Monday, November 28, 2005

US External Debt and The Bubble

In the book The United States as a Debtor Nation it says the following:


More fundamentally, even if foreign investors give the United States an unlimited length of rope by continuing to finance ever-greater buildups in US external liabilities, there is a problem of long-term burden for the US economy as it becomes increasingly indebted abroad. To the extent that the borrowing is primarily directed not towards financing investment but rather toward financing high levels of private consumption and government dissaving, the accumulation of foreign debt amounts to mortgaging the country's economic future. Eventually, there will be a price to pay in the form of a major terms of trade loss as the external debt is serviced. This will reduce the real standard of living of US citizens - many of them of the next generation- from levels otherwise attained as real consumption is eroded through higher import prices. Injudicious, and perhaps inequitable, deferral of the adjustment burden into distant future is a fundamental reason to address the external deficit even if a sharp break in confidence and a hard landing are considered unlikely.
The housing bubble is a significant contributing factor in the ever growing amount of US external liabilities. Mortgage debt is being bought by foreigners. Furthermore, the housing bubble has allowed a huge amount of home equity extraction, which has fueled strong consumer spending. A significant portion of this consumer spending is being spent on imported products. All this increases US external liabilities.

Unsustainable.

2 comments:

  1. This currently is the fundemental premise for the current expansion, one based on real estate gains, home improvement, sales, building, banking, and a consumer that extracts money from the equity of their homes to continue to buy foreign made products. It has worked over the last several years very well- and has been promoted by A Greenspan. The real tragedy is that this will END- and it will leave many in a very harsh state of being in the aftermath. I wonder what happens a few short months down the road, with increasing listings, and sales slipping. It seems that this is a strong possibilty- that being so anyone have predictions on WHAT)in their opinion) will happen?

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  2. It isn't all just easy money and financial deregulation (although those are a big part).

    Foreigners need to buy SOME U.S. asset, since they export tons to us and don't buy anywhere near as much from us.

    Our elites now believe in "free trade" like a religion, no matter how mercantilist our trading "partners" are. Nothing can ever be said or allowed against free trade, no matter how enormous the trade deficit gets.

    Since we refuse to even consider tariffs or quotas, or reconsider our disastrous free trade agreements, that huge trade deficit must be financed.

    I think foreign central banks aren't completely stupid. They know that our mortgage securities are worth garbage. But they have to buy something or their exporters will not have a market in this country.

    We are being fattened up as our future is stolen.

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