Is U.S. National Debt More Dangerous Today?

First, I’d be curious as to which economists have said this. If they mean it seriously, they are worthy of mocking. I did Google the phrase before I asked this answer-question, of course, and most of what I found was Right-leaning sites parroting that phrase in a mocking sort of way. Thus, I have to wonder if “economists” (which?) have said it at all, traditionally.

As for worrying about debt right now, I refer you to my answer to your other question here.

And, as far as which economists to listen to, I would leave a piece of advice. Rather than choosing a concept and seeing if any economists support it, choose some economists and see what they have said. If an economist’s views and predictions have come to pass, perhaps other things they’ve said have merit. (Did the economist predict the housing bubble, for example? The Right tends to favor those who said that “nobody could have predicted it.” Yet they still keep listening to them. However, ones that did predict the bubble – perhaps the ones worth listening to? – are saying that now is not the time to worry about debt.) If, however, the economist you’re studying has made predictions that failed to pan out (or missed things like the housing bubble), maybe the other things they say are not necessarily worth listening to.

Just because someone says it doesn’t mean it’s factual. This goes for economists just like anyone else.

@laureth Come on! Everything you read on teh internet is true (unless you disagree with it).

I do not believe that it is more dangerous today than it was during the Reagan era. Of course, now that we have a Democrat in office and Dems in power in Congress, it’s finally okay to blame the debt on Washington again.

The truth is that debt is never really a good thing anyways, but we have such a bad history of pissing people off that I don’t think it’ll make much difference in our foreign relations. And as Laureth’s link points out, we do have other, bigger problems.

Yes, and it gets more dangerous by the hour! : (

laureth – The economists who suggested that we shouldn’t worry about the size of the federal debt because “we owe it to ourselves” were the authors of the economics textbook I studied shortly after the earth cooled. I have no idea what their political leanings were.
I agree completely with your views on which economists to heed. As you know, too many people select their “authorities” based on political affiliation or the views that they have expressed. The most recent economist I read appears in a publication of the Federal Reserve Bank of Cleveland. I have no idea of his political affiliation or any ideological bias. http://www.clevelandfed.org/research/commentary/2002/0515.pdf
jerv – I haven’t gone back to see the proportion of national debt held by foreigners and, especially by foreign central banks, under different administrations. I’m not into politics and the partisan blame game. However, I suspect that it has been rising over the last few decades under different administrations of both parties for various reasons.
I believe, along with many others, that having close to half our national debt held in foreign nations poses a number of threats to our country.

What are those threats, @ItsAHabit?

@ItsAHabit That it does. Of course, we don’t help the issue any by pretty much endorsing living on credit and living like we are entitled to fast cars and big mansions. The federal budget faces the same issues that many household budgets have; too many wants/needs and not enough income. The difference is that the federal government has the option of billing as-yet-unborn generations whereas the most we mere private entities can do is max out a few credit cards.

That doesn’t change the fact that it was just as dangerous 30 years ago, but I don’t recall there being such vitriolic hatred for the government regulating business or taxing the rich as there is right now. Same root problem but lots of other stuff going on too.

It does seem like a cosmic coincidence that since WWII, we have had 12 presidents split equally along party lines. Five out of six Democrats left office with less federal debt than when they came in. The sixth hasn’t even hit the middle of his first term yet, so we’ll hold off on him.
Now look at the Republicans. Eisenhower and Nixon were “old school” Republicans and managed to do the same thing. Ford… well, we really have to put an asterisk by him especially given that he wasn’t elected and all. However, Reagan and both Bushs, the type of Republican that seems to be the new GOP, managed to make debt absolutely skyrocket and yet convince us that it was the best thing since sex on sliced bread.

The thing is that the only way we can have any sort of economic policy is to do one of the following:
1) Elect people who will increase spending no matter what the cost to future generations
2) Elect people who will increase spending no matter what the cost to taxpayers
3) Reform our system. whether by adding a third party or getting the GOP to act like the same party it was 40–50 years ago and the Democrats to act like they did in the Clinton era.
4) Take control of our nation (or at least our economic policy) away from the government altogether.

laureth – This article notes some of the threats posed by heavy dependence on foreign creditors: http://www.moneyweek.com/investments/why-americas-debt-makes-it-a-dangerous-place.aspx

jerv – You’re absolutely right about living beyond our means in our personal and national life.
What has been the proportion of national debt held by foreign creditors since the end of WWII? Has it increased, remained steady or decreased over that time?

It sounds like the author is mainly worried about the value of the dollar falling. If the dollar falls, U.S. exports would be cheaper and more competitive on the world market.

A lot of the other things that the author is worried about seem to have happened between the time the article was written (2008) and now.

“The rating agencies have already told us what [will cause U.S. bonds to lose their high rating]: a rise in the federal government’s interest payments to 20% of revenue, not spending. That is the limit of what the agencies view as acceptable.” (Source)

So, the worst he’s worried about besides a falling dollar would be China deciding not to buy our debt anymore. On the other hand, when times are bad lately, there’s always a rush of people buying U.S. bonds – so much so, that they’re occasionally buying them at negative interest, because they apparently think they’d lose less that way than in any other falling investment. ;) Suffice to say that others would pick up where China leaves off, if need be.

