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The Hidden Costs of Too Much Government Debt

Economics / US Debt Nov 21, 2009 - 12:11 PM GMT

By: Mike_Larson

Economics

Best Financial Markets Analysis ArticleThis week was a fascinating one on the geopolitical front. President Barack Obama travelled to China in what was billed as a major diplomatic trip.

The idea? Try to reach common ground on several fronts, including global nuclear proliferation, environmental issues, and especially China’s currency …


The U.S., Europe, and even some of China’s Asian neighbors believe that China is artificially suppressing the value of its currency, the renminbi or yuan. That, in turn, is giving China an artificial advantage in global trade by making its exports more competitive vis-à-vis those of other nations.

But you know what Obama came home with? Not much of anything. A joint statement here. A stiff, “no questions asked” press conference there. Substantive progress was nowhere to be found.

Obama's trip to China was all smiles but no  substance.
Obama’s trip to China was all smiles but no substance.

That’s disturbing — and it reflects a very uncomfortable fact: The balance of power between the U.S. and China has shifted largely in China’s favor because of our overreliance on China to fund our profligacy. In fact, I believe that this shift is one of the single biggest “hidden” costs of our massive government debt load.

Debt Costs Keep Rising, With No End in Sight!

You don’t need me to tell you that our public debt is enormous. As of this week, it came to $12,031,299,186,290.07. That’s more than $12 TRILLION in case you have trouble grasping a number that big. In just the past decade, it’s up more than 111 percent.

Things are only going to get worse, too, because Washington has completely abandoned any semblance of fiscal discipline! We’re running ever-larger budget deficits, including $1.42 trillion in fiscal 2009 alone.

The interest cost alone on our debt last year was $202 billion. That’s enough to send every man, woman, and child in this country a $656 check. Keep in mind that those costs were artificially low because of the lowest short-term rates in history due to the Fed’s rate cuts. Moreover, the flight-to-quality rally in government bonds helped keep longer-term rates low.

As bond prices fall, rates rise, and absolute debt levels climb ever-higher. That number is going to spiral upward. In plain English, we’re going to be dedicating a larger and larger share of the U.S. budget just to pay interest on our debt. Forget about defense, health care, Social Security or anything else.

China is the largest foreign owner  of U.S. debt.
China is the largest foreign owner of U.S. debt.

He Who Controls the Purse Strings Makes the Rules …

But again, those are just the VISIBLE costs. The HIDDEN costs are much, much worse over the long term.

China owned $799 billion of our Treasury debt as of September. That’s up from $618 billion a year earlier and $468 billion the year before that. About 61 percent of the Treasuries traded in the marketplace, as of mid-2008, were in foreign hands. And now, China has surpassed Japan as the largest foreign owner. That means they control the purse strings.

Heck, China is such an 800-pound gorilla in our debt market, they don’t even have to dump their existing bond horde to send prices plunging and interest rates surging. They can just step back and buy fewer bonds at auction!

China knows this. What’s more, the country’s leaders are so confident in their position of strength that The New York Times reported the following about the China-U.S. trip …

“In six hours of meetings, at two dinners and during a stilted 30-minute news conference in which President Hu Jintao did not allow questions, President Obama was confronted, on his first visit, with a fast-rising China more willing to say no to the United States.

“On topics like Iran (Mr. Hu did not publicly discuss the possibility of sanctions), China’s currency (he made no nod toward changing its value) and human rights (a joint statement bluntly acknowledged that the two countries “have differences”), China held firm against most American demands.

“With China’s micro-management of Mr. Obama’s appearances in the country, the trip did more to showcase China’s ability to push back against outside pressure than it did to advance the main issues on Mr. Obama’s agenda, analysts said.”

The chairman of the China Banking Regulatory  Commission criticized U.S. monetary and fiscal policies.
The chairman of the China Banking Regulatory Commission criticized U.S. monetary and fiscal policies.

That’s not all. Chinese officials have taken to frequently lecturing the U.S. about how to run our monetary and fiscal policy.

One example: The chairman of the China Banking Regulatory Commission, Liu Mingkang, just warned that …

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation.”

He added that …

“The U.S.’ monetary policy has seriously affected global asset prices, fueled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy.”

Not very subtle. But also not surprising in light of the shifting balance of power.

Bottom line: We’re in hock as a nation like never before. Neither the administration nor Congress has any plan to change that fact. And both the actual and hidden costs of our debt are rising every day. We should all be concerned, and anyone who tells you otherwise is, in my view, woefully misguided.

Until next time,

Mike

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .


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