The Senate has signed off. The president's borrowing power has been floated up to $10 trillion, which beats the AmEx black card. The president's limit when he came into office in 2001 was $6 trillion. So it's been hiked an average of $500 billion per year during his eight years of office. As of this week, according to the national debt clock, the U.S. government owes nearly $30,000 to every citizen.
Over the weekend Mayor Bloomberg assailed the continuing huge U.S. budget deficits in a friendly speech to British conservatives: "Too many of our conservatives in the United States want to run up enormous deficits and hope that some way, somehow, someone else will pay for it. That's not conservatism, that's alchemy at best, or, if you like, lunacy."
The mayor's comment may stem from envy. New York City must balance its budget every year. A former NYC mayor allegedly said: "a bad loan is better than a good tax."
The United States is not alone in borrowing to finance the national budget. A CIA table shows the national debts of France and Turkey cluster with us at 64.7 percent of our GDPs. Nearly 30 countries have even higher ratios.
Some see no problem with heavy borrowing. If Americans owe the money to one another, it's just a wash that has the side benefit of providing a secure asset for savers. The burden of the debt may be shifted to the next generation, they say, but it's only fair because this generation is leaving behind so much infrastructure.
But there is lunacy in benign neglect of the national debt on at least two fronts:
1. The U.S. debt is largely being financed overseas, which creates the potential for financial crisis.
2. The debt is not accumulating because of major infrastructure improvements or other long-term investments. It is growing to fight wars in Afghanistan and Iraq that are tragically costly in human terms and are not accomplishing their missions.
Foreigners buy U.S. debt to make sure Americans keep buying goods and services from them. Foreign central banks buy the debt to neutralize the extra dollars from foreign countries' current account surpluses. Figures on U.S. external debt, i.e., public and private debts repayable in foreign currencies calculated in U.S. dollars at current exchange rates, show the extent of the cumulative overhang. While U.S. external debt is the highest at $10 trillion, it isn't much higher than the $8.3 trillion figure for the UK, so from the cumulative perspective Mayor Bloomberg was preaching fiscal prudence to the wrong crowd.
Five Countries with the Highest External Debt, 2006
1. United States $10.0 trillion
2. United Kingdom, $8.3 trillion
3. Germany, $3.9 trillion
4. France, $3.5 trillion
5. Italy, $2.0 trillion
Source: CIA, The World Factbook, as of 9/20/07.
The U.S. current account deficit in 2006 was $862 billion, nearly 15 times the UK's deficit of $58 billion. So on a current basis Britain is indeed more thrifty than the United States.
Five Countries with the Highest Current Account Deficits, 2006
1. United States, -$862.3 billion
2. Spain, -$98.6 billion
3. United Kingdom, -$57.7 billion
4. Australia, -$41.6 billion
5. France, -$38.0 billion
Source: CIA, The World Factbook, as of 9/20/07.
The current account balance, ranked for 163 countries, is the trade balance (net export of goods and services such as legal advice) + net factor income from abroad (such as interest and dividends) + net unilateral transfers from abroad (such as foreign aid, pension payments from overseas or workers' remittances from overseas).
The danger is a return to the 1970s problem of expensive oil and other commodities, leading to both high unemployment and high inflation - i.e., a high Misery Index, which peaked at 22 percent in June 1980. For the first half of 2007, the Index was low, under 6 percent. But this level will rise if a weakened dollar shows up more signficantly in what we pay for fuel and food.
