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Is America Going Broke?

wollensak

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This is the cover story of the March 7th issue of McLeans magazine.

David walker, controller-general of the United States, the senior accountant in the US government says America's finances are in a shambles, and if something isn't done soon, the world will face an economic shakeup of disastrous proportions.

The US debt is $7.7 trillion US dollars, that's 26,000 USD for every American. Canda's by contrast is $16,000 CDN per Canadian.

The real fear is that the US debt is spiralling out of control. The predicted shortfall for health and retirement in the USA is $43 trillion USD.

The article suggests that the US will have to dramatically cut spending, wile simultaneously raising taxes to avoid defaulting on it's debts. At the same time, the US has to devalue it's dollar in a controlled fashion to avoid scaring away the foreign holders of US debt.

The talking heads are not lefties, but senior economists from Morgan Stanley and others - ie the capitalists.

Canada is particularly at risk, as 80% of our trade is with the USA.

At any rate, a sobering read.
 

someone

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wollensak said:
This is the cover story of the March 7th issue of McLeans magazine.

David walker, controller-general of the United States, the senior accountant in the US government says America's finances are in a shambles, and if something isn't done soon, the world will face an economic shakeup of disastrous proportions.

The US debt is $7.7 trillion US dollars, that's 26,000 USD for every American. Canda's by contrast is $16,000 CDN per Canadian.

The real fear is that the US debt is spiralling out of control. The predicted shortfall for health and retirement in the USA is $43 trillion USD.

The article suggests that the US will have to dramatically cut spending, wile simultaneously raising taxes to avoid defaulting on it's debts. At the same time, the US has to devalue it's dollar in a controlled fashion to avoid scaring away the foreign holders of US debt.

The talking heads are not lefties, but senior economists from Morgan Stanley and others - ie the capitalists.

Canada is particularly at risk, as 80% of our trade is with the USA.

At any rate, a sobering read.
It sounds like an interesting article. I will have to pick up a copy. I assume that they are talking about total foreign debt as when it comes to government debt, I think that Canada is still above the U.S. (but closing the gap relatively fast) I'm I correct that your figures refer to total foreign debt?
 

wollensak

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Article just identifies this as "National Debt", so I guess it includes both domestic and foreign creditors.

This years deficit expected to be $427 billion USD. Cost of borrowing amounts to 8.6% of 2005 budget. White House forecast suggest by 2010, yearly costs to service the debt will reach $314 billion USD.

Doesn't sound too good.
 

onthebottom

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wollensak said:
Article just identifies this as "National Debt", so I guess it includes both domestic and foreign creditors.

This years deficit expected to be $427 billion USD. Cost of borrowing amounts to 8.6% of 2005 budget. White House forecast suggest by 2010, yearly costs to service the debt will reach $314 billion USD.

Doesn't sound too good.
http://www.cia.gov/cia/publications/factbook/rankorder/2186rank.html

As you can see the US ranks 39th for public debt as a percentage of GDP, Canada for reference at 23rd. If you're looking for a country going broke look to Japan.

OTB
 

langeweile

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Interesting to note, that seven European countries are ahead of the USA. Wonder how they are going to pay off their debt?
The uSA has still alot of room to raise taxes if need be, how much more can Germany and France raise their taxes?
 

onthebottom

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langeweile said:
Interesting to note, that seven European countries are ahead of the USA. Wonder how they are going to pay off their debt?
The uSA has still alot of room to raise taxes if need be, how much more can Germany and France raise their taxes?
The US economy is growing faster, has a younger workforce that is actually growing..... Europe is demographically screwed.

OTB
 

wollensak

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langeweile said:
Ah..McLeans the "Canadian Prawda".
A magazine in decline, desperately trying to find some readers, by palying to the anti americanism in this coutry. Well what else can they write about. :D
Ah, the old "ad Hominem" argument. Was it Plato or Aristotle that identified this as an invalid form of argument at the dawn of civilization?

Seriously, read the article and make an intelligent comment if you can.
 

wollensak

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onthebottom said:
http://www.cia.gov/cia/publications/factbook/rankorder/2186rank.html

As you can see the US ranks 39th for public debt as a percentage of GDP, Canada for reference at 23rd. If you're looking for a country going broke look to Japan.

OTB
The point of the article, and the post, was the RATE at which US debt is expanding, and the unfunded liabilities in the Pension and Medicaid systems.

I would think the substance of the arguments advanced would call for something more than a facts almanac answer. Is this the best you can do, OTB?
 

onthebottom

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wollensak said:
The point of the article, and the post, was the RATE at which US debt is expanding, and the unfunded liabilities in the Pension and Medicaid systems.

I would think the substance of the arguments advanced would call for something more than a facts almanac answer. Is this the best you can do, OTB?
Pesky facts.

Just trying to put the argument in perspective, facts can be quite useful for that. The US is running a 4.x% of GDP deficit at the moment, does it need work, yes, are we going broke, no. Our pension and medical liabilities going forward are quite a bit smaller than in many other large countries (or Canada for that matter) which have slower growing economies, older populations (that are aging quicker) and higher unemployment. I can understand your concern though, without a prosperous US where would Canada be?

OTB
 

onthebottom

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Just for fun

Bush’s Supply-Side Boom
Larry Kudlow
March 4, 2005

Witness the economic power of lower marginal tax-rate incentives.

The economy is on a tear. You might not know this from coverage in the mainstream media, which may have a built-in bias against George W. Bush. Sure, some big outlets like the New York Times have come around at least somewhat on the president’s freedom-and-democracy revolution in the Middle East. But they’re not about to concede on the economic power of lower marginal tax-rate incentives

Too bad, because the evidence is overwhelming that the supply-side tax cuts enacted in the spring of 2003 have triggered an economic boom. Yes, I will call it the Bush boom.

