Experts Warn Debt May Threaten Economy

You owe $145,000. And the bill is rising every day. That's how much it would cost every American man, woman and child to pay the tab for the long-term promises the U.S. government has made to creditors, retirees, veterans and the poor.

And it's not even taking into account credit card bills, mortgages - all the debt we've racked up personally. Savings? The average American puts away barely $1 of every $100 earned.

Our profligate ways at home are mirrored in Washington and in the global marketplace, where as a society America spends $1.9 billion more a day on imported clothes and cars and gadgets than the entire rest of the world spends on its goods and services.

A new Associated Press/Ipsos poll finds that barely a third of Americans would cut spending to reduce the federal deficit and even fewer would raise taxes.

If those figures seem out of whack to you, if they seem to cut against the way you learned to handle money, if they seem like a recipe for a national economic nightmare - well, then, at least you're not alone.

A chorus of economists, government officials and elected leaders both conservative and liberal is warning that America's nonstop borrowing has put the nation on the road to a major fiscal disaster - one that could unleash plummeting home values, rocketing interest rates, lost jobs, stagnating wages and threats to government services ranging from health care to law enforcement.

David Walker, who audits the federal government's books as the U.S. comptroller general, put it starkly in an interview with the AP:

"I believe the country faces a critical crossroad and that the decisions that are made - or not made - within the next 10 years or so will have a profound effect on the future of our country, our children and our grandchildren. The problem gets bigger every day, and the tidal wave gets closer every day."

Federal Reserve Chairman Alan Greenspan echoed those worries just last week, warning that the federal budget deficit hampered the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. He criticized the nation's "hesitancy to face up to the difficult choices that will be required to resolve our looming fiscal problems."

Certainly, there are those who feel such comments bring to mind the preachers who predict the end of the world at a specific time and place, and have always been wrong. And undeniably, borrowing isn't all bad - easy access to money has been a critical tool in building America's businesses, from mom-and-pops to multinationals.

But something has changed. More than two centuries ago, Benjamin Franklin warned: "He that goes aborrowing, goes asorrowing." Now, a laugh-til-you-cry commercial portrays a man with a beautiful home and car declaring: "I'm in debt up to my eyeballs. I can barely pay my finance charges. Somebody help me."

The epidemic of American indebtedness runs from home to government to global marketplace. To examine it, let's start at home.

Americans used to save, but no longer. Back in the 1950s, a generation of Americans who had survived the Depression and Second World War saved roughly 8 percent of their income. The savings rate rose and fell slightly over the decades - it went as high as 11 percent and as low as 7 percent during the "greed is good" 1980s - but now those days are only a memory.

In the charge-everything start of the new millennium, savings have plummeted: to just 1.8 percent last year, below 1 percent since January and at zero in the latest estimate from the Bureau of Economic Analysis.

The lack of savings is mirrored by a rise in debt. In 2000, household debt broke 18 percent of disposable income for the first time in 20 years, meaning debt eats almost $1 in every $5 American families have to spend after they get past the bills that keep them fed and housed. (That figure hasn't dropped. Credit card debt alone averages $7,200 per household.)

Many people take comfort in the rising value of their homes, and its spurred record home-building and buying, with new construction making places like Las Vegas the fastest-growing in the nation. But a home translates into wealth only when you sell it - and there's a vigorous debate over whether the housing boom is becoming a bubble that will burst.

"It seems like, with the younger generation, that they want to have now what it took us years to get," says Jo Canelon, a 46-year-old social worker in Statenville, Ga.

"I see people younger than me with comparable jobs that drive new vehicles and have a boat and mortgage and things," says Canelon, who responded to the AP/Ipsos poll. "And I just wonder about their debt."

Canelon sees echoes in the rise of obesity: a pervasive I-want-it-now attitude no matter what the consequences. To her, debt's a symptom of disease, and one that's spreading.

Leaders are elected by the people they serve, of course, and the American people seem to want the best of both worlds - tax cuts and government services - while they hope the dollars sort themselves out. They worry about the nation's problems, but not enough to agree on a course of action to fix them.

The AP/Ipsos poll of 1,000 adults taken July 5-7 found that a sweeping majority - 70 percent - worried about the size of the federal deficit either "some" or "a lot."

But only 35 percent were willing to cut government spending and experience a drop in services to balance the budget. Even fewer - 18 percent - were willing to raise taxes to keep current services. Just 1 percent wanted to both raise taxes and cut spending. The poll has a margin of error of 3 percentage points.

The nation's political leaders could hardly be said to have a mandate calling for fiscal responsibility.

A few years ago, government finances were the strongest they've been in a generation. Then came a turnaround - and a stunningly quick one. The budget surplus of $236 billion in 2000 turned into a deficit of $412 billion last year. The government had to borrow that much to cover the hole between what it took in and what it had to spend; a difference that's called the federal deficit.

Blame the bust of the dot-com boom, the ensuing recession, President Bush's federal tax cuts, the Sept. 11 terrorist attacks and the subsequent wars in Afghanistan and Iraq.

