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America is borrowing itself into a deeper and deeper hole

A borrower can go into debt as far as a lender will allow him to go.

It does not matter if the borrower has a bad credit rating or if the security for the debt is worthless or if the borrower has no intent to repay. The limit to debt is determined by the lender. And it is becoming obvious that the government of the United States of America just might continue to borrow until its lender will not loan it any more money.  

This writer recalls a conference held at the time of the high interest era during the 1980s when the subject of housing demand in the Jackson, Miss., area was the topic.  A panel of experts was convened to offer their perspectives.   Several academic types, consultants and researchers presented their analyses and forecasts.  The last person was J.W. “Bill” Underwood, a prominent real estate developer who had built hundreds of houses in the area.  His forecast was vague and specific at the same time, “As long as there is a lender to finance it, there is a builder who will build it.”  His point, of course, is that the traditional market forces of supply and demand are not the only factors when considering whether something will be done.  

My grandfather told me never to borrow money.  My mother told me to borrow money only in an emergency.  My finance professor in graduate school told me that it is smart to borrow money if the money was invested at a higher rate.  Dave Ramsey, the personal finance guru, tells me to avoid, reduce and eliminate debt.

Discussion of debt, deficits and monetary policy is boring and almost certain to turn off some people.  Steve Forbes, publisher of Forbes Magazine, says that if one finds himself in the center row seat on an airplane, all he has to do is start talking about monetary policy and soon he will have the entire row to himself.  Regardless of how boring, the subject must be receive constant attention.  

The conventional wisdom is that the United States would never default on its debt.  But for that to happen something must give.  Most economists agree that it is not possible to stay on the current course.  The current national debt stands at nearly $8 trillion, and the Administration has estimated that there will be $1-trillion-plus shortfalls through 2011, followed by $700-billion-plus shortfalls through 2019.  For lenders to keep lending to a questionably creditworthy borrower, the first thing that would happen is adjustment for risk.  In other words, interest rates would go up.  The government would find itself paying a greater percentage of the nation’s gross domestic product.  Then the cutting would have to start.

This is not the first time that the United States has had a lot of debt on its books.  In a recent Washington Post article Joel Achenbach points out that at the end of World War II, the country had greater debt as a ratio to its economy.  Then the country dug itself out of the fiscal hole and firmed up its status as a global superpower.  But it did that with a baby boom and a manufacturing economy.  Where is the coming baby boom?

To be fair, there are some economists who maintain that the country can stand more debt.  No less than Nobel Laureate and New York Times columnist Paul Krugman has said the current budget deficit is too small for the current situation.  

Some have said that the massive debt and concomitant interest rates are the only way to stop federal spending on federal programs.  If the federal budget has so much interest to pay, then it will be forced to eliminate programs.  Now there is some financial discipline for you.

Here is a list of the top 15 lenders, or owners of U.S. government debt, as reported by CNBC.com, citing U.S. Treasury, U.S. Federal Reserve and U.S. Office of Debt Management as its source:

 

1.  Federal Reserve and intragovernmental holdings $4.785 trillion

2.  Mutual funds $769.1 billion

3.  China (Mainland) $776.4 billion

4.  Japan $711.8 billion

5.  Other investors $629.7 billion

6.  State and local governments $522.7 billion

7.  Pension funds $465.4 billion

8.  United Kingdom $214 billion

9.  Oil exporters $191 billion

10.  Caribbean banking centers $189.7 billion

11.  Brazil $139.8 billion

12.  Insurance companies $126.4 billion

13.  Russia $119.9 billion

14.  Depository institutions $107.3 billion

15.  Luxembourg     $102.4 billion

 

So the question is:  How long can the U.S. government keep borrowing money?  To paraphrase Bill Underwood, “As long as there is a lender to finance, the government will borrow.”  The follow-up question is the one that is now being asked more frequently:  What happens if there is not a lender to lend it?

 

Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government. Contact him at phil@philhardwick.com.

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