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| Apr 11, 2009 8:44 am |
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Who owns America |
Sekar Narasimhamurthy
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Uncle Sam seems to be living in a fool's paradise, using other's money.
A classmate says of this economy .. "If it's too scary to be true .. it probably is true" .
Who owns America's debt?
Find out which countries are propping the US economy
As of Dec 2008:
(In Billion Dollars)
China:727.4
Japan:579.9
Uk:157.9
Brazil:129.9
Russia:116.4
Luxemborg:97.4
Hongkong:97.4
Taiwan:97.4
China is worried about its vast United States treasury holdings and premier Wen Jiabao has urged Washington to safeguard their value. This is how the US - and all governments for that matter - borrow money: they issue government securities, which other countries and institutions buy. So, the US national debt is owned predominantly by Asian economies. The US Treasury releases the figures on this - here they are in a more useable form.
Let's get clear on this. Unless the US dramatically cuts its spending, the US will always run deficits. Who will fund these deficits? (1) Foreigners, (2) the Federal Reserve - by printing more dollars and/or raising taxes. The possibility for the US citizens to cover its own govt finance is remote. They now only constitute less than 5% of current US debt holders. Not only that, they now can't even pay their own mortgages/credit cards, are losing jobs and their homes, and you expect them to lend their own govt money? Isn't that the opposite of the stimulus plan = give money to the people?
Out of the total $10 trillion US debt, 50% is held by the Federal Reserve or US govt agencies, and 30% by foreigners. So if foreigners lose taste of US debts, expect more dollars to be printed = hyperinflation and dollar devaluation = further diminishing the attractiveness of US assets in addition to making the lives of ordinary Americans harder - see Zimbabwe.
And, unless US corporates and investors like Warren Buffett become fervent patriots who keep their money only at home, they will always invest outside USA. The reason is not because of benevolence, simply they are in search of higher rate of returns (ROR).
But should they really decide to keep money at home, then there will be excess liquidity in the US which will drive down US Treasuries yield (thus lower ROR), and it will result in asset (property and stock market) bubble = high inflation.
So, I will end with an all-hell-break-out-loose scenario. China needs the US consumers (20% of China's export market) for economic growth and thus have to fund the US deficit by buying US debt. But should China dump all the US debt, not only China will lose 20% of its export market but its current holding of US debt in its forex reserves (70% of China FX reserves in USD) will be worthless. But, hey, 30% of that $2 trillion forex reserve = $600 billion would still be the world's second largest (well actually Japan's FX reserve will also plunge making China's FX reserve still the world's largest). Since China will lose 20% of its export market, it will probably have either to boost export to the rest of the world, or risk losing 100 million jobs or more - very bad. It would take China probably 10 years (for its domestic service industry to catch up) to be able to absorb these job losses. Not to mention that China would be extremely lucky if there is no domestic riots and...revolution.
Now, what happens to the US? If either the US default on its debt (sovereign credit rating will go to junk immediately), or foreigners refuse to fund US debt, then the US will have to either go super-thrifty or fund its deficit by raising tax/printing more dollars. Raising tax will obviously worsen current problems, so cross that out. Printing more dollars will mean dollar devaluation and hyperinflation. Americans will not be able to afford those Middle-Eastern oil and those nice European cars. A $5 burger today will cost $50 the next day, and $500 the day after that. The US would then have to be self-subsistent and restart its own manufacturing industry. Happy now? Wait, it's not that easy. Those manufacturing needs natural resources that not all the US self-produces - oil, iron ores etc. The US now have to buy these resources at higher price because dollar gets devalued. Inflation and a $1000 burger is there to stay forever. American standard of living drops drastically.
Oh, and if the US goes super-thrifty? Okay, health and defense (see www.federalbudget.com) each account for roughly 25% of govt spending. Don't forget now that the US Social Security Trust Fund, which is composed of more US debts, is now completely worthless. The Americans has just basically lost its social safety net and the govt still has to cut spending on health+education. Defense will probably receive the biggest cut. Say goodbye to American military hegemony.
US ownership of global assets was a process of annexation underwritten by funny money capital. That means all the off balance sheet debt was re-leveraged into investments in the global economy. When those hedge funds and US banks implode as their balance sheet risks get properly accounted the foreign assets are sold off in a fire sale. That is what happened to global commodity prices. That is why there is no trade finance around for even profitable and otherwise liquid international trade inventories.
But let me get to the bottom line. You Americans own very little of you global empire of asset investments. You might still have the title on paper for a while as it all works through but what remains needs to come home to the US and be redeemed at 0.10c in the dollar to the sorry investors.
As for paying for your own government. Give me us break, do the numbers, look at the deficit, look at the value of your services economy, look at its structure - things like financial services and the bubble growth now being reversed - look at the retail industry with all those malls that have traded discretionary imported manufactures to fill up McMansions. It is all over mate. No tax receipts to pay for your obscene military expenditure, your bailouts, or your daily bread when your job gets neutered or your savings get wasted in the coming inflationary conflagration
Private Reply to Sekar Narasimhamurthy (new win) |
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