Bush has gotten his share of brickbats, from both the right and the left, for the spending while he's in office. Still, the federal deficit isn't as big as it was in the worst of the years under President Reagan as a percentage of the overall economy.

Some note things are getting better: The latest reports project a deficit of $331 billion for 2005, nearly $100 billion less than expected. Outstanding debt - the amount of securities and bonds that must be repaid - is far below what it was in the early 1990s.

The nation's three biggest entitlement programs - Social Security, Medicare and Medicaid - make promises for retirement and health care (for the elderly and the poor) which carry a huge price tag that balloons as the population grows and ages.

Add it up: current debt and deficit, promises for those big programs, pensions, veterans health care. The total comes to $43 trillion, says Walker, the nation's comptroller general, who runs the Government Accountability Office. That's where the $145,000 bill for every American, or $350,000 for every full-time worker, comes from.

Simply hoping for good times to return won't erase numbers like that, Walker says.

"There's no way we're going to grow our way out of our long-range fiscal imbalance," he says, adding that the country must re-examine tax policy, entitlement programs and the entire federal budget.

"I really do not believe the American people have a real idea as to where we are and where we're headed, and what the potential implications are for the country if we don't start making some tough decisions soon," he says.

The dangers are clear as day to Felicia Brown in Saginaw, Mich. To her, it's the leaders who ignore them, she says.

"We're stealing from our children's future and our grandchildren's future," says the cashier and mother of three, who also responded to the AP/Ipsos poll. "We're led off on this belief that we should buy, buy, buy. Everyone needs a big house, everyone needs a new car every two years. We're spending all this money on that, and we're not saving anything."

Some people, however - including economists - think the picture isn't so gloomy.

Ben Bernanke, who recently left the Federal Reserve Board to serve as President Bush's top economic adviser, has argued that the problem is not with the United States. The trouble lies overseas, where people want to save rather than spend their money. The key is to encourage other countries to spend and invest more, he says, though he also believes that the federal budget needs to be balanced.

By raising the issue of foreign investment, Bernanke touches on another area that scares economists - America's inexhaustible desire for foreign goods.

The trade deficit - the difference between what America imports and what it exports - is the highest it's ever been, both in absolute numbers and in comparison to the size of the economy.

As a society, Americans are on track this year to spend $680 billion more on foreign goods such as Chinese-made clothes, Japanese-made cars and Scandinavian cell phones than overseas buyers do on American goods. The crush of arriving, Asian-made products recently spurred the Port of Los Angeles to switch to 24-hour operations.

Nearly two decades ago, the country fretted over a trade imbalance equal to 3.1 percent of the overall economy, or the gross domestic product. It's more than twice as big now, roughly 6.5 percent.

Here's how economists, from former Federal Reserve Chairman Paul Volcker to former Clinton Treasury Secretary Robert Rubin to analysts at the International Monetary Fund, explain the danger: Americans, who go into debt to keep living a life beyond their means, are spending more and more of that borrowed money to buy goods from overseas.

At the same time, the government provides more services to the public than it can afford to - and goes into debt to cover the cost.

Other nations actually purchase that debt, in the form of U.S. Treasury bonds and notes. Those bonds have increasingly been snapped up not just by private investors but by foreign banks. Japanese investors hold the most U.S. debt, but China has been buying more than any other country in recent months.

The biggest trade deficit is with China, too, at $162 billion. Japan is next, at $75 billion.

In a very real sense, the U.S. economy is dependent on the central banks of Japan, China and other nations to invest in U.S. Treasuries and keep American interest rates down. The low rates here keep American consumers buying imported goods.

But the lack of fiscal discipline in the United States is undermining the value of the American dollar, thereby lowering the value of the U.S. Treasuries in foreign banks. As the dollar's value drops, other nations' willingness to keep investing cannot last, says Nouriel Roubini, an economics professor at New York University.

If those banks reduced their dollar holdings or were simply less willing to invest so much, it could spark a sharp fall in the value of the dollar. And that could create a host of economic problems.

Economists and business leaders are closely watching China's decision last month to uncouple the value of its currency, the yuan, from the dollar and tie it instead to a basket of different currencies. The move could make the dollar's position less exposed to a quick shift by international investors - or it could spur those investors to look elsewhere and leave the United States' position more precarious.

In the end, Roubini, Walker and others say, disaster is still avoidable, but it's going to require the American people and the country's leaders to clean financial house - to reduce the federal deficit and the trade deficit. Global economics may drive some changes: if Japanese cars cost more, for example, Americans may buy less-expensive GMs.

- What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?

- How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.

- How would government, which depends on the taxes of a strong economy to operate, keep all its promises?

Roubini says time is critical because the worse debt becomes, the more vulnerable America is to shocks in the global economic systems - another spike in oil prices, another major terrorist attack, another major military conflict.

OK, now back to you. No one's asking you to write a check to cover that $145,000, not yet. But the pressures are building around the world, in Washington, and in America's homes to straighten out our finances or get ready for a real mess.

"We're living beyond our means," Roubini says, "and we have to get our act together."

