The end of the debt-cycle?

I was often criticized for having unfathomable ideas.  One of the most interesting that comes to mind is my American Defense Policy professor in undergraduate once told me that there is no way the U.S. would build the Ballistic Missile Defense system because of the ABM treaty...which I thought we would pull out of.  I wrote this in a paper and got seriously downgraded on it.  He found that argument to be unreasonable.  Why does this matter?  Because, as Margaret Thatcher once said after the Falklands, "the unnexpected often happens and we should consider it as an option always."  The US ended up pulling out of that treaty by the way, and I expanded the idea into another argument and was still downgraded; but more for formatting reasons.  My point still stands--accept that everything around you is impermanent and can change when you least expect it.  In short:  Be prepared if at all possible.

And so we come to today's entry...debt.  The U.S. has been buying debt from many nations for the last decade at a staggering pace.  The National Debt of the United States is currently over 10 trillion dollars.  That's right, 10 TRILLION.  The day I left my job on Capitol Hill the debt was at 9.5 trillion; and this was six months ago.  In the last two days two things of such monumental importance happened; but few people outside of Budgetary and economic circles will be able to come to grasp with the concept for years to come.  

First, China has said that it is reluctant to keep buying U.S. debt.  All those checks that were sent out last year to "stimulate the economy" were borrowed largely from Japan and China.  Japan is in as bad a financial mess as we are right now so they do not have the capital reserves to lend and China is tired of buying U.S. bonds that have a near zero return on their investment.  Also, China is worried about America's long-term ability to repay.  And finally, China is worried that the Obama Administration is going to come through on its campaign promises and start what most people will soon be calling a "trade war" between the Democrat controlled House, Senate, and Administration and the Chinese government.  We will all wait and see what happens next.

Second, President-elect Obama finally did what few Presidents before him had done and told the people what we are facing.  Many Administrations, at least the Clinton and Bush ones were famous for this, would exaggerate the preliminary budgetary numbers to make it look like they had done more to help the economy at year end.  So if we were looking at deficits they would make them look bigger initially and then show how they had done amazing things to "correct" the problem before the end of the year.  If Mr. Obama is doing that fine--but if you look at the actual numbers they are that bad.  We will be looking at trillion dollar deficits for a decade.  Remember the U.S. just pumped 5 trillion dollars into the global financial economy that it didn't have.  Where do you think that money is going to come from if Japan is broke and China, with the largest amount of reserve savings in the world, refuses to lend?  Many people say it is unwise to just "print more money" but it would appear that is what we have been doing.

I will offer a position that is not my own but I have heard being said in some circles in the incoming Adminstration:  If not now then when?  Many people have been sitting back for years watching the debt climb and hoping we would do something about it before it was too late--we didn't.  America kept spending; Congress kept borrowing; our credit ratings kept falling.  And here we are.  Times will be hard for a long time to come.  I have to believe that we can make it.  Many are saying this is the end of the American Empire.  They said that in the early 1980's as well, by the way.  I don't know if this is it.  But remember we are an "accidental empire" as some British historians have called us.  We got to be this strong because after WWII no one else had the industrial capacity to make goods on the scale that we could--all our competitors were ravaged by war.  We had to know that the playing field would even out sometime.  Capital flows to where the best and safest environment for it to grow is.  Right now that place is East Asia.  The sooner we come to accept that the better.  Right now we have to worry about getting our own house in order.  Thomas Friedman borrowed from Charles Kindleberger when he spoke about how "buying manias" drive people to do risky behavior in bubble times.  We all got sucked into being lawyers, hedge fund managers, and financial advisors.  We all thought that Ivy League educations that cost hundreds of thousands of dollars in Law and Finance would get us all rich. But that was just the modern day "tulip bulbs."  Now the Chinese are trying to get into the Ivy League (who on average have way better scores in Math and Logical reasoning than their American competitors) and are balking at the high price-tag.  Why would they pay that much if they can't make the amount necessary to afford the monthly payments?  Expensive educations that you cannot afford are irresponsible, in their opinion.  We forgot that lesson somewhere...but with rising tuition costs how could we stop it?  Not everyone could go overseas to cheaper colleges that offered an education that was just as good.  America got duped, and the high-value Chinese talent are now going elsewhere.  The news in the West will be picking up on that trend fairly soon.

America should have been pumping out useful technical degrees.  I'm not saying that the other degrees aren't important.  However if you have a society with a lawyer for every sixteen people you have issues of labor/skill imbalance.  Years from now people will be looking back on today and wondering what were we thinking these last fifteen years?  Why didn't we work on the more pressing issues like balancing the budget rather than procrastinating until the whole thing fell apart?  And the answer is because we, like my former professor, couldn't fathom that change can happen.  We as a country couldn't see that the "new economy" of services and finance could not support a country of our size and maintain such a high standard of living.  America bet the wrong way, that's all; and by doing this ignored the budget problems we assumed would correct itself over time.

Be well dear reader.  We have a long road ahead of us.

--A Wise Man in the East