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Posted on Sat, Mar. 21, 2009 10:15 PM
COMMENTARY
Rising debt, deficits erode confidence in U.S.
More News
Uh-oh. It’s scary when this subject even comes up. No one is saying the United States is on the verge of defaulting. That isn’t going to happen. But until now, the safety of U.S. Treasury securities was a given. It wasn’t even worthy of mention.
In the last several months, however, there’s been a change. The cost of insuring against a U.S. default has risen by about 60 percent since the end of last year.
That’s not only because of the financial meltdown and the recession. It’s also a reflection of the extravagant budget Obama made public recently.
In his “absolute confidence” remarks, Obama was responding to Chinese Premier Wen Jiabao, who said recently that he was “definitely a little bit worried” about the safety of Beijing’s U.S. holdings. The Chinese government has about $1 trillion in U.S. government securities.
Wen’s fears are understandable. U.S. debt is rising rapidly and the world’s capacity to absorb it is hardly unlimited.
China’s worries go beyond the question of any default.
If U.S. inflation heats up, securities held by China would be paid off in dollars with diminished purchasing power. If interest rates rise, the market value of Beijing’s holdings will fall, since interest rates and bond prices move inversely.
A year ago U.S. debt held by the public was around $5 trillion. Now it’s $6.6 trillion, not counting the huge liabilities of Fannie Mae and Freddie Mac and the cost of the various bailout efforts that began in the waning months of the Bush presidency.
Then there’s the Obama budget, which would pump out another gob of Treasury paper. This year’s deficit alone will come to a record $1.8 trillion, the Congressional Budget Office said Friday.
But not to worry, the White House says. By 2013, the deficit will be down to $533 billion.
Not likely.
•The stimulus package was larded with health care and other kinds of spending that will permanently boost federal outlays, as new dependents are signed up for entitlement programs.
•The cost of Obama’s health-care initiative is likely to be much higher than the $634 billion down payment specified in the budget. Some experts say the 10-year cost will be twice that.
Last year, consultants at the Lewin Group estimated the cost of Obama’s health plan at $1.2 trillion. But that plan would not have covered all uninsured Americans.
Covering everyone, according to the Lewin Group’s John Shells, would probably come to $1.5 trillion over 10 years. John Rother, public policy director for AARP, arrives at a similar number.
Overall, the Obama budget could produce trillion-dollar deficits for the foreseeable future. In its report Friday, the CBO said deficits on that scale could well continue for a decade.
“We are very stretched financially,” said Nicholas Lardy of the Peterson Institute for International Economics.
To some extent, Premier Wen’s remarks were for domestic consumption. Lardy says the Chinese government has been criticized because some of its U.S. investments lost money. China’s investment in the Blackstone Group is an example, he said.
Or Wen’s statement could have been a barbed response to Treasury Secretary Timothy Geithner, who — during his confirmation hearings — accused China of being a currency manipulator.
Wen’s larger point, however, is valid. The global appetite for American assets isn’t bottomless.
As if on cue, a story buried in The Wall Street Journal last week lent credence to Wen’s concerns. The headline: “Foreign Capital Flees the U.S.”
In January, net capital outflows came to $148.9 billion, a record. One analyst called it “a truly awful report.”
Awful would also be a good description of the U.S. government’s current fiscal position.
To reach E. Thomas McClanahan, call 816-234-4480 or send e-mail to mcclanahan@kcstar.com.
Posted on Sat, Mar. 21, 2009 10:15 PM
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