The entire article is crap. They deliberately don't count 401K's, IRA's, stock brokerage accounts, mutual fund holdings, direct stock investments, real estate holdings, gold, or any other form of "savings" or assets. And anybody who puts their assets into a "savings account" deserves exactly what they get.

Are you saying that all these "401K's, IRA's, stock brokerage accounts, mutual fund holdings, direct stock investments [...]" some day might be worth no more than paper on which they are printed? At least gold will buy you some food?

I'm not excusing the irresponsible spending by the Republicans, but Greenspan is more a threat to our economy than the debt.

Thanks for the alert.

We did depend on inflation to cancel out the debt. After WW II debt, starting college salaries in 1949 were $2,500 per year now $50,000 [20 x]. Foreign nations are buying the debt. Maybe with our military we can just say screw you and cancel the debt or we can maybe beg for debt forgiveness as a 3rd world country.

Don't fret and worry about the National Debt. It's only paper. Currency today is only little pieces of green paper with fancy printing and hidden tracking chips installed. The Fed can always print more green paper. Or the Fed can decide to prime the economic pump again and again by lowering interest rates. Besides, the National Debt is not really that important.

People do not really care about the nation's debt. But people do care about what they can purchase. Today the means to purchase anything is available to anybody. All you need to qualify for a loan is a job. Every day people are urged to buy new or used vehicles by means of easy credit. "Nobody is turned away," say the television commercials. Mortgage brokers are saying the same thing to people every day. Anybody can buy anything. Using credit. Which brings me to my next point.

Far greater in importance is our personal debt. I know a guy that earns about $ 35,000 a year and he just bought a $ 200,000 house. Interest rates are about 3.9% or lower on ARM loans. Easy credit, means easy money. Easy money multiplies itself through the economy about three times (M3). Some economists believe that is really M4 today with interest rates so low. $1 spent in the economy really means a multiplied total of $ 3. With the current 'boom' (or 'bubble') in real estate, that $ 1 is $ 4. Inflationary pressures are working away in the economy. But nobody really cares as long as they can make their monthly payments.

What happens if the economy stumbles? Greenspan can always lower interest rates again. Or, is that what got us into this mess at the outset? Not for me to worry, anyway. Nobody cares about my opinions.

Are you really interested?

Not at all. Just like the CPI is a cheat, so is any study of "savings rates" - they only count "savings accounts" as savings.

If you have $100,000 in a money market account, it doesn't count as "savings"

two micromanagers of the economy who believe that things like wealth, growth and full employment (whatever that's defined to be) cause inflation.

Firstly, they do not "micromanage" the economy; they give it a slight push in one direction or another. And, secondly, nobody has ever said that wealth causes inflation.

When you want tickets to a game that are no longer on sale, you pay a premium, right? That is, the price of the tickets goes up --- inflation. The same applies to labor. When employment is full, no more labor is available, and whatever you, the employer, can get costs you more (usually through overtime paid at a higher rate). That increases the cost of goods you produce, and you recover that costs through higher prices charged to your customers. In turn, the one that purchased your goods --- say car parts --- paid more and now has to recover his cost by charging more for cars. And so those higher prices trickle down through the economy. Full employment creates inflation.

What problem do you have with that?

we have a great American who slashed regulations, cut taxes, had confidence in Americans and empowered them. I know which one I'm taking.

Presidents do play a role in putting certain issues in focus. But it is the Congress, not presidents, that slashes or raises taxes and/or regulation.

Presidents to do not influence the economy: Congress and the Fed do --- the former through fiscal policy (budget, spending) and the latter through monetary policy (interest rates charged to bans, reserve requirements, etc.)

I think the IRS should look into the "top 100" on the Forbes List to see if their "legal" tax shelters have been abused.

For example, I think that capping tax-free income from "tax-exempt" bonds at, say, $1,000,000 would erase some of the unfair advantage that inherited "old money" seems to have over hard-working (taxable) "new money".

Such a standard might require TeREsa Kerry to film a few "ketchup" commercials in order to maintain her otherwise un-deserved "sans-souci" life-style.

"A new Associated Press/Ipsos poll finds that barely a third of Americans would cut spending to reduce the federal deficit and even fewer would raise taxes."

People don't want to understand that there is no such thing as a free lunch, and anything the government gives, it first has to take away from the people.

Apparently 2/3 of the people are getting something from the government and that's why they don't want to see spending cut.

If you spend your own money on yourself,
you care how much you spend and how well you spend it.

If you spend your own money on someone else, you care how much you spend, but you don't care how well it is spent.

If you spend someone else's money on yourself, you don't care how much you spend, but you do care how well it is spent.

And finally, if you spend someone else's money on someone else, you don't care how much you spend, and you don't care how well it is spent. That is government.

This article must be a big lie . . .

after all, President Bush can throw $15 billion to Africa and forgive most of the foreign debt owed to us, plus throw away other billions on third-world cesspools, plus spend $200 billion plus on police action nation building in Iraq.

And, the UN says we should give 7% of our GDP to the "poor nations".

So, obviously, we have money to burn, right?

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