigners are down from $9.7 billion in July to $2.1 billion in August. Looking at just who owns our foreign debt should be sobering too. Since 2000 for example the undemocratic and totalitarian Chinese government has purchased $172B of our debt. But lately it has been finding more attractive places to invest its money, including many projects inside China. If one were to look at the United States Government as just another company, increasingly its stockholders are foreigners. The current total federal debt is about $7.4 trillion dollars. Of that “intragovernmental holdings” (the Treasury’s words for our debt held by foreigners) was about $3.1 trillion dollars. In other words foreigners own about 42% of the federal debt. In 1997 foreigners owned about 30% of the federal debt.
In the short term it is unlikely that foreigners will stop investing in the United States. But foreigners may well demand higher interest rates because they may see us as a country unable to live within its means. With federal deficits currently over $1B a day the cost of our borrowing money at all levels in the United States could rise markedly. In the longer term this trend is very bad news. If our country is perceived as living indefinitely off the future it may be perceived as a junk bond country. If the flow of overseas capital stops the government will still probably find the money to finance government. It will do so by offering higher and higher interest rates. And this will mean the capital needed by businesses for expansion will either dry up or also become a lot more costly. And that in turn will mean that inflation will no longer be a mild problem but a severe problem. Inflation will drive an economic downturn that will put people out of work and could slide us into a recession or worse.
The United States is skating on fairly thin financial ice. But except for us fiscal conservatives no one seems to notice nor care. They think, “It can’t happen here. We won’t be another Argentina.” Oh but it can happen here. If our levels of deficit spending continue into the stratosphere and our insatiable desire for cheap foreign goods continues at its current insane levels then the day of reckoning is much closer than it appears. What is needed is some good old-fashioned austerity and modest tax hikes. Leadership, in other words. Unfortunately I don’t see that sort of sober leadership happening regardless of who gets elected in two weeks. Both parties have sold to the public, almost as if it is a right, that we can have our cake and eat it too. Even Kerry is promising more tax cuts for the middle class, not less.
It appears we’d rather live in fantasyland. Most likely sometime in the next four years our day of reckoning will arrive sharply and painfully.