@ItsAHabit I drive a Toyota that runs on foreign oil, and my computer was made in various parts of Asia. If our national economy is anything like our consumer-level economy then I think that that says it all.

Oh, wait…. trade deficits count too!
We are fucked! :D

December 2009 – “Foreign demand for US Treasury bonds and notes fell by a record amount in December as China reduced its holdings.” (Link)

January 2010 – “Treasury one-month bill rates turned negative for the first time in 10 months.” (Link)

laureth – This might be the greatest danger: “The size of its outstanding debt to the rest of the world makes the US vulnerable to pressure in global political matters.”
jerv – I’m old enough to remember the oil embargo. We are not simply susceptible to threats of “oil diplomacy” but to “creditor diplomacy” and other creditor-related tactics.

@ItsAHabit – Pressure how? Our creditors will threaten to do what, exactly, if they don’t get what they want? I understand that they might want us to do things their way, but what precisely will they do to us that’s a threat?

laureth – You’re correct that there can be short term fluctuations in demand for government notes and bonds. It appears that the demand for bonds fell whereas the demand for notes increased. That’s good for the short term but not necessarily for the long term.

I’m concerned about the demand five and ten years or longer in the future rather than recently or even right now.

laureth – “The size of its outstanding debt to the rest of the world makes the US vulnerable to pressure in global political matters. If, for example, China wanted to have its way on an important political issue, it could imply that it was going to reduce its dollar holdings due to lack of confidence in the currency. This kind of declaration would have hugely negative ramifications for the dollar and the US economy, and is something the US would be keen to avoid.

It is this fourth point that I wish to expand on. China is often seen as seen as the main threat to US domination in global politics due to its size, its economy and its military might. It now has a major bargaining advantage in its creditor status. Since China’s rise to prominence as a global economic power, its partial embrace of capitalist culture and its accession to the World Trade Organisation, there hasn’t really been a significant dispute with the US. But what if this were to change one day? In the same way that Russia has become more confident and more belligerent as its economic wealth has grown, China could also adopt a more aggressive stance towards the US.

In some ways the economic strength of the US and its influence on the world stage has been sold out from underneath it by the sale of so many Treasury bills. A country such as China, which holds 19% of all the T-bills in circulation, might be able to dictate terms to the US or else it could threaten to sell off its holdings under the auspices of diversification or lack of confidence. Whilst this would mean that the value of all China’s dollar-denominated foreign reserves were pummelled, it would ultimately survive. However, there would be a run on the US dollar and it would decimate the US economic system. In one single bound China could overtake the US as the world’s most important economy and as the world’s premier superpower.

If China were to sell its US dollar holdings at an accelerated rate, then the value of the dollar would collapse and interest rates would be forced up in order to support the currency. High interest rates would almost certainly send the US into a severe recession. It would also likely lose its triple-A credit rating which would exacerbate the problem. A stable currency is essential for any country to attract foreign investment and the dollar has been propped up for a long time by the continued purchases of T-bills by overseas investors, particularly China, due to the size of its holdings. It currently requires $2billion a day to finance the current account and if sovereign wealth funds stopped buying dollars the deficit could balloon to unmanageable proportions. America’s role as the greatest economic power in the world would be at an end.

Other holders of dollar-denominated assets, such as Japan and the OPEC members, would also suffer and they would certainly condemn China for taking such action. But are their concerns enough for China to pass up the chance of moving up the rankings in the global economy? Wars have been started for less.

Whilst the chance of an economic attack on the US by China as described above might be considered fantasy, the fact remains that the US has put itself in a position where it is theoretically possible that such a strategy could be carried out and where the very hint of a threat by the Chinese could be extremely damaging. Sino-US relations have never been particularly friendly and the two countries have traditionally been seen as opponents, if not enemies. Maybe the struggle between communism and capitalism hasn’t completely disappeared after all and the Chinese have been merely biding their time.

The US has been quite vocal about the way it thinks China should manage its currency but it is not really in a position to dish out advice on a subject in which it is clearly not an expert. The current Bush administration continues to officially support a strong dollar policy but the reality is somewhat different – and they are kidding no-one. Either the US has no control over its own currency or the huge depreciation in the value of the dollar was what they wanted all along. However, today the US has clearly lost a large degree of control over its currency, and by association its economy, because it has put itself in the position of debtor to China (and to other countries) and this makes the US a riskier place to invest than is widely perceived, regardless of its current credit rating. A rapid sale of US treasuries by China might seem like a black swan event but it is one that is theoretically possible and which can be foreseen. If it ever occurs then you don’t want to be holding US dollars. Even without any action on the part of foreign holders of US Treasuries, the balance of power has certainly changed and the US has placed itself in a vulnerable position.”

Source: http://www.moneyweek.com/investments/why-americas-debt-makes-it-a-dangerous-place.aspx

How much demand there will be would seem to be dependent upon how well the U.S. economy recovers (good risk) or fails to (bad risk).

And, yes, I read your article, thanks. I wrote my responses above.

In a certain sense, it’s most dangerous to China. If we were to suddenly break off relations with China today, we would have pulled off the equivalent of robbing their national treasury. We have spent a trillion dollars of THEIR money. They have only a promise that we will some day pay it back.