Friday’s payroll-jobs increase of 262,000 is yet another data-point arguing that the economy may actually be speeding up in the first half of 2005. Using a 12-month moving average of monthly job changes, nonfarm payrolls have increased to 200,000 through February 2005 from a decline of 150,000 going all the way back to January 2002.

Since May 2003 — which not coincidentally was the debut period for Bush’s tax cuts on personal income, dividends, and capital gains — the economy has generated 3 million new jobs. Using the Labor Department’s household survey, 2.6 million more people have been employed since the tax cuts. The unemployment rate has dropped to 5.4 percent from 6.3 percent. Weekly unemployment claims have fallen to 300,700 — the lowest since late 2000.

There are lots of other good data points. To wit: January factory orders for non-defense capital goods (excluding volatile aircraft) are 17 percent above year-ago levels, while shipments are running 14 percent ahead of last year. In other words, there is a capital-spending boom going on.

Retail sales are picking up smartly. When measured against year-ago levels, sales at department stores, specialty shops, and other retail outlets are 4.8 percent ahead of last year. A record 84 percent of merchants beat expectations.

In the technology sector, January chip sales rose 17.5 percent against the year-ago level, according to the Semiconductor Industry Association. Meanwhile, the transportation sector is white hot. Rail freight car loadings are 12.6 percent above a year ago and freight tonnage shipped by trucks is 20.6 percent above the year-ago mark. The Dow Jones transportation index has reached another all time high.

The productivity miracle also continues apace. Output-per-hour by nonfarm companies has increased 2.8 percent over the past year, in line with the 10-year trend average. Because of all the technologically related efficiencies now in place throughout American business, unit labor costs are only 1.3 percent. And because labor costs are low, profit margins remain positive.

Hence, with business sales rising 11 percent, profits are gaining by leaps and bounds. Net operating earnings for S&P 500 companies increased 22 percent in 2004. While profits will slow in 2005, they will still register solid double-digit gains. In other words, rising profits will continue to fuel the strong business expansion. That is the heart of economic growth.

cont....

OTB
 

onthebottom

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Cont....
Some economists are grousing over the strength in raw-material futures prices, with the Commodity Research Bureau’s index now back at 1981 levels. These worrywarts are saying that inflation is bound to be a problem.

But consider this. In 1980-81, core inflation was 10 percent. Today it is 1.6 percent (using the personal spending deflator). One might ask, Why did rising commodity prices cause high inflation then, but not now? The answer lies with the numerous pro-growth policy changes over the past 25 years that have streamlined the economy and generated much more income and output growth.

Lower tax rates, deregulation, trade liberalization, capital investment, and the technology-induced productivity surge are all counter-inflationary measures. That is, each new unit of money creation by the Federal Reserve is less inflationary in today’s free-market capitalist environment.

The global spread of capitalism and growth, especially among emerging economies in China, India, and Eastern Europe, is what’s really impacting the commodity world. These growth stories require basic materials and industrial goods. So commodity demands, which are commercial in nature, have led to raw-material price increases. Unlike the 1970s, central banks are not producing the excess money today that would raise future inflation.

This is why worldwide bond yields are historically low. Global credit markets are not demanding high inflation premiums. The worldwide commodity boom is a growth signal, not an inflation signal.

Growth is never inflationary. The same goes for more people at work. The spurt in global economic growth is absorbing all the money created by central banks today. There is no monetary overhang to cause significant inflation. That’s why the current commodity boom is completely unlike the one 25 years ago when hard goods and real assets were used as inflation hedges.

Today’s story is totally different. And it’s a very good story at that.

OTB
 

21pro

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No. America is not going broke.

Canada has a higher debt per GDP, but the U.S. growth of debt is at a faster pace... doesn't mean they'll go broke. All superpowers have to fluctuate debt is such a way. The problem would only arise shall the European investors call in their debentures in Euros... then the U.S. could go broke... but that would in turn destroy the European economy.. actually worse than what would happen in North America... the Euros would essentially shoot themselves in the foot.

oh and wollensak... that wasn't a true ad hominen fallacy that langeweile stated because he wasn't using a logical process to arrive at the assumed conclusion that the story was untrue. it was just a statement of his opinion of the magazine.
 

langeweile

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wollensak said:
Ah, the old "ad Hominem" argument. Was it Plato or Aristotle that identified this as an invalid form of argument at the dawn of civilization?

Seriously, read the article and make an intelligent comment if you can.
I love your latin skills.
See the smiley face? It is called a joke, but all good jokes have a poece of truth in them.
I have commented around the issue. Let me sum it up for you.

Tax rates in the USA are at an all time low. If there is an urgent need to pay of goverment debt, it can be done tomorrow.
My guess is that there is so much pork left in the system, that it won't be necessary for a while.

Most of Europe and Canada rank above the USA in % of debt vs. GDP. The problem is that tax rates in both countries arer much higher. Where is the extra needed money coming from. More Taxes? This should be good for the economy.

Maybe the USA will go bancrupt one day. Rest assure you that other countries will go before us.
 

onthebottom

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bbking said:
Y...... I have always followed the creed that no one has lost money in the long term by betting on the US economy.


bbk
I'd bet on the US economy every time!
OTB
 

Vietor

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I have admired Mr. Buffett since he spoke to my class in business school. My admiration notwithstanding, his investment performance of the past two years has lagged the overall stock market. Since Berkshire Hathaway is essentially a mutual fund, a comparison of his recent performance to those funds of a similar size is pretty discouraging. Perhaps it's time for him to start thinking about a successor.